Emergent BioSolutions Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; financial statements are unaudited. The company develops vaccines and antibody therapies in biodefense and biosciences. BioThrax, its only marketed product, generated substantially all product sales, principally to the U.S. government.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $88.1 million | $62.1 million | $106.7 million | $108.9 million |
| Product sales | $71.5 million | $55.9 million | $77.1 million | $94.7 million |
| Contracts and grants | $16.7 million | $6.3 million | $29.6 million | $14.2 million |
| Operating income (loss) | $20.2 million | $14.8 million | $(15.3) million | $18.0 million |
| Net income (loss) attributable to Emergent | $14.2 million | $9.8 million | $(7.2) million | $12.3 million |
| EPS, diluted | $0.39 | $0.31 | $(0.20) | $0.39 |
Q2 product sales rose 28%, primarily on 25% more BioThrax doses delivered. Six-month product sales fell 19%, with doses delivered down 22% after potency-testing capacity was redirected in Q1 to qualify replacement reference standards and other development testing. Contract and grant revenue increased in both comparisons, reflecting BARDA/NIAID work and Abbott and Pfizer collaborations.
R&D expense increased 69% to $31.5 million in Q2 and 72% to $66.2 million for the first half, driven mainly by biosciences programs, including acquired candidates. SG&A rose 15% in Q2 and 14% year to date, including approximately $2.2 million of UK restructuring charges. Product-sales gross margin, calculated from product sales less cost of product sales, was approximately 77.5% in Q2 and 77.8% for the first half; the company attributed higher cost per dose in part to lower production yield.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $122.1 million, investments were $5.0 million, and total current assets were $223.8 million versus current liabilities of $72.5 million.
- Cash and cash equivalents decreased $46.9 million in the first half. The cash flow statement reports $28.8 million used in operating activities and $19.8 million used in investing activities, including $16.8 million of capital expenditures. Management’s cash-flow discussion gives operating cash use of $29.5 million including foreign-exchange effects.
- Debt principal was reported as $39.3 million at June 30; the balance sheet shows $10.2 million current and $29.1 million noncurrent indebtedness. The revolving credit line expired June 1 with no amount outstanding.
- After quarter-end, PNC provided a construction loan facility of up to $30 million for the Baltimore facility; $17.8 million had been drawn by the filing date, including $6.2 million used to repay the prior HSBC loan. A separate $12 million equipment facility was available and undrawn.
Material changes, outlook and risks
- The existing HHS BioThrax supply agreement, modified to cover 17.9 million doses at a total purchase price of approximately $500 million, runs through September 30, 2011. About 14.3 million doses had been delivered by June 30. The company said the government intended to award a sole-source contract for 44.75 million doses over five years, but discussions were ongoing; no award was assured.
- Management expects research and development spending to increase as programs advance, subject to trial results, collaborator participation and funding. It expects lower future spending on Typhella and the double-mutant anthrax vaccine program, the latter reflecting reduced U.S. government funding.
- In May 2011 the company acquired Zanolimumab assets for approximately $3.1 million, expensed as R&D, with potential additional milestone and sales-based payments. The Trubion-related contingent value rights were valued at $15.9 million at June 30 using Level 3 estimates; fair value charges were $1.4 million for the first half.
- The company remains highly dependent on U.S. government BioThrax demand, contract awards, appropriations and delivery timing. Other key risks include manufacturing yield and lot-release requirements, qualification of new facilities, clinical and regulatory uncertainty, partner decisions, and the need for future financing. Management reported effective disclosure controls as of June 30.
- The Trubion acquisition class actions were approved for settlement and dismissed with prejudice on July 29, 2011. European patent oppositions concerning Bavarian Nordic MVA patents remained pending on appeal.
Investor verification priorities
- Confirm the status, terms, funding and delivery schedule of the expected HHS follow-on BioThrax contract.
- Reconcile the reported $39.3 million debt principal with the note disclosure that gives $46.6 million as the June 30 carrying and fair value of long-term indebtedness.
- Track BioThrax production yields, potency-testing capacity, lot releases and the qualification and validation schedule for Building 55.
- Assess the cash-burn trajectory, Baltimore facility spending and draws under the post-quarter PNC loan facilities.
- Monitor biosciences development results and spending, collaboration commitments, and the valuation and potential cash obligations associated with contingent value rights.