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Is There Any Hope Left for Emergent BioSolutions?

By Zhiyuan Sun - Apr 27, 2021 at 6:10AM

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The go-to government contractor is in deep trouble. Should investors buy the dip?

Emergent BioSolutions' (EBS 2.54%) streak as a hot coronavirus stock recently came to an abrupt end, after the company ran into problems with its coronavirus vaccine manufacturing contracts. In a little over two months, it is down nearly 50% from its February highs. 

With its price-to-earnings (P/E) ratio at 11, the lowest it's been in a year, the stock looks ridiculously cheap. But that's not enough, alone, to justify a purchase. There are still plenty of reasons why investors should stay away from this value trap. 

Scientist examining biohazardous liquid.

Image source: Getty Images.

A scandal in the making

The whole idea behind Emergent BioSolutions was for it to "switch online" during national emergencies and use its excess manufacturing capacity to produce vaccines. It fulfills contracts for defense purposes during times of calm to stay afloat. 

Last June, the company received a $628 million contract to manufacture coronavirus vaccines for AstraZeneca (AZN -0.18%) and Johnson & Johnson (JNJ 1.13%). At the time, it had inadequate staff as well as quality assurance problems in its Baltimore manufacturing plant, called Bayview.

There have been reports over the past year that Robert Kadlec, the assistant secretary for preparedness and response at the U.S. Department of Health and Human Services (HHS), allegedly used his personal connection to Emergent BioSolutions to pressure the former Trump administration in awarding the contract to Emergent BioSolutions. Kadlec had previously served as a consultant for Emergent BioSolutions. From 2017 to 2020, the firm received more than $1.2 billion in government contracts from the HHS.

On April 21, the U.S. Food and Drug Administration (FDA) issued an inspection report detailing nine violations at its Baltimore plant. These include contamination, inadequate staff training, and unsanitary procedures. At least 15 million doses of the Johnson & Johnson vaccines had to be thrown out after they'd been ruined. After that event, AstraZeneca moved its vaccine production out of Bayview.

Emergent BioSolutions is no longer producing any coronavirus vaccines pending a resolution of issues raised by the FDA. When it resumes capacity, it will be no longer make any more AstraZeneca vaccines. There is now a congressional investigation into the company's vaccine contracts. 

On top of all of that, Emergent's CEO, Ryan Kramer, has come under fire for allegedly selling $5.5 million worth of shares in the company in February and March based off insider information, before news of the company's COVID vaccine blunder broke. Lawsuits against Kramer and other executives were filed in Maryland last week.

Can Emergent BioSolutions recover? 

In 2020, Emergent realized $1.555 billion in revenues and $630 million in operating income less noncash items (EBITDA). Its revenue segments consist of anthrax vaccines, smallpox vaccines, a nasal spray to fight opioid overdose, and, of course, manufacturing and development contracts.

This year, it expects its sales to top $2 billion and its EBITDA to reach $780 million. The company is continuing to keep an eye on long-term sustainability by monitoring contract development and manufacturing service backlogs. At the end of 2020, those amounted to $1.34 billion. At the same time, Emergent BioSolutions also has $689 million in possible contract extensions. But it's reasonable to say that given recent developments, there's a possibility that some of those deals won't be renewed.

For these reasons, I'm skeptical that Emergent BioSolutions can reach its goal of $945 million in contract development and manufacturing revenue this year. What's more, the company forecasts just $805 million in product sales in 2021, representing an 18.7% decline year over year. Additionally, the company relies on government agencies like the Biomedical Advanced Research and Development Authority (BARDA) and the HHS for its anthrax and smallpox vaccines, which could be at risk due to bad optics from a congressional investigation.

Right now, the stock is trading for 2.2 times sales and 11 times earnings. That looks pretty cheap relative to past financials, but is well justified considering its bottom-line faces huge risks ahead. I would definitely avoid Emergent BioSolutions for the next year or so, and turn to other healthcare stocks for long-term gains instead.

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Stocks Mentioned

Emergent BioSolutions Inc. Stock Quote
Emergent BioSolutions Inc.
EBS
$31.83 (2.54%) $0.79
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$179.52 (1.13%) $2.01
AstraZeneca PLC Stock Quote
AstraZeneca PLC
AZN
$65.95 (-0.18%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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