Emergent BioSolutions Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Financial figures are in U.S. dollars unless noted.
Business context and reporting period
Emergent develops and manufactures vaccines and therapeutics through its Biodefense and Biosciences segments. BioThrax, its only marketed product, is the only FDA-approved vaccine for pre-exposure prevention of anthrax and is sold primarily to the U.S. government. Biosciences programs are development-stage, spanning tuberculosis, oncology, and autoimmune and inflammatory disorders.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Total revenue | $273.4 million | $286.2 million | Down 4.5% |
| Product sales | $202.4 million | $251.4 million | Down 19% |
| Contracts and grants | $71.0 million | $34.8 million | Up 104% |
| Operating income | $32.1 million | $73.6 million | Down 56% |
| Consolidated net income | $16.1 million | $47.2 million | Down 66% |
| Net income attributable to Emergent | $23.0 million | $51.7 million | Down 55% |
| Diluted EPS | $0.64 | $1.59 | Down 60% |
| Operating cash flow | $14.6 million | $98.9 million | Down $84.3 million |
Product sales fell mainly because BioThrax deliveries declined 21%, following redeployment of potency-testing capacity and lower production yields. Contracts and grants increased with BARDA-funded BioThrax scale-up work, increased anthrax-program activity, and collaboration revenue. Research and development expense rose 40% to $124.8 million, while selling, general and administrative expense decreased 3% to $74.3 million. Product gross profit was approximately $160.2 million, a 79% gross margin; operating margin was approximately 11.7%.
Fourth-quarter 2011 revenue was $107.9 million, operating income $46.0 million, net income attributable to Emergent $28.7 million, and diluted EPS $0.78. Compared with fourth-quarter 2010, revenue increased 4.6%, operating income increased 31.5%, and attributable net income increased 9.2%.
At year-end, cash and cash equivalents were $143.9 million, investments $2.0 million, accounts receivable $74.2 million, working capital $190.3 million, and total assets $546.9 million. Cash, cash equivalents and investments together were $145.9 million. Debt principal was $59.5 million, including $5.4 million current; total liabilities were $130.1 million. The company reported $416.7 million of total stockholders’ equity. Operating cash flow was reduced by timing-related increases in receivables and lower deferred revenue; investing cash outflow was $54.0 million, primarily capital spending on the Baltimore facility and equipment. Cash decreased $25.1 million during the year. The company reported compliance with its debt covenants, including a $50 million minimum cash and liquid-investments requirement.
Material changes versus prior period
- Lower BioThrax deliveries drove a $49.0 million decline in product sales, partly offset by a $36.2 million increase in contracts and grants.
- R&D spending increased $35.5 million, especially in Biosciences, including tuberculosis and TRU-016 programs. Emergent expects to bear more TRU-016 development costs after Abbott’s collaboration termination becomes effective March 20, 2012.
- Capital expenditures increased to $54.0 million from $22.1 million as Baltimore facility renovation and infrastructure investment advanced.
- Debt increased from $47.4 million to $59.5 million, chiefly reflecting PNC borrowing for Baltimore construction and equipment. The revolving credit line with Fifth Third Bank was not renewed in June 2011.
- U.S. government and HHS-agency revenue represented 91.3% of total revenue, down from 97.5% in 2010; customer concentration nevertheless remained high.
Outlook, commentary, risks and unusual items
- Revenue outlook: Management expects substantially all product sales for the foreseeable future to continue to come from BioThrax sales to U.S. government customers. The CDC contract covers up to 44.75 million doses over five years, with a maximum stated value of up to $1.25 billion, subject to available funding. About 750,000 doses were delivered and accepted under it by year-end 2011. No specific consolidated revenue or earnings guidance was provided.
- Spending outlook: Management expects R&D spending to increase as programs advance and clinical, manufacturing and regulatory work expands. Results may vary materially by quarter with BioThrax delivery timing and contract or grant activity.
- Development and regulatory: In February 2011, FDA issued a complete response letter on the proposed five-year BioThrax expiry dating. After a 2010 complete response letter on a revised three-dose primary schedule, Emergent submitted a response in November 2011. A pivotal BioThrax PEP immunogenicity and safety study began in November 2011. The MVA85A infant Phase IIb trial was expected to report preliminary data in 2012.
- Partner change: Abbott gave notice in December 2011 that it would terminate its TRU-016 collaboration effective March 20, 2012; Emergent expects to regain worldwide rights but lose Abbott’s cost-sharing. The company tested its TRU-016 in-process research and development and goodwill for impairment and reported no impairment at December 31, 2011.
- Operating and funding risks: BioThrax demand depends on government appropriations, procurement priorities, contract terms and delivery schedules. Manufacturing yields, FDA lot release, scale-up qualification, and reliance on certain single-source supplies could disrupt deliveries. Building 55 and Baltimore facility projects require further qualification or completion work.
- Regulatory and legal matters: FDA’s August 2011 Lansing inspection generated observations; corrective actions were underway, while earlier inspection observations had been closed. European patent oppositions involving Bavarian Nordic’s MVA patents remained on appeal. Management did not expect other ordinary-course litigation to materially affect operations.
- Unusual items: The company recorded a $1.0 million impairment charge on Frederick, Maryland buildings held for sale. It also paid $10.0 million on Trubion contingent value rights. These rights had a $4.8 million fair value liability at year-end. No impairment was recorded for acquired in-process R&D or goodwill after the Abbott termination assessment.
- Reporting controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded disclosure controls and internal control were effective.
Most important facts for investors to verify
- Delivery pace, funding availability and economics under the CDC BioThrax contract, including the extent of ongoing U.S. government customer concentration.
- Whether BioThrax production yields and potency-testing capacity recover, and whether FDA lot releases and manufacturing-facility approvals proceed as planned.
- FDA decisions and trial outcomes for BioThrax PEP, the revised dosing schedule, five-year expiry dating, and MVA85A.
- TRU-016 development plans and financing after Abbott’s collaboration ends, along with the progress and funding of other Biosciences programs.
- Cash generation versus capital spending, debt maturities and balloon payments, covenant compliance, and the planned sale of the Frederick properties.
- Effects of potential changes in government appropriations, contract options, procurement priorities, or development funding on revenue and profitability.