Shares of drug manufacturer Emergent BioSolutions (EBS -8.26%) are down 75% in the past 12 months. Investors have been turning to safer investments amid the bear market and ditching the risky drugmaker. But last quarter, the company's revenue came in higher than its guidance, and the Food and Drug Administration (FDA) also recently approved its Narcan nasal spray for over-the-counter (OTC) use. Is Emergent on the right track, and can the stock be a great buy heading into the latter half of 2023?
The company needs more consistency in its top line
A big problem with Emergent BioSolutions is that the U.S. government is a fairly large customer for the company, driving demand for multiple medical countermeasure (MCM) products it makes, including Anthrax MCM and Smallpox MCM. MCM products help prevent and treat diseases in relation to chemical and biological threats.
For the three-month period ending March 31, sales of those products totaled $29.1 million -- versus $132.7 million in the prior-year period, for a decline of 78%. There isn't an ongoing need for MCM products and that has been visible in Emergent's falling sales numbers:
EBS Revenue (Quarterly YoY Growth) data by YCharts.
Sales of $165 million in the first quarter were down 46% year over year, but the positive is that they were above Emergent's previously issued guidance, which estimated revenue to be between $130 million and $150 million.
Emergent does have another product, Narcan, which generated more than $100 million last quarter and that may be the answer to the business' growth problems. Narcan can reverse an opioid overdose and restore a person's breathing. While it generated a modest 8% revenue growth last quarter, there is a catalyst that could unlock even more potential for the treatment.
The FDA recently approved Narcan's nasal spray to be available as an OTC emergency treatment for opioid overdose. It is the first such approval of its kind for treating opioid overdoses that will make it more broadly available. The company expects that by "late summer" it will be available OTC.
But a falling growth rate is just part of the problem, as the company also faces problems with profitability and cash burn.
The company's profitability and cash flow need substantial improvements
For up-and-coming growth stocks, a big risk is often that the underlying businesses are burning through lots of money and need to issue shares to keep their operations growing. That results in dilution for existing shareholders, and downward pressure on the stock price as more shares become available in the markets.
Unsurprisingly, as Emergent's revenue growth has slowed down, its bottom line and cash burn have also deteriorated:
EBS Cash from Operations (Quarterly) data by YCharts.
Last quarter, selling, general, and administrative costs alone totaled $100.5 million. After adding in product costs of $102.9 million, that totals $203.4 million, which is 42% higher than its revenue.
This year, management expects the business to remain in the red, with its net loss being between $135 million and $185 million. That's an improvement from the $223.8 million loss it reported in 2022, but it may not be enough of a reason to convince investors that it's on the right path just yet.
Should you buy Emergent's stock?
There isn't a big reason to be bullish on Emergent, even with the positive news surrounding Narcan. Although the company updated its guidance last month, it only bumped up its revenue guidance for Narcan by $70 million, projecting its 2023 sales to come in between $360 million and $380 million. It suggests that perhaps there may not be enough of a catalyst there to turn things around, at least not in the short term.
Emergent is a volatile stock to own, and it isn't a suitable investment for most investors given the risk it possesses. There's simply too much work for the business to do in growing Narcan and bringing down its expenses for it to prove that it has a path to profitability and positive cash flow. And until that happens, investors are better off avoiding the healthcare stock.
