Emergent BioSolutions Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone Q4 filing; fourth-quarter figures are unaudited. Amounts are in U.S. dollars.
Business context
Emergent develops, manufactures and sells medical countermeasures for public-health and national-security threats, alongside contract development and manufacturing services. The U.S. government is its principal customer and an important source of development funding. BioThrax remained its largest product; the company expanded its portfolio through October 2017 acquisitions of ACAM2000 and Raxibacumab.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $560.9 million | $488.8 million |
| Product sales | $421.5 million | $296.3 million |
| Contract manufacturing revenue | $68.9 million | $49.1 million |
| Contracts and grants revenue | $70.4 million | $143.4 million |
| Operating income | $124.3 million | $105.5 million |
| Net income from continuing operations | $82.6 million | $62.5 million |
| Diluted EPS | $1.71 | $1.35 |
| Operating cash flow | $208.1 million | $54.6 million |
Revenue grew 15%; product sales rose 42%, including BioThrax sales of $286.7 million, up 21%. Other product sales increased with BAT deliveries, international sales and the addition of ACAM2000 and Raxibacumab. Contract and grant revenue fell 51%, mainly as funded development work and CIADM activity declined or completed. Operating expenses rose to $436.6 million, including higher product and manufacturing costs. Approximate gross margin on product sales and contract manufacturing was 65%; operating margin was 22%.
Q4 2017: Revenue was $193.8 million, operating income $53.1 million, net income $33.9 million and diluted EPS $0.67. In Q4 2016, the corresponding figures were $151.7 million, $50.9 million, $37.4 million and $0.77.
Cash and liquidity: Cash and equivalents were $178.3 million at year-end, down from $271.5 million. Working capital was $385.3 million; current assets were $485.4 million versus current liabilities of $100.1 million. Operating cash flow less $54.8 million of capital expenditures was approximately $153.3 million, before acquisitions and other investing activity. Investing cash outflow was $249.9 million, including $195.1 million for acquisitions.
Debt: About $239.4 million of the $250 million 2.875% convertible notes converted into approximately 8.5 million shares during Q4; $10.6 million principal remained at year-end. No borrowings were outstanding under the new $200 million secured revolving facility, which includes a conditional $100 million accordion. The balance sheet reports $13.5 million of long-term indebtedness; the filing does not provide a directly comparable face-value total-debt figure in that balance-sheet line.
Material changes and notable items
- ACAM2000 was acquired for $125 million total consideration. Its CDC contract, with up to approximately $160 million remaining at acquisition, was due to expire in March 2018, subject to renewal or extension and government funding.
- Raxibacumab was acquired for $76 million upfront, with up to $20 million in contingent sales and manufacturing milestones. The assumed BARDA supply contract had up to approximately $130 million remaining at acquisition and runs through November 2019.
- The convertible-note conversion reduced debt substantially but increased shares outstanding. The company also repurchased 0.8 million shares for $33.1 million in 2017.
- The 2017 tax provision was $36.0 million, with a 30% effective rate. Tax reform effects were provisional: a $13.4 million benefit from remeasuring deferred taxes was largely offset by $13.6 million of transition-tax expense on deemed repatriated earnings.
Outlook, risks and contingencies
- The filing gives no overall numerical revenue or earnings guidance. Management stated it expected BioThrax to remain a substantial source of product sales for at least the next two to three years; results may fluctuate with government order timing and funding.
- Management anticipated a possible NuThrax emergency-use authorization as early as 2019, subject to FDA review and sufficient data. The related BARDA contract could reach approximately $1.5 billion only if specified options are exercised and milestones and regulatory conditions are met.
- Revenue and development funding are concentrated in government customers and appropriations. BioThrax generated $286.7 million, approximately 51% of total revenue; U.S. government customers accounted for 78% of revenue.
- Key risks include procurement renewals and funding, FDA authorization and product-manufacturing transfers, manufacturing quality and capacity, single-source suppliers, acquisitions and integration, and competition. The filing says the Raxibacumab manufacturing transfer to the company’s facility was subject to FDA approval.
- A securities class action concerning statements about BioThrax demand and contract renewal was in discovery; the motion to dismiss had been denied. The company said it could not estimate potential loss.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. The acquired ACAM2000 operation was excluded from the control assessment and represented approximately 11% of year-end assets and 2% of annual revenue.
Most important facts for investors to verify
- Government procurement funding, order timing and renewal terms for BioThrax and other stockpile products, particularly the ACAM2000 contract due for renewal or extension in March 2018.
- NuThrax regulatory progress, timing and conditions for any EUA, and whether BARDA procurement options are exercised.
- Whether acquisition-related product deliveries, manufacturing transfers and contingent payments meet expectations, especially for Raxibacumab.
- How sustainable operating cash flow is after considering working-capital timing, capital spending, and the 2017 acquisition-related cash outflows.
- Final tax-reform accounting and the outcome and potential financial exposure of the shareholder litigation.