Emergent BioSolutions Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. The company operates in Biodefense and Biosciences, with substantial reliance on U.S. government purchases and funding.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $138.0 | $89.1 | $302.2 | $214.6 |
| Operating income | $31.0 | $18.1 | $13.4 | $19.5 |
| Net income attributable to Emergent | $21.8 | $13.5 | $6.6 | $15.9 |
| Diluted EPS | $0.49 | $0.36 | $0.17 | $0.44 |
- Q3 revenue rose 55% year over year, while nine-month revenue rose 41%. The nine-month increase reflected Cangene-acquired products and contract manufacturing, as well as higher contracts, grants and collaboration revenue.
- Q3 operating margin was approximately 22.5%, compared with 20.4% a year earlier. Nine-month operating margin fell to approximately 4.4% from 9.1%; higher R&D and SG&A, acquisition-related costs, and increased product and manufacturing costs weighed on results.
- Q3 product sales were $84.5 million, including $66.0 million of BioThrax sales. Contracts, grants and collaborations contributed $44.1 million, including $15.3 million of MorphoSys license revenue. Contract manufacturing revenue was $9.4 million.
- Nine-month BioThrax sales were $158.0 million, down from $165.3 million, mainly because 7% fewer doses were delivered on the timing of Strategic National Stockpile shipments. The company reported $82.3 million of contracts, grants and collaboration revenue and $21.3 million of contract manufacturing revenue.
- Cash and cash equivalents were $242.2 million at September 30, 2014, versus $179.3 million at December 31, 2013. Current assets were $383.6 million and current liabilities $81.4 million, implying a current ratio of about 4.7.
- Nine-month operating cash flow was $60.5 million, versus $88.3 million in 2013; investing cash outflow was $192.8 million, principally reflecting the Cangene acquisition; financing cash inflow was $195.2 million, principally from convertible notes. Cash increased $62.9 million during the period.
- Long-term indebtedness was $251.0 million, consisting primarily of $250 million of 2.875% convertible senior notes due 2021. The $100 million secured revolving facility was undrawn; the notes’ initial conversion price was approximately $32.38 per share.
Material changes and notable items
- The February 2014 Cangene acquisition added products, manufacturing capacity and Biosciences revenue. Purchase price was approximately $221.8 million. Since acquisition through September 30, Cangene contributed $82.1 million of revenue and a $4.8 million net loss attributable to Emergent.
- Q3 SG&A increased 38% year over year to $30.3 million, including acquired Cangene operations. Nine-month R&D increased 24% to $111.9 million and SG&A increased 46% to $90.9 million.
- The August MorphoSys collaboration for MOR209/ES414 provided a nonrefundable $20 million upfront payment. Emergent recognized $15.3 million for the delivered license and deferred $4.7 million for development services. It may receive up to $163 million in milestone payments, shares development costs 36% (with its funding capped at $186 million), and retains U.S. and Canadian commercialization rights subject to royalties.
- FDA issued a complete response letter for IXINITY on July 29, requesting additional data analyses and identifying chemistry, manufacturing and controls deficiencies. The company reported no impairment of its $8.5 million IXINITY in-process R&D asset as of September 30, based on its fair-value assessment.
- In October, the company announced restructuring plans to cease Munich product development, close its Princeton sales office and sell its Winnipeg facility. It expected completion in the first half of 2015 and estimated costs of up to $5 million.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance is provided in the filing. Management expects BioThrax to remain the majority of product sales and notes that results may vary with delivery timing and contract, grant and milestone funding.
- The CDC contract covers up to 44.75 million BioThrax doses through September 2016, subject to government funding. Approximately $911 million had been committed and about $635 million recognized through September 30, 2014. Dependence on appropriations and the U.S. government is a central business risk.
- The secured credit agreement requires, among other things, a minimum $50 million liquidity level and compliance with leverage and debt-service covenants. The facility is secured by substantially all company assets, including certain real estate. The filing states the company had no revolving borrowings at quarter-end.
- Key risks include acquisition integration, product development and regulatory outcomes, manufacturing and supply continuity, government procurement and funding, and the ability to meet debt covenants. The company also disclosed that Cangene’s internal controls were excluded from management’s control effectiveness assessment.
- Contingent purchase consideration was $19.2 million at quarter-end and is based on Level 3 estimates. The filing also describes contingent license-agreement payments that could total approximately $118 million, excluded from contractual-obligations totals because achievement and timing are uncertain.
Important facts for investors to verify
- Whether BioThrax delivery volumes and U.S. government appropriations support the company’s revenue and cash-flow assumptions.
- Progress integrating Cangene, realizing expected benefits, and managing acquired-product margins and contingent consideration.
- IXINITY’s response to the FDA’s complete response letter, including the required data analyses and manufacturing remediation, and the assumptions supporting the no-impairment conclusion.
- MOR209/ES414 development costs, milestone probability and timing, and the eventual economics of the collaboration.
- Debt covenant headroom, potential dilution from convertible notes, and the cash impact of the announced restructuring.
- The cash-flow statement reports operating cash flow of $60.497 million, while MD&A gives $60.514 million; investors should confirm the intended figure. The cash-flow statement is used above as the primary source.