Overview: Emergent BioSolutions incorporated in May 1998 as a global biopharmaceutical company to protect and enhance life through specialized products that address medical needs and emerging public health threats. Emergent operates with two main divisions: biodefense and biosciences. The biodefense division is a specialty biopharmaceutical business focusing on countermeasures against public health threats known as CBRNE (chemical biological radiological nuclear explosives) primarily combating affects of Anthrax. About 60% biodefense revenue comes from BioThrax, the only FDA approved drug for the prevention of Anthrax. Biosciences involve therapies treating hematology and oncology. Emergent markets over a dozen products, with many more in investigational stages.
Strategy: Emergent recently (January 2016) announced a 5 year growth plan centered on renewed focus on medical countermeasures to public health threats. The strategy is based on 4 factors: 1. Expanding leadership in public health markets; 2. Developing innovative products; 3. Continuing growth through acquisition of revenue-generating products and businesses; and, 4. Delivering attractive net income. In August of 2015, Emergent announced a plan to pursue a tax-free spin-off of the biosciences division into a sole entity, publicly traded company known as Aptevo. Following the premier of this send-off plan, EBS shares rose roughly 30%. Investors will have two options: continue to trade EBS shares with or without the right to receive shares of Aptevo stock. This move will allow Emergent to centralize operations as a company that provides specialty products for military and civilian populations against emerging bio-threats. Emergent will also avoid biosciences costs of R &D, sales, and marketing and exercise greater flexibility in capital allocation decisions (future acquisitions). Further, the unit has consistently been a loss making subsidiary, making emergent appear more attractive to investors.
Risk: Emergent's plan to produce a spin-off biosciences subsidiary is subject to material conditions such as delays in tax opinion, difficulty in obtaining required clearances, and uncertainty in the financial markets. The primary customer for BioThrax is with the U.S. government, specifically the Center for Disease Control (NASDAQ:CDC). If CDC demand for the product declines, Emergent could face severe revenue drops and its contract expires in September of this year. Another scare, through June and July, EBS shares decreased from $43 to $33, sparking a sell-off for investors.
Market Outlook: Biotech firms have been down a collective 25% year to date. Emergent has clearly outperformed the industry average.
I believe this security is a steal right now. The bullish pattern will be driven by the loss of the firm's non-profitable biosolutions unit, and continuation of the CDC contract. The aforementioned stock price downturn is likely due to market movements from Brexit because it took place immediately after the vote and is now beginning to recover (increased 9% over last two weeks). The CDC recently confirmed its sizable contract for renewal this October, securing Emergent's biggest revenue source (valued at $44 Million). The separation from biosciences should free up Emergent to focus on public health threats and confirm its 5 year growth plan.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.