Emergent BioSolutions: Investment Advice For the War on Terror

by: Andrew Doss
Emergent BioSolutions Inc (NYSE:EBS) manufactures immunobiotics in two separate segments. Its Biodefense segment commercializes immunbiotics for protection against possible bioterrorism. Its commercial segment attempts to develop vaccines for diseases that have no known vaccine. Emergent BioSolutions sole licensed vaccine Biothrax has recently been made mandatory for US military personnel deploying in high risk regions.


EBS was first incorporated as BioPort Corporation in Michigan early in 1998. In June 2004, it completed a corporate reorganization into Emergent BioSolutions Inc., a Delaware corporation formed in December 2003. This new reorganization resulted in an initial public offering in late 2006 for Emergent BioSolutions. With the ongoing war on terrorism, Emergent BioSolutions will strive to provide the Department of Defense and the Department of Homeland Security with critical vaccines.


BioThrax- Biothrax is the only anthrax vaccine approved by the FDA. It is used by the US military and Homeland security. EBS also has several other vaccines in research and development for the Biodefense industry. Although at this time EBS has no marketable commercial products they are aggressively developing multiple vaccines. I believe EBS has to potential to revolutionize the market with some of these products. EBS is currently developing a vaccine for Chlamydia which is the most prevalent STD in the world. I believe that in modernized countries this vaccine will be mandatory. In addition to STDs, EBS is also developing a vaccine for Streptococcus. I believe that this vaccination if approved its use would be as widespread as the common flu shot.

The below graphs, obtained from the companies website, show the current stages of product development.

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EBS chart 1

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EBS chart 2


EBS is subject to multiple risks and I feel it is important to disclose these before we attempt to evaluate its financial health. Although it is approved by the FDA, BioThrax has been linked to lawsuits and controversy. Until 2004 the vaccine was mandatory for US military personnel. However, the US military made the vaccine optional two years ago. When the US military made this change, 50% of the troops offered the vaccine turned it down. In October the DOD announced that the vaccine would again become mandatory. Several rights groups have threatened lawsuits once needles start going into arms.


The high cost of research and development presents a barrier of entry to EBS. However, with revenue generated from the firm's recent IPO, EBS stands to present itself as a forerunner in the pharmaceutical industry. EBS has a stable relationship with the US government which gives it a competitive advantage over many other firms. EBS must successfully develop its commercial line into a profitable segment before revenue generated from Biothrax runs out.

Recent Developments

EBS went public on November 22, 2006. I have been tracking this company ever since its initial public offering. It completed its first critical delivery of BioThrax to the Strategic National Stockpile on December 14, 2006. This delivery increased 4th quarter revenue by 75 million. On 14Dec2006 EBS stock was up 58 cents an increase of 5.94% EBS closed at $10.35. When EBS went public its price was 12.72 however in less than 10 days its price dropped to $10.00. Since EBS has been able to deliver on time their first major order as a public company, they will see their value continue to rise. Furthermore, I believe that the value will continue to grow based on key financial analysis that I will present in the next section.

Financial Analysis

All Dollar amounts are in thousands
EBS Chart 3

EBS Chart 4

Expense distribution

EBS Expense Distribution

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EBS Chart 5

The chart above reflects a high amount of plant equipment and short term investments. I like the percentage of short-term investments that the firm is currently maintaining. However its ability to convert these short term investments into cash worries me. I would like to see the firm have at least some cash on hand.

Assets and Capital Structure

EBS Capital Structure

EBS Chart 6

Ratio Analysis

1) Liquidity

EBS Liquidity

EBS has been able to meet its short term obligations and did a good job by bringing its current ratio up to 1.96. The firm’s quick ratio in 2004 was unacceptable and I would like to see EBS continue to increase its quick ratio. It is difficult to benchmark EBS against other pharmaceutical companies alone. Therefore I also compared common ratios against select firms in the defense industry. I believe the war on terrorism will have a long term impact on the profitability of the firm.

2) Asset Management

EBS asset management

The total asset turnover looks acceptable but I doubt the firm’s ability to maintain it during the next three quarters. The firm’s collection period was high in 2004 due to complicated negotiations with the government. The firm’s ability to lower this figure in 2005 shows that the firm is learning its lessons and is becoming more efficient with its collections.

3) Debt Management

EBS Debt Management

EBS has done a good job of keeping these two ratios low. However, since the company has gone public, I will continue to monitor this sector. If EBS can keep these ratios low it will encourage me to recommend this company for our firm to invest in.

4) Profitability

EBS profitability

EBS maintained an excellent NPM from 2004 to 2005, although I would like to see this margin around 15% in the future. The firms ROA average rose 2% from 2004 to 2005. I believe with such a significant increase in sales from the same time period this figure should be a bit higher. The firms ROE was significantly above average for pharmaceutical companies in 2004. However the company was still private at that time and many defense stocks experienced similar ratios for that period.

5) Market Value Ratios

EBS Market Value Ratios

2005 was a good year for investors in the pharmaceutical and defense industries. I combined these two industries to obtain averages for comparison in respect to the PE and MB ratio. Although EBS had favorable ratios in each segment they were still below par. I doubt the markets ability to sustain these rates into 2007. However I believe that EBS will continue to keep its MB ratio above three. Furthermore, I anticipate EBS to outperform the industry in 2007 due to expected contracts with the US government.

I value EBS stock to be at or around $14 or $15 and expect consistent large term growth for the next 5 years. Immediately following the start of the war on Terror, defense stocks and contracts rose considerably. As a corollary, during my research I was unable to find any pharmaceutical firm that reflected similar gains based on this assumption. I believe that EBS is about to show gains similar to those experienced by the defense industry. EBS has delivered on time or better on all orders from the government for the BioThrax vaccine. EBS has an adequate current and quick ratio and is steadily showing improvements with asset management. EBS bolstered an impressive .20 debt to assets ratio in FY 2005. Furthermore in FY 2006 EBS increased its research and development cost by 10 million. This shows me that the firm does have the shareholder in mind. EBS has proven itself as the leader in the small BioDefense industry. Furthermore it has continued to deliver its product on time since its IPO. I believe that this stock is under looked and undervalued.

Disclosure: Author went long EBS on the first of December.