On November 5, 2020 Emergent BioSolutions Inc. (NYSE: EBS) reported financial results for the three and nine months ended September 30, 2020 and updated its full year 2020 guidance (Press release, Emergent BioSolutions, NOV 5, 2020, View Source [SID1234570054]).
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"Over the last 22 years, Emergent has built a solid business founded on demonstrable strengths in partnering, manufacturing, and integrating value-added M&A," said Robert G. Kramer, president and chief executive officer of Emergent BioSolutions. "The strength of our core business and the accelerated growth of our contract development and manufacturing unit validate our strategy to pursue leadership positions across the public health threat market. Our diverse product and service portfolio gives us continued confidence in executing our strategy, delivering on our commitments to our partners and customers, and creating value for our shareholders."
SELECT Q3 2020 BUSINESS ACCOMPLISHMENTS
Completed an offering of $450 million in aggregate principal amount 3.875% Senior Unsecured Notes due in 2028. The Company utilized the proceeds from the offering to repay $353 million outstanding under its revolving credit facility with the remainder to be utilized for general corporate purposes.
Announced the initiation of a Phase 3 clinical trial sponsored by the National Institutes of Health to evaluate the safety, tolerability, and efficacy of hyperimmune globulin products, including the Company’s COVID-19 Human Immune Globulin (COVID-HIG), as a potential treatment in adult patients hospitalized with COVID-19.
Announced U.S. Food and Drug Administration (FDA) approval of the shelf life extension of NARCAN (naloxone HCl) Nasal Spray from 24 months to 36 months.
Secured approximately $60 million in new business and existing project extensions across development services, drug substance manufacturing, and drug product manufacturing towards the Company’s contract development and manufacturing (CDMO) portfolio.
2020 FINANCIAL PERFORMANCE (unaudited)
(I) Quarter Ended September 30, 2020 (Q3)
Revenues
Total Revenues
For Q3 2020, total revenues were $385.2 million, an increase of $73.4 million as compared to 2019. Total revenues reflect an increase in contract development and manufacturing services revenues partially offset by a decrease in product sales and contracts and grants revenues.
Product Sales
For Q3 2020, product sales were $202.2 million, a decrease of $54.0 million or 21% as compared to 2019. Other product sales increased due to increased sales of BAT[Botulism Antitoxin Heptavalent (A, B, C, D, E, F, G) – (Equine)] and VIGIV [Vaccinia Immune Globulin Intravenous (Human)] offset by a decline in sales of travel health vaccines.
Contract Development and Manufacturing (CDMO) Services
For Q3 2020, revenue from the Company’s contract development and manufacturing operations was $157.1 million, an increase of $137.1 million as compared to 2019. The increase is largely due to the contribution of arrangements across development, drug substance manufacturing, and drug product manufacturing services with industry and government customers.
Contracts and Grants
For Q3 2020, revenue from the Company’s development-based contracts and grants was $25.9 million, a decrease of $9.7 million as compared to 2019. The decrease primarily reflects the completion of development activities associated with the AV7909 product candidate in 2019, partially offset by recent new development awards related to the Company’s COVID-19 product candidates.
Operating Expenses
Cost of Product Sales and Contract Development and Manufacturing (CDMO) Services
For Q3 2020, cost of product sales and contract development and manufacturing services was $149.0 million, an increase of $41.0 million or 38% as compared to 2019. The increase is primarily due to a charge of $29.9 million associated with contingent consideration liabilities due to the increased expectation that the Company will meet its final sales milestone for NARCAN Nasal Spray, a charge of $13.8 million related to a write-down of inventory balances due to the expected expiration of a portion of the Company’s travel health vaccines, and an increase in volume in CDMO services offset by a decline in volume of product sales.
Research and Development (Gross and Net)
For Q3 2020, gross R&D expenses were $84.4 million, an increase of $31.0 million or 58% as compared to 2019. The increase primarily reflects the impairment of the Company’s in-process research and development (IPR&D) intangible asset of $29.0 million. Excluding this item, research and development expenses were consistent reflecting an increase in costs associated with the Company’s COVID-19 therapeutic product candidates offset by a decrease in costs due to the completion of development activities associated with the Company’s AV7909 product candidate.
For Q3 2020, net R&D expense, which reflects investments made in development programs that are not currently funded in whole or in part by third-party partners and is calculated as gross research and development expenses minus contracts and grants revenue and the impact of the IPR&D intangible asset impairment, was $29.5 million, an increase of $11.7 million or 66% as compared to 2019. The increase is attributable to an increase in costs associated with the Company’s COVID-19 product candidates. The Q3 2020 and Q3 2019 net R&D expense was 8% and 6%, respectively, of adjusted revenue (total revenue less contracts & grants).
Selling, General and Administrative
For Q3 2020, selling, general and administrative expenses were $75.5 million, an increase of $10.5 million or 16% as compared to Q3 2019. The increase primarily reflects an increase in staffing costs to support the Company’s growth.
Amortization of Intangible Assets
For Q3 2020, amortization of intangible assets was $15.0 million, which was consistent with amortization of intangible assets of $14.7 million in Q3 2019.
Income Taxes
For Q3 2020, the income tax provision was $15.5 million as compared to $15.7 million in Q3 2019. The decrease is due to a decrease in income before the provision for income taxes of $3.9 million, an increase in discrete tax benefits of $3.5 million, offset by the impact of non-deductible contingent consideration expense. The Company’s effective quarterly tax rate, excluding discrete adjustments, was 34% and 26%, for Q3 2020 and Q3 2019, respectively. The effective quarterly tax rate, excluding the impact of non-deductible contingent consideration expense was 22% and 26%, for Q3 2020 and Q3 2019, respectively.
Net Income & Adjusted Net Income
For Q3 2020, the Company recorded net income of $39.5 million, or $0.73 per diluted share, versus net income of $43.2 million, or $0.83 per diluted share, in 2019.
For Q3 2020, the Company recorded adjusted net income of $119.0 million, or $2.19 per diluted share, versus adjusted net income of $64.8 million, or $1.24 per diluted share, in 2019. (1)
Adjusted EBITDA
For Q3 2020, the Company recorded adjusted EBITDA of $168.1 million versus $106.4 million in 2019. (1)
(II) Nine months ended September 30, 2020 (unaudited)
Revenues
Total Revenues
For the nine months ended September 30, 2020, total revenues were $972.4 million, an increase of 30% over 2019. Total revenues reflect an increase in product sales and contract development and manufacturing services offset by a decrease in contracts and grants revenues.
Product Sales
For the nine months ended September 30, 2020, product sales were $648.9 million, an increase of $56.2 million or 9% as compared to 2019. Other product sales decreased due to a decline in sales of raxibacumab and travel health vaccines slightly offset by an increase in sales of BAT and VIGIV.
Contract Development and Manufacturing (CDMO) Services
For the nine months ended September 30, 2020, revenue from the Company’s contract development and manufacturing services operations was $251.4 million, an increase of $196.8 million as compared to 2019. The increase is largely due to the contribution of arrangements across development, drug substance manufacturing, and drug product manufacturing services with industry and government customers.
Contracts and Grants
For the nine months ended September 30, 2020, revenue from the Company’s development-based contracts and grants was $72.1 million, a decrease of $26.3 million or 27% as compared to 2019. The decrease primarily reflects the completion of development activities associated with the AV7909 product candidate in 2019, offset by recent new development awards related to the Company’s COVID-19 product candidates.
Operating Expenses
Cost of Product Sales and Contract Development and Manufacturing Services
For the nine months ended September 30, 2020, cost of product sales and contract development and manufacturing services was $355.7 million, an increase of $55.0 million or 18% as compared to 2019. The increase is due primarily to an increase in volume of product sales and CDMO services, charges of $31.3 million related to the Company’s contingent consideration liabilities, a charge of $13.8 million related to a write-down of inventory balances due to the expected expiration of a portion of the Company’s travel health vaccines, and an increase in share-based compensation expense due to a one-time special broad-based, immediately vested equity award to employees.
Research and Development (Gross and Net)
For the nine months ended September 30, 2020, gross R&D expenses were $175.0 million, an increase of $11.6 million compared to 2019. The increase primarily reflects the impact of impairment of the Company’s IPR&D intangible asset of $29.0 million. Excluding this item, gross R&D expense decreased $17.4 million compared to 2019. The decrease primarily reflects a decrease in costs in 2020 due to the completion of development activities associated with the Company’s AV7909 product candidate in 2019. The decrease has been partially offset by an increase in costs associated with the Company’s chikungunya and COVID-19 product candidates.
For the nine months ended September 30, 2020, net R&D expense, which reflects investments made in development programs that are not currently funded in whole or in part by third-party partners and is calculated as gross research and development expenses minus contracts and grants revenue and the impact of the IPR&D intangible asset impairment, was $73.9 million, an increase of $8.9 million or 14% as compared to 2019. The increase primarily reflects an increase in costs associated with the Company’s chikungunya and COVID-19 product candidates offset by a decline in costs associated with the FLU-IGIV product candidate. The 2020 and 2019 net R&D expense was 8% and 10%, respectively, of adjusted revenue (total revenue less contracts & grants).
Selling, General and Administrative
For the nine months ended September 30, 2020, selling, general and administrative expenses were $221.2 million, an increase of $19.9 million or 10% as compared to 2019. The increase primarily reflects an increase in staffing costs to support the Company’s growth and share-based compensation due to a special broad-based, immediately vested equity award to employees during the second quarter of 2020.
Amortization of Intangible Assets
For the nine months ended September 30, 2020, amortization of intangible assets of $44.8 million was consistent with $43.9 million in 2019.
Income Taxes
For the nine months ended September 30, 2020, the income tax provision of $34.7 million increased $36.4 million when compared to 2019. The increase is due to an increase in income before the provision for income taxes of $148.5 million, offset by an increase in discrete tax benefits of $7.0 million in 2020. The Company’s effective tax rate, excluding discrete adjustments, was 29% and 27%, for the nine months ended September 30, 2020 and 2019, respectively. The effective tax rate, excluding the impact of non-deductible contingent consideration expense was 25% and 24%, for the nine months ended September 30, 2020 and 2019, respectively.
Net Income & Adjusted Net Income
For the nine months ended September 30, 2020, the Company recorded net income of $119.7 million, or $2.23 per diluted share, versus net income of $7.6 million, or $0.15 per diluted share, in 2019.
For the nine months ended September 30, 2020, the Company recorded adjusted net income of $225.1 million, or $4.20 per diluted share, versus adjusted net income of $69.6 million, or $1.33 per diluted share, in 2019. (1)
Adjusted EBITDA
For the nine months ended September 30, 2020, the Company recorded adjusted EBITDA of $339.5 million versus $145.4 million in 2019. (1)
2020 FINANCIAL FORECAST
Based upon the Company’s financial performance year to date as well as expectations for the remainder of the year, the Company has updated its full year 2020 financial forecast reflected by the following financial metrics and accompanying operational considerations:
The following operational considerations are incorporated in the Company’s forecast and remain consistent with the previous forecast:
Year over year improvement in gross margin of 400 – 600 basis points driven by improved product mix and increased contribution from the Company’s CDMO business;
The previously announced delay into 2021 of the launch of the Phase 3 clinical study for CHIKV-VLP, the Company’s chikungunya virus virus-like particle vaccine, due to the timing of certain operational factors;
The continued deferral into 2021 of a follow-on procurement contract with the U.S. government for raxibacumab, the Company’s FDA-approved anthrax monoclonal antibody therapeutic, due to the impact of the prioritization of Operation Warp Speed on the Company’s technology transfer activities for the product;
Continued challenges through the end of 2020 in the Company’s travel health business and revenues associated with Vaxchora (Cholera Vaccine, Live, Oral) and Vivotif (Typhoid Vaccine Live Oral Ty21a);
No generic competition in 2020 for NARCAN Nasal Spray.
The Company has assessed the risks to its business associated with the COVID-19 pandemic and has adopted measures to mitigate those risks as they are understood today and accordingly is providing this outlook for 2020. Despite the lack of expected material disruption to the business, the Company’s executive management continues to assess the business and operational implications associated with the pandemic and market conditions on its employees, patients, and customers.
The outlook for 2020 does not include estimates for potential new corporate development or other M&A transactions.
FOOTNOTES
(1) See "Reconciliation of Net Income to Adjusted Net Income and Adjusted EBITDA and Gross Margin and Adjusted Gross Margin" for a definition of terms and the reconciliation tables.
CONFERENCE CALL, PRESENTATION SUPPLEMENT, AND WEBCAST INFORMATION
Company management will host a conference call at 5:00 pm (Eastern Time) today, November 5, 2020, to discuss these financial results. The conference call and presentation supplement can be accessed from the Company’s website or through the followin