Emergent BioSolutions (NYSE:EBS) reported solid second-quarter financial results today, but it was the announcement that it's spinning out its biosciences division into a new company that dominated the conference call. First, let's take a look at the financials.
Revenue grew 14% year over year as the company works through the delay in shipment of its anthrax vaccine, BioThrax, after foreign particles shut down release of the product. Sales were up 7% year over year in the second quarter, but it still hasn't made up for the lack of shipments in the first quarter. For the year, BioThrax sales are down 22% compared to the same period last year. Management thinks it will be caught up by the end of the third quarter.
As we saw in the first quarter, revenue from contracts, grants and collaborations helped boost overall revenue through a 54% year-over-year increase in the category. Emergent BioSolutions recently received a contract to manufacture monoclonal antibodies for the Biomedical Advanced Research and Development Authority, or BARDA.
Earlier this week, Emergent BioSolutions announced that it had licensed Emergard, a military-grade auto-injector device, from Pharma Consult of Austria. The device isn't approved by the FDA, so the company can't sell it here yet, but plans to start selling it outside the U.S. in the fourth quarter. Emergent BioSolutions thinks the annual worldwide market for heavy-duty auto injectors that could be used for antidotes or other treatments in the field is in the $100 million to $200 million range.
On the bottom line, Emergent BioSolutions reported an income of $17 million for the quarter, and reiterated its guidance for income of $50 million to $60 million for the year. Emergent BioSolutions is still sitting on a loss for the year after the lack of BioThrax sales in the first quarter, but the catch-up deliveries will help the biotech reach its guidance. Third-quarter revenue is expected to be 11% to 19% higher than the second quarter.
Looking forward to next year, Emergent BioSolutions is still on track to start shipping BioThrax made in Building 55 in early 2016. The new plant has a larger capacity, so the company is in discussions with CDC about increasing their purchases; but management couldn't give more details.
As noted above, Emergent BioSolutions announced that it plans to spin out its biosciences division. The move will be a tax-free distribution to shareholders, resulting in current shareholders owning 100% of the new company. The split is expected to close in the middle of next year.
The move will make Emergent a pure play on biodefense and emerging infectious diseases, and jettisons the high research and development costs associated with developing oncology products that the biosciences division has in its pipeline. Emergent also won't have the high costs associated with selling branded drugs.
The company estimates that ditching the biosciences division will increase EBITDA by $40 million to $50 million based on 2014 revenue and costs. It will use the increased cash flow to make acquisitions, and plans to consider stock buybacks or a dividend.
The marketed drugs and pipelines will get split along the obvious lines, with Emerget retaining the six marketed drugs and devices aimed at biodefense and emerging infectious diseases. Emergent is also keeping the manufacturing plants, and will manufacture products for the new biologics company for a fee.
The new company is keeping the other four marketed drugs. They're mostly mature products, except for recently launched Ixinity, which is entering the crowded hemophilia B market. Given the costs associated with its research and development pipeline and the small sales of the drugs -- just $7 million in the second quarter -- the new company isn't likely to be profitable. Emergent plans to seed the new company with $50 million to $70 million to get it started.
Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Emergent BioSolutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.