Emergent BioSolutions Looks to the Second Half for Growth

Emergent BioSolutions (EBS 1.86%) continued its transition in the second quarter with another loss on the earnings line. Fortunately, the bioterrorism expert shouldn't take too long to turn things around, because earnings growth is expected in the second half of this year.

Emergent BioSolutions results: The raw numbers

Data source: Emergent BioSolutions.

What happened with Emergent BioSolutions this quarter?

• The increased revenue came from acquisitions of Adapt and PaxVax in the fourth quarter of last year.
• Narcan, the nasal spray for opioid overdose that came from Adapt, added $73 million. The company continues to benefit from a new California law that calls for the co-prescription of Narcan or one of the other naloxone-containing drugs when an opioid is prescribed for the first time. New Mexico implemented a similar law in the second quarter.
• Sales of the catchall "other product" category were up 65% year over year to $76 million. The growth primarily came from raxibacumab, for anthrax inhalation, and the travel health vaccines, which were acquired from PaxVax.
• Sales of anthrax vaccine BioThrax dropped substantially year over year as the government transitions from BioThrax to Emergent's next-generation anthrax vaccine, AV7909. Last week, the government exercised its option to buy 10 million doses of AV7909, worth $261 million, over 12 months. That's in addition to the base 3 million doses that are part of the contract, and there are options to purchase another 40 million doses.
• Sales of smallpox vaccine ACAM2000 also dropped year over year as the company continues to negotiate with the government for a new contract.
• Contract manufacturing decreased 21% year over year to $18.7 million, but the year-ago quarter had one-time items, so the decrease wasn't unexpected.
• Revenue from contracts and grants increased to $41 million, mostly from the government contract to develop AV7909.
• In June, Emergent was awarded a 10-year contract from the U.S. government, valued at about $535 million, to continue to supply vaccinia immune globulin intravenous (VIGIV), which the government stockpiles to treat complications resulting from smallpox vaccination.

Image source: Getty Images.

What management had to say

Bob Kramer, Emergent's president and CEO, appeared to have plenty of confidence that the ACAM2000 negotiations would get wrapped up shortly:

With the VIGIV contract secured, momentum regarding contract negotiations for ACAM2000 has accelerated with the U.S. government. We have continued to manufacture product and ensure sufficient supply chain availability to meet our shipment obligations once we land on the final contract. As a result, we have a high degree of confidence in our ability to provide [a] substantial number of doses to the stockpile during the second half of this year, further supporting our reaffirmed guidance.

Chief financial officer Rich Lindahl explained how management still thinks the company can hit 2019 guidance even after the slow start to the year: "We have a high degree of fixed cost in our business, and so we do get significant operating leverage as revenue increases. And so you can certainly expect a high percentage of the increase in revenue in the fourth quarter will flow through to profitability in the fourth quarter."

Looking forward

Management reiterated 2019 guidance for revenue of $1.06 billion to $1.14 billion and net income of $80 million to $110 million. Since most of the revenue comes from government contracts, investors should have confidence that management can hit its goals.

The one wildcard remains the ACAM2000 contract. If negotiations drag out, a delay could certainly push the revenue into 2020, but long-term investors needn't be worried about the exact timing of the revenue. With Emergent BioSolutions being the only company able to meet the government's needs, Emergent will likely be awarded a contract... eventually.