Emergent BioSolutions Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone Q4 filing; Q4 figures below are the unaudited quarterly data included in the 10-K. The 2013 results largely reflect the pre-Cangene business. Emergent acquired Cangene on February 21, 2014, after year-end.
Business context
Emergent operated Biodefense and Biosciences divisions. BioThrax, its anthrax vaccine, was the principal product and the U.S. government the dominant customer. In August 2013, Emergent acquired RSDL, a chemical-agent decontamination product, from Bracco. The subsequent Cangene acquisition added seven marketed products and contract manufacturing operations, broadening the portfolio into plasma-derived therapeutics and commercial specialty products.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Total revenue | $312.7 million | $281.9 million | +11% |
| Product sales | $257.9 million | $215.9 million | +19% |
| Contracts and grants | $54.8 million | $66.0 million | -17% |
| Operating income | $42.8 million | $30.0 million | +43% |
| Net income attributable to Emergent | $31.1 million | $23.5 million | +32% |
| Diluted EPS | $0.85 | $0.65 | +$0.20 |
| Operating cash flow | $97.0 million | $39.6 million | +$57.3 million |
Product-sales gross margin was approximately 75.9% (product sales less cost of product sales); operating margin was 13.7%, and net margin attributable to Emergent was 10.0%. These are simple calculations from reported figures, not company-presented adjusted margins.
Revenue growth chiefly reflected 12% more BioThrax doses delivered and $11.2 million of RSDL sales after its acquisition. BioThrax sales were $246.7 million; RSDL contributed $11.2 million. Higher product costs—up 35%—reflected greater deliveries, lower production yields for doses sold, and the absence of a favorable prior-year testing-specification adjustment. Lower development-contract revenue reflected reduced milestone and program revenue and terminated collaborations, partly offset by CIADM funding. SG&A rose 16% to $87.9 million, including acquisition-related costs and a U.K. restructuring charge. There was no 2013 impairment of in-process R&D, compared with a $9.6 million charge in 2012.
Q4 comparison: Revenue was $98.1 million versus $94.6 million in Q4 2012; operating income was $23.3 million versus $24.0 million; net income was $15.2 million versus $16.1 million; diluted EPS was $0.41 versus $0.44.
Cash, liquidity and debt
At December 31, 2013, cash and cash equivalents were $179.3 million, accounts receivable $60.6 million, working capital $216.5 million, and total assets $626.6 million. Operating cash flow was $97.0 million; investing cash outflow was $67.9 million, including $42.0 million of capital expenditures and $25.9 million paid for the Bracco assets. Cash increased $37.7 million during the year.
Year-end debt was $62.0 million under a secured revolving credit facility, with up to $100 million of revolving capacity and a potential $125 million term loan facility. The credit agreement is secured by substantially all company assets and contains financial covenants, including a $50 million minimum liquidity requirement; the company reported covenant compliance at year-end. In January 2014, Emergent issued $250 million of 2.875% convertible notes due 2021 and repaid the $62 million revolver balance, restoring its full revolving capacity. The Cangene acquisition cost $222 million in cash.
Outlook, risks and unusual items
- Management’s stated strategy was to grow biodefense sales, diversify into specialty markets through acquisitions, expand biologics manufacturing, and control R&D costs by seeking external funding. The filing does not provide a specific numerical revenue or earnings forecast.
- The CDC BioThrax contract covers up to 44.75 million doses through September 2016, with a maximum potential value of about $1.25 billion subject to appropriations and other terms. By year-end, $704 million had been committed and about $479 million of product delivered and recognized. Future procurement and delivery timing remain funding-dependent.
- Customer concentration is substantial: HHS and its agencies generated 95.5% of FY 2013 revenue, and accounted for 96.2% of year-end receivables. Management expects significant reliance on government sales and development funding to continue.
- Manufacturing and regulatory execution are important risks. Building 55, intended for larger-scale BioThrax production, had not received FDA approval; Building 12 was the only approved BioThrax manufacturing facility. FDA inspections of Lansing had identified observations that the company said it was addressing. Several key inputs are single-sourced.
- In February 2013, Emergent stopped further MVA85A tuberculosis-vaccine development after trial results did not show statistically significant protection in infants. The related U.K. restructuring cost $2.8 million. Otlertuzumab studies reported positive interim or preliminary findings, but it remained investigational.
- The Cangene purchase-price allocation was preliminary at filing. Its pro forma combined results, assuming acquisition on January 1, were revenue of $440.3 million and net income of $13.9 million for 2013, versus $400.3 million and $2.2 million for 2012; these are not Emergent’s reported historical results.
- Auditors issued unqualified opinions on the financial statements and internal control. Management and the auditor excluded the acquired Bracco division’s internal controls from the 2013 control assessment; integration was ongoing.
Important facts for investors to verify
- Appropriations, contract modifications and delivery schedules for BioThrax, and the timing and collectability of government receivables.
- Post-acquisition Cangene integration, realized revenue and cost synergies, and the final purchase-price allocation, including the inventory step-up.
- Debt and liquidity after the convertible-note issuance and Cangene cash purchase, including compliance with secured-credit covenants.
- FDA progress for Building 55 and any material manufacturing observations, supply interruptions or single-source supplier issues.
- Clinical and regulatory progress for otlertuzumab, NuThrax, PreviThrax and BioThrax’s proposed post-exposure indication, alongside the availability of external development funding.