The public crisis that is the COVID-19 pandemic has some companies scrambling to survive, and others working hard to contribute to solving the problem. Investors, meanwhile, are dumping stocks of the companies in the former category while optimistically buying up shares of companies that might somehow profit from the tragedy.
Emergent BioSolutions (EBS +2.20%) is a biotechnology company that specializes in drugs, vaccines, and medical devices to address public health threats, which COVID-19 most certainly is. The share price has managed to hold its own in a woeful market, partly because the company is working on solutions to the pandemic. But is the stock a buy now?
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A profitable supplier to governments
The U.S. government is Emergent's largest customer. The company supplies vaccines and therapeutics for the U.S. Strategic National Stockpile (SNS) and for the military to protect against threats including anthrax, smallpox, botulism toxin, and chemical warfare agents. The company also sells Narcan nasal spray (the treatment for opioid overdose used by first responders) and vaccines for cholera and typhoid.
Selling to governments under long-term supply contracts gives Emergent a consistent flow of revenue that's growing and relatively predictable. Revenue for the full year of 2019 was up 41%, to $1.11 billion. This was primarily driven by sales of Narcan, which Emergent acquired in October 2018, and ACAM2000, a smallpox vaccine that the company started delivering under a new $2 billion contract to the SNS to fight biological warfare. Organic growth, excluding sales from recent acquisitions, was 7%.
A lot of biotechnology companies, including some in the cohort working on COVID-19, are early-stage businesses that aren't yet selling products. Emergent not only has a diversified product line, it also delivers solid results. For the full year of 2019, the company had adjusted earnings per share of $2.91, up 22% from 2018. The midpoint of Emergent's guidance for 2020 implies that the company expects adjusted net income to grow another 21% this year, after increasing at a compound annual growth rate of 14% since 2012.
Three reasons Emergent will keep growing
Emergent BioSolutions has been able to sustain growth for years for three main reasons. First, the market for countermeasures for public health threats supports a steady and growing business. Threats from terrorism aren't going away, and COVID-19 is just the most recent and vivid reminder that emerging infectious diseases in our connected world are on the rise. Government contracts give Emergent a predictable and growing source of cash that it can invest in new products to meet new threats.
Second, Emergent puts about 9% of its product revenue toward research and development, which supports a pipeline of new vaccines, therapeutics, and devices. The company's most advanced pipeline candidates include a new anthrax vaccine, vaccines for pediatric cholera and chikungunya virus, and a therapeutic treatment for people with severe influenza. But it also has vaccines in the works for shigellosis (a bacterial infection of the digestive system), Lassa fever (an animal-borne viral illness), and Marburg virus (which causes hemorrhages and fever), as well as a universal flu vaccine. Therapeutics in the company's early-stage pipeline include treatments for the viruses Zika and Ebola, and antitoxins for the infection diphtheria and the poison ricin.
But the growth strategy that's been arguably the most lucrative for Emergent in recent years has been acquisitions. The company has added $600 million in annual revenue through acquisitions since 2017, and it intends to make more deals. In the most recent conference call, CEO Robert Kramer said that the company has made infrastructure investments so future acquisitions can be executed smoothly. When asked about the potential for new deals, he said, "We're ready and experienced, and we'd like to do it again soon."
Is Emergent BioSolutions a COVID-19 stock?
Emergent has attracted investor interest recently by announcing two moves in response to the COVID-19 threat. On March 10, the company said it's teaming up with Novavax (NVAX +2.31%) to help that company bring its experimental COVID-19 vaccine to clinical testing. Emergent has a business supplying contract development and manufacturing services to drug companies large and small, which generated about 7% of the company's revenue last year. Emergent will produce Novavax's vaccine candidate for the phase 1 clinical study within the next four months.
The next day, Emergent announced that it has its own COVID-19 products in the works. The company is leveraging its hyperimmune platform (the basis for its FDA-approved treatments for smallpox vaccine complications, botulism, and anthrax) to develop two plasma-derived product candidates. Both are being developed as potential treatments for severely ill hospitalized patients, and one could be used to protect healthcare workers or other at-risk individuals. Emergent expects to begin a clinical study as early as the third quarter.
A more conservative choice for a biotech investment
Right now, investors are chasing after stocks of biotechs that have announced they're working on vaccines or treatments for COVID-19, and some of those stocks are soaring. Unfortunately, a lot of those investors are going to get hurt when the frenzy subsides and the reality of what it will take to actually get a drug launched and profitable sinks in.
At this point, I wouldn't buy the stock of any biotechnology company solely because you hope to score big on a COVID-19 vaccine or treatment. But Emergent represents a different sort of opportunity. The stock has the potential to do well based on its business selling countermeasures for other public health threats, regardless of how things turn out with COVID-19 -- and there are two ways in which it could potentially contribute to a solution to the pandemic that could pay off down the road.
Emergent BioSolutions' steady growth and profitability make it a consideration for some conservative investors who otherwise wouldn't want to take a chance on a biotech. It's less susceptible to disappointments from binary events than other companies in the space, and the shares sell for a reasonable valuation, about 15 times analyst estimates for 2020 earnings per share. That's about as cheap as it has been in recent months, making the stock a solid buy.
