Emergent BioSolutions Nabs Its Acquisition (Times 2)

Emergent BioSolutions (EBS -3.88%) saw earnings per share fall year over year in the third quarter, but given the nature of the company's lumpy sales, the fall doesn't appear to be anything to worry about. Looking at the year-to-date numbers, EPS for the vaccines and bioterrorism-response company are up 25% over the same period last year.

Emergent BioSolutions results: The raw numbers

Data source: Emergent BioSolutions.

What happened with Emergent BioSolutions this quarter?

• Product sales were up 17% due to the addition of smallpox vaccine ACAM2000 and anthrax treatment raxibacumab, which were both acquired in the fourth quarter of last year. Sales of Emergent's anthrax vaccine BioThrax were down year over year, but management said that was expected due to the delivery schedule for the strategic national stockpile.
• Contract manufacturing services were up 17%, while revenue from contracts and grants grew 12% year over year.
• Lower taxes in the quarter -- due to a one-time adjustment -- helped boost income. But that couldn't make up for lower gross margins and higher research and development (R&D) costs. Gross margins decreased due to contract manufacturing and a noncash amortization cost, neither of which seems particularly worrisome. And the R&D investment should pay off in the long run.
• The Centers for Disease Control and Prevention issued a pre-solicitation notice for a new contract to buy ACAM2000 for the strategic national stockpile -- the first step in contract negotiations, which management hopes to wrap up by the end of the year.
• The Food and Drug Administration (FDA) said Emergent doesn't need to run any more studies for NuThrax, its follow-on anthrax vaccine, before applying for Emergency Use Authorization, the application for which is scheduled to be submitted before the end of the year.
• Management met its goal of making an acquisition this year -- two in fact: PaxVax and Adapt Pharma. PaxVax adds two FDA approved vaccines designed for travelers (against typhoid and cholera) and two pipeline candidates. Adapt Pharma adds Narcan nasal spray, a treatment for opioid overdose.
• Combined, the acquisitions are expected to add between $270 million and $300 million in revenue in 2019 as well as add to the company's profitability.

Image source: Getty Images.

What management had to say

There are other opioid overdose drugs in development, but CEO Daniel Abdun-Nabi thinks there's plenty of room for multiple products in the growing market:

And as we look at the landscape, increased education, increased awareness, increased avenues for availability, this is a growing marketplace. It's not static and fixed. And particularly when we see some of the state initiatives and the federal government allocating grant money for block grants to the states, and the utilization of those funds by the states to address the opioid crisis in the way they see fit. This is an expanding market. So it's not static whereby an additional product or two coming into the market actually affects the growth prospects for the Narcan nasal spray.

Emergent had to take on debt to finance the acquisitions, but CFO Richard Lindahl noted the company still has plenty of flexibility: "To finance these transactions, we incurred $768 million of debt under our concurrently amended and restated credit facility and also used $190 million of cash on hand. After factoring in this activity, we now have over $280 million of undrawn capacity under our expanded revolver, which when combined with our cash flow profile, ensures we retain the financial flexibility to fund our operating and investment needs, service our debt, and opportunistically consider additional [mergers and acquisitions] as we move down the road."

Looking forward

With the addition of PaxVax and Adapt Pharma and solid performance so far this year, management increased revenue guidance to between $770 million and $800 million, up from previous guidance of $715 million to $755 million. Guidance for net income was adjusted down, but that's to be expected with transaction and integration costs. On an adjusted basis, management is now looking for net income in the $105 million to $115 million range.