Emergent BioSolutions Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial statement figures are unaudited. Emergent develops and supplies medical countermeasures, with the U.S. government its primary customer and a major source of development funding.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $100.8 million | $91.2 million | $217.6 million | $194.2 million |
| Operating income | $8.5 million | $(2.0) million | $23.4 million | $19.1 million |
| Net income (loss) | $4.6 million | $(10.9) million | $15.1 million | $(7.0) million |
| Diluted EPS | $0.11 | $(0.27) | $0.35 | $(0.10) |
Q2 revenue rose 10%; six-month revenue rose 12%. Product sales increased 32% in Q2 and 30% for the half, while contract manufacturing grew 59% and 90%, respectively. Contracts and grants declined 36% in Q2 and 41% for the half, mainly reflecting lower VIGIV and CIADM funding. BioThrax sales were up 31% in Q2 but down 3% for the half, primarily because of delivery timing.
Cost of product sales and contract manufacturing was $34.6 million in Q2 and $80.9 million for the half, up 17% and 51%. Approximate gross margin, calculated as revenue less this cost divided by revenue, was 65.6% in Q2 versus 67.7%, and 62.8% for the half versus 72.5%. Operating margin was approximately 8.5% in Q2 versus negative 2.2%, and 10.8% for the half versus 9.8%. R&D expense fell 8% in Q2 and 14% for the half; SG&A fell 11% in Q2 and 1% for the half.
At June 30, cash and cash equivalents were $315.6 million, versus $271.5 million at year-end 2016. Total assets were $970.5 million; current assets were $509.7 million and current liabilities $72.9 million (about 7.0 times current-liability coverage). Long-term indebtedness was $248.7 million; the company also reported $250 million principal of 2.875% convertible notes due 2021. The notes’ estimated fair value was $323.2 million. The $20 million Aptevo note payable was paid in January 2017.
For the first half, operating cash flow was $95.7 million, capital expenditures were $29.6 million, and financing used $21.9 million; cash increased $44.1 million. Operating cash generation included a $36.2 million reduction in receivables and a $17.0 million increase in deferred revenue, as well as non-cash depreciation and stock compensation.
Material changes and unusual items
- Compared with Q2 2016, the company returned to operating and net profitability. The 2016 comparison includes Aptevo discontinued-operations losses of $8.9 million for Q2 and $16.8 million for the first half; Aptevo was spun off in August 2016.
- In March 2017, Emergent entered a $100 million, two-year BARDA BioThrax delivery contract. Related changes to the NuThrax agreement reduced its potential total value to up to $1.5 billion and altered the allocation and timing of contract revenue. The company allocated $137.1 million to NuThrax development services and $93.6 million to BioThrax procurement under the linked agreements; some consideration is deferred pending future NuThrax deliveries or extinguishment of delivery obligations.
- First-half capital spending was directed to infrastructure and equipment, including a third manufacturing suite at the Baltimore CIADM facility. Construction-in-progress was $90.1 million, primarily related to CIADM.
- The company completed its EBOL restructuring; the remaining termination-benefit liability was $0.8 million at June 30.
Outlook, risks and contingencies
The filing provides no consolidated financial guidance. Management expects to fund operations, capital spending and debt service from cash, product sales, government development contracts and grants, contract manufacturing, and available credit; future funding needs depend on sales, government awards, development spending and acquisitions. Results may fluctuate with government purchasing and delivery schedules. BioThrax procurement and government development funding depend on appropriations and agency decisions.
NuThrax remains subject to development and FDA Emergency Use Authorization and licensure risks. The company anticipated submitting for EUA pre-approval in 2018, but emphasized that timing and approval are uncertain. Other key risks include manufacturing and regulatory compliance, supplier concentration, fixed-price contract cost exposure, product development outcomes, and debt and credit-facility restrictions.
Two acquisitions announced after quarter-end remained subject to customary closing conditions, including antitrust clearance: ACAM2000 for $97.5 million upfront plus up to $27.5 million in milestones; and raxibacumab for $76 million upfront plus up to $20 million in milestones. The company also expected to assume a BARDA supply contract for raxibacumab valued at up to approximately $130 million. These are proposed transactions, not June 30 balance-sheet obligations.
A securities class action alleging misleading statements concerning BioThrax demand and contract renewal remained pending; the court denied the company’s motion to dismiss on July 6, 2017. The company filed its answer July 28 and stated that the potential loss could not be estimated. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- BioThrax delivery schedules, government appropriations, and the level and timing of procurement under CDC and BARDA contracts.
- Revenue recognition, deferred revenue, and remaining performance obligations under the linked BioThrax and NuThrax agreements.
- Cash-flow sustainability: the effects of receivable collections and deferred revenue on first-half operating cash flow.
- Closing, financing, integration costs, and expected economics of the ACAM2000 and raxibacumab acquisitions.
- NuThrax development, FDA review timing, and the potential impact of delays or additional requirements.
- Developments and any estimable exposure in the securities class action, along with debt terms and credit-facility capacity.