Emergent BioSolutions (NYSE:EBS) secures FDA permission to resume production of the Johnson & Johnson (JNJ) COVID vaccine at its Bayview facility. We reiterate our Buy rating and $100 price target.
Q2:21 Highlights
- EBS announces plan to resume production of the Johnson & Johnson COVID vaccine at its Bayview manufacturing site. The facility has the capacity to manufacture 120 million doses per month.
- The US Dept. of Health and Human Services exercise contract options valued at $182 million covering delivery of doses of the company's ACAM2000 smallpox vaccine in 2021 and $56 million covering delivery of its VIGIV smallpox therapeutic.
- EBS builds revenues outside the US by securing a contract with the Canadian government for deliveries of Anthrasil, its treatment for inhalational anthrax. In addition, the company received approval from Belgium authorities to sell its Trobigard auto-injector, an emergency treatment of exposure to nerve agents or toxins.
- Sales of the company's NARCAN nasal spray rise 46% YOY to $106.2 million and EBS anticipates a decision regarding its patent infringement lawsuit currently being argued in the US Court of Appeals before year-end 2021.
- The company's CDMO business ends the June quarter with new business of $53 million, contract backlog of $1.1 billion and an opportunity pipeline of $672 million. New business was offset by $108 million of negative contract modifications mainly related to winding down work on the AstraZeneca (AZN) COVID vaccine at Bayview.
- We updated our revenue and adjusted EPS estimates to reflect June quarter results and guidance and reiterate our BUY rating and $100 price target, which values EBS shares at 12x our FY:21 adjusted EPS estimate.
Q2:21 Financial Results
Total revenue rose 1% YoY to $397.5 million. Revenues were relatively flat year-over-year as a result of a 61% decline in sales of anthrax vaccines and no sales of ACAM2000. Both declines were attributable to the timing of sales to the US government. Sales of NARCAN nasal spray improved 46% YOY to $106.2 million. Overall, product sales declined 39% YOY from $298.5 million to $181.2 million. From a low vase, CDMO revenues more than doubled to $190.9 million. Contracts and grants revenues rose 8% to $25.4 million.
Cost of product sales and contract manufacturing grew 76% to $227.8 million as a result of increased CDMO activity and product sales and an inventory write-down of $41.5 million related to discarded COVID vaccine batches manufactured at the Bayview facility. Gross margin fell to 39% from 65% one year earlier as a result of the inventory write-down, a less favorable product mix and $12.4 million of costs associated with remediation activities at Bayview.
Gross R&D spending increased 2% YOY to $48.9 million. Net of contract and grant revenues, R&D spending was $23.5 million. SG&A expense increased 22.9% YOY to $91.2 million as a result of higher spending to defend and support the company's reputation.
GAAP net earnings were $4.6 million or $0.09 per share in Q2:21, down 95% from net earnings of $92.7 million or $1.73 per share one year earlier.
Adjusted earnings were $18.0 million or $0.33 per share, down 83% from adjusted earnings of $105.7 million or $1.98 per share one year earlier. The main differences between GAAP and adjusted earnings are acquisition-related costs, non-cash amortization, and tax effects.
H1:21 Financial Results
Sales rose 26% in the first half of 2021 to $740.5 million, GAAP net income declined 7% to $74.3 million or $1.37 per share and adjusted net income dropped 4% to $101.6 million or $1.87 per share.
Q2:21 Performance Overview
EBS is a specialist in public health threats and is an important player in the COVID-19 vaccines space. On July 29th, the company announced plans to resume manufacturing the Johnson & Johnson COVID-19 vaccine at its Bayview facility, which has been shuttered since late March after a vaccine manufacturing snafu. At full capacity this plant can manufacture 120 million doses per month. To date, approximately 30 million doses of the Johnson & Johnson COVID vaccine manufactured at Bayview have been cleared by the FDA for distribution.
During the June quarter, the US government exercised and funded its option to procure the company's ACAM2000 smallpox vaccine. The option exercise is valued at approximately $182 million and requires all doses to be delivered in the current calendar year. In addition, EBS secured the next option exercise for its smallpox therapeutic product VIGIV. This option is valued at $56 million.
The company continues discussion with the US government regarding exercising the final option on its existing contract covering procurements of its next generation anthrax vaccine candidate AV7909 and is on target to submit its Biologics License Application (BLA) for AV7909 this year. In addition, EBS recently secured a procurement contract from the Canadian government to supply doses of Anthrasil, its polyclonal antibiotic therapeutic for treating inhalational anthrax.
On the R&D front, the company continues to develop its COVID-HIG candidate as an early treatment option for at-risk COVID patients, with plans to initiate Phase III clinical trials in the coming few months. In addition, EBS recently obtained approval of its Trobigard auto-injector from Belgian regulatory authorities. Achieving this first approval of its auto-injector platform is a key milestone for the company's devices product line.
Regarding its NARCAN nasal spray patent infringement lawsuit, oral arguments in the US circuit court of appeals are scheduled for August 2 and the company expects a decision before year-end.
In the vaccine development space, EBS plans to soon initiate Phase III clinical trials of its chikungunya virus vaccine and begin Phase I studies in late 2021 or early 2022 of its Shigella, Lassa and universal flu vaccine candidates.
Despite Q1 challenges to vaccine manufacturing and the CDMO business, the company was able to secure incremental CDMO contract awards valued at $53 million during the June quarter. These new awards were offset by $108 million of negative contract modifications, primarily related to winding down work at Bayview on the AstraZeneca COVID vaccine. Going forward, all manufacturing operations at Bayview will be in support of the Johnson & Johnson COVID vaccine. The CDMO business ended the June quarter with contract backlog of $1.1 billion and an opportunity pipeline estimated at $672 million.
EBS ended the June quarter with cash of $448 million, liquid assets of $710 million, undrawn capacity on its revolving credit line of $600 million and a net debt position of $416 million. The company closed out the quarter with a ratio of net debt-to-adjusted EBITDA below 1x.
Guidance and Valuation
EBS reaffirmed its full-year 2021 guidance for revenues in a range of $1.7 billion to $1.9 billion, adjusted net income of $395-$470 million and adjusted EBITDA of $620-$720 million. The company did lower guidance for gross margins from 63%-65% to 61%-63%, but expects to offset the negative impact of lower gross margin on operating profits via reduced SG&A and R&D spending. EBS also provided guidance for Q3:21 revenues in a $400-$500 million range.
Our updated FY:21 estimates forecast revenues of $1.83 billion and adjusted EPS of $8.05.
At its recent $66 share price, EBS shares trade at 8.2x our FY:21 adjusted EPS estimate. We think investors have overreacted to the company's March quarter manufacturing challenge and believe a higher valuation is warranted. Our $100 price target values EBS shares at 12x our FY:21 adjusted EPS estimate. This price target is also validated by our DCF model and assigns a $116 value to EBS shares.
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