- Emergent BioSolutions has had a rough go over the past couple of months resulting from a cross-contamination mishap at their Baltimore facility.
- Due to the cross contamination, the company had to toss millions of Johnson & Johnson vaccines. Consequently, the FDA put a halt on vaccine production at that facility.
- Following the news, EBS share price has been cut in half and crushed to new 52-week lows. I believe there is an opportunity for a quick reversal play.
- The company's latest quarter earnings and updated guidance point to record revenues in 2021. The market will find it hard to ignore double-digit growth over the rest of 2021.
Emergent BioSolutions (NYSE:EBS) has recently been under public and regulatory scrutiny for the vaccine debacle that transpired at their Bayview facility. In addition, the company’s CEO and the company’s government contracts have also generated some concerning headlines. The negative headlines in conjunction with the FDA’s inspections have dragged down the share price to a new 52-week low. Despite the setbacks, I believe Emergent will address the issues that caused the mishap and will return to being a vital cogwheel in fighting the pandemic. As a result, I am looking to take advantage of the drastic sell-off and will be looking to establish a short-term position before the headlines clear.
I intend to review the recent vaccine headlines and provide my opinion about how the company is handling the situation. In addition, I take a look at the company’s recent earnings and will discuss what investors should expect for the rest of 2021. Finally, I present my plan for establishing a pilot position in the coming days to take advantage of a potential reversal.
It was only a few months ago when Emergent BioSolutions appeared to be firing on all cylinders and was manufacturing millions of doses of COVID-19 vaccines a week. Unfortunately, the engine appears to have seized and the vaccine production had to come to a stop.
On April 21st, the FDA dispensed an inspection report describing nine violations at Emergent’s Bayview plant. The violations at the facility consisted of contamination, inadequate staff training, and unsanitary procedures. At least 15M doses of the Johnson & Johnson (JNJ) vaccines had to be discarded after they'd been contaminated as a result of an apparent ingredient error with AstraZeneca’s (AZN) vaccine components. Subsequently, the FDA put a halt on production until the company addressed these issues cited.
Obviously, this is a major setback for national vaccine production, JNJ, and Emergent. In addition, AstraZeneca decided to move its vaccine production out of the Emergent facility. Consequently, the share price has been chopped in half and hasn’t shown a sign of a reversal.
There have been several accounts that congress is looking into how Emergent was able to secure these vaccine contracts despite having a record of violations. Former President Trump’s assistant secretary for preparedness and response at the HHS, Robert Kadlec, purportedly pushed to have Emergent BioSolutions be awarded $1.5B in government contracts. Previously, Kadlec was a consultant for Emergent BioSolutions for several years. Now, the House of Representatives has requested Emergent’s CEO Robert G. Kramer, and executive chairman Fuad El-Hibri, to testify before the coronavirus subcommittee about these allegations. There might be relationships that connect Emergent with members of the previous administration; however, one must understand that the company has a long history of supplying government stockpiles… preparing and responding to public health crises is essentially Emergent’s mission statement, so receiving those contracts shouldn’t be a source of criticism.
Figure 1: Public Health Portfolio (Source: EBS)
Another negative headline comes from Emergent's CEO Kramer, who allegedly sold $7.6M worth of EBS in February and March before the COVID vaccine blunder news hit the wire. Apparently, these transactions were scheduled back in November, so it is difficult to say that this was insider trading. Nevertheless, it is another negative headline for the company to add to the pile.
Punished For Answering The Call
Clearly, these headlines and accusations are serious, so the reaction in the market is justified. However, some of these allegations are being used for political theatre and pharmaceutical warfare. It is important to acknowledge that Emergent stepped up to answer the U.S. government’s call to action to help increase global vaccine production. Prior to the pandemic, Emergent BioSolutions’ Bayview facility was used as a clinical development site, so the company had to quickly transition the facility to a commercial site that was going to produce hundreds of millions of COVID-19 vaccines from two different companies. This transition is not a simple process and involves designing a complex symphony of components to create cutting-edge biologics, which can take years to hone in. Not only does a company have to procure and assemble the equipment, but they also need to develop the procedures to ensure every finished product is perfect. This is an extremely difficult task considering biotech companies are essentially growing the products, whereas pharmaceuticals are manufacturing their product. Consequently, product loss is not a unicorn event in biologics and can occur for an assortment of reasons.
Considering the company just got the facility online and was helping to produce novel products, I wasn’t surprised that there was a mishap. However, I am not willing to quickly pounce on Emergent and its employees for some mistakes while trailblazing the COVID-19 vaccine production in the United States. Let us see if the company is able to address the issues the FDA has cited before labeling Emergent as a “troubled” company.
The company recently reported their Q1 earnings with a beat on EPS and a miss on revenue. Emergent BioSolutions delivered on expectations due to the strength and durability of their diversified business. The company reported significant revenue growth and corresponding profitability. The company's financial condition remains strong, with the liquidity and financial flexibility to fund the company operations and pursue opportunistic investments.
Q1’s total revenues came in at $343M, which a 78% increase set against the prior year. The company’s anthrax vaccine sales were $55M and their NARCAN Nasal Spray sales were $74M. Both of these were in line with the prior year, while other product sales came in lower than the prior-year due to reduced global demand resulting from the pandemic. Obviously, the company saw significant growth in CDMO services as revenues increased to $184M due to vaccine production.
Figure 2: Q1 2021 Vs. Q1 2020 (Source: EBS)
In terms of the balance sheet, Emergent BioSolutions ended the quarter with ~$548M in cash and $184M of accounts receivable, which equals about $730M in aggregate current liquid assets. What is more, Emergent still has roughly $600M of undrawn revolver capacity.
Figure 3: End of Q1 2021 Balance Sheet (Source: EBS)
Looking For Record Revenues Ahead
In Q1, Emergent BioSolutions secured $187M of new business and has a backlog of $1.34B of business. For Q2, Emergent BioSolutions expects revenue to come in between $370M-430M. The company’s 2021 forecast expects their anthrax vaccine revenues to be in a range of $280M-310M, ACAM2000 to be between $185M-205M, and NARCAN to be between $305M-325M. As for CDMO, they have adjusted their revenues to be between $765M and $875M. Overall, the company anticipates total revenues to be around $1.7B-1.9B, and an adjusted net income of $395M-470M.
Figure 4: Revised 2021 Forecast (Source: EBS)
The forecasted range for CDMO services has been cut primarily due to the vaccine hold-up and the inability to initiate new manufacturing at Bayview. Even if the FDA gives the thumbs up, we have to expect there will be a delay in the projected revenue. Even though the company has to cut their CDMO and overall estimates, it will still generate double-digit growth in 2021 (Figure 5).
Figure 5: EBS Revenue Estimates (Source: Seeking Alpha)
A Positive Outlook
Despite the setbacks and negative headlines, one cannot deny that Emergent BioSolutions continues to deliver strong numbers that have improved its financial outlook for 2021. Emergent BioSolutions has constructed a robust business with the assets, capacity, and finances required to supply resources needed to respond to a broad range of public health emergencies.
Figure 6: EBS Business Units (Source: EBS)
Emergent BioSolutions took on this public health crisis and has been a critical component in vaccinating the globe. Now, the company is ready to prove that they learned from these mistakes and will be prepared for the next public health disaster. If the FDA is content with Emergent’s proposed changes, we could see the company return to generating tens of millions of doses per month, while pushing the rest of their portfolio.
Perhaps the damage is done and the company won’t be able to fully recoup what is lost. However, it is hard to justify a 50% drop in share price if the company doesn’t expect a 50% drop in revenues. The company is expecting to report record revenues in 2021, and the stock is trading at 52-week lows? The industry’s average price-to-sales is 5x, and the company expects their 2021 revenue to be $1.7B-1.9B, which would be a forward price-to-sales of about 2x (Figure).
Figure 7: EBS Daily Chart (Source: Trendspider)
If EBS was priced in line with the sector, it would be trading around ~$171 per share. Admittedly, EBS doesn’t have amazing growth forecasted beyond 2021, so we shouldn’t expect the share price to reach that multiple. However, to knock all the premium out of the stock is a bit of an overreaction.
I understand there is a risk that this incident could impair the company’s ability to close additional deals down the road and there are other accusations that need to be addressed. However, I am going to rely on the company’s earnings numbers and the chart’s technicals to take advantage of this over-zealous sell-off.
I am looking to enter a small position in the coming days due to the share price moving closer to a volume shelf around $63 per share that has historically been an area of support. What is more, the stock moved into the oversold area on the daily RSI, which usually results in a brief bounce. Consequently, I will be ready to book some profits and let the rest ride on house money. On the other hand, if the share price continues to sink, I will take a fundamental valuation approach and will look to add to my position around $50 per share for a longer-term position in anticipation the company will execute their growth strategy (Figure).
Figure 8: EBS Growth Strategy (Source: EBS)
This article was written by
Biologics is a full-time healthcare investor who developed a passion for biotech and life saving therapies after working in the medical field for years. His trade focus is around innovative companies developing breakthrough therapies and/or pharmaceuticals with catalysts for potential acquisitions.He is the leader of the investing group Compounding Healthcare. Features of the group include: Several model healthcare portfolios, a weekly newsletter, a daily watchlist, and chat for dialogue and questions. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EBS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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