What happened

Shares of Emergent BioSolutions (EBS 9.68%) jumped 19.4% in September, according to data provided by S&P Global Market Intelligence, after the bioterrorism expert was awarded a contract from the U.S. Department of Health and Human Services to buy approximately $2 billion worth of its smallpox vaccine ACAM2000 over the next 10 years.

So what

Management has said for multiple quarters now that it was in talks with the government to set up the follow-on contract, so the announcement certainly wasn't a surprise. But as the months wore on and the previous contract expired, biotech investors seemed to get a little anxious and the company's stock price suffered accordingly.

The contract may have also been larger than investors were expecting. The previous 10-year contract, which Emergent got when it acquired the drug from Sanofi (SNY 2.00%) in 2017, was only for $425 million, with about a third of that attributable to license maintenance activities.

Emergent BioSolutions didn't disclose the number of doses that it has to deliver, but it seems reasonable to assume that the government is getting a bulk discount. Equally likely, even if margins are compressed, Emergent probably negotiated for a profit that still resulted in the company earning more than it did under the old contract.

Gloved hands about to give an injection into a shoulder

Image source: Getty Images.

Now what

Through the first half of the year, Emergent had only generated about 40% of management's 2019 revenue guidance. The new ACAM2000 contract will help it catch up since it plans to deliver a majority of the $170 million of doses under the first year of the contract before the end of this year.