INVESTMENT THESIS
Emergent BioSolutions Inc. (NYSE: EBS), While the stock has cooled down since marking its all-time-high in early August, having now retreated roughly 40%, its efforts to fight the COVID-19 pandemic, other infectious diseases, and the opioid epidemic have remained strong. These include Johnson & Johnson, AstraZeneca, Novavax, and Vaxart. Elsewhere in its portfolio, the Canadian Pharmacists Journal recommended that all patients receiving an opioid should be dispensed take-home naloxone, the active ingredient in Narcan Nasal Spray.
However, given the influx of CDMO projects related to the coronavirus, the strong growth of its Narcan Nasal Spray, and the government’s continued procurement of Emergent’s anthrax vaccines, we think the current discount is unwarranted.
RECENT DEVELOPMENTS
The beta on EBS is 1.08.
Emergent BioSolutions has taken a number of actions in response to the COVID-19 pandemic. On July 27, Emergent signed an agreement with AstraZeneca to expand manufacturing services for AstraZeneca’s COVID-19 vaccine candidate, AZD1222. Valued at $174 million through 2021, the agreement builds on a previously signed $87 million contract from June that covered development services, performance and process qualification, raw materials, and an initial capacity reservation. Along similar lines, on July 6 Emergent signed a five-year agreement to provide large-scale drug substance manufacturing for Johnson & Johnson’s lead COVID-19 vaccine candidate. Scheduled to begin in 2021, the contract calls for two years of large-scale manufacturing services valued at $480 million, with the remaining three years using a flexible capacity model to support the production of additional drug substance batches.
The company is also developing an equine-derived version of the product, although that remains separate from its co-development efforts with BARDA.
The EBS share price has also been influenced by non-COVID-19-related developments. On August 17, the FDA approved an extension of the shelf life of Narcan Nasal Spray, an emergency treatment for suspected opioid overdose, from 24 months to 36 months. In related news, in late September, the Canadian Pharmacists Journal published national consensus guidelines that recommended that all patients receiving an opioid should be dispensed take-home naloxone, the active ingredient in Narcan, and be counseled by a pharmacist. Regarding the rest of its pipeline, as of November 19, 2020, Emergent had fifteen product candidates and seven device candidates.
Emergent recently reported 3Q20 results that missed the consensus estimates for revenue but beat on earnings. Adjusted net income rose 77% to $2.19 per share from $1.24 in 3Q19. The consensus forecast had called for earnings of $2.15 per share.
It now expects revenue of $1.52-$1.58 billion, representing growth of 37%-43% and narrowed from its earlier forecast of $1.5-$1.6 billion; adjusted EBITDA of $575-$615 million, representing growth of 106%-120% and raised from its earlier forecast of $535-$600 million; and adjusted net income of $375-$405 million, representing growth of 146%-166% and raised from its earlier forecast of $340-$390 million.
EARNINGS & GROWTH ANALYSIS
In 3Q, Product Sales fell 21% to $202 million, primarily due to a timing delay for the company’s smallpox vaccine, ACAM2000, which will now have its deliveries take place in 4Q20 and potentially in 2021. Offsetting the delay in ACAM2000 sales, sales of Narcan Nasal Spray rose 18% to $89 million, anthrax vaccine sales rose 83% to $74 million, and Other product sales rose 34% to $39 million.
The increase reflected a charge associated with contingent consideration liabilities due to the increased expectation that the company will meet its final sales milestone for Narcan Nasal Spray, a write-down of inventory balances due to the expected expiration of a portion of Emergent’s travel health vaccines, and an increase in the volume of CDMO services, partially offset by a decline in the volume of product sales.
We expect continued growth in 2021, with earnings of $8.90, up from our earlier estimate of $7.96.
FINANCIAL STRENGTH & DIVIDEN
The company’s board has not authorized additional repurchases.
MANAGEMENT & RISKS
Robert G. Kramer is Emergent’s CEO and President, having succeeded Daniel Abdun-Nabi following his planned retirement in April 2019. Mr. Kramer also replaced Mr. Abdun-Nabi on Emergent’s board. Karen L. Smith became Emergent’s chief medical officer on April 21, 2020. Dr. Smith previously served as chief medical officer at Jazz Pharmaceuticals, and has also held senior executive positions at Allergan, AstraZeneca, and Bristol-Myers Squib. She was most recently president and CEO of Medeor Therapeutics. Most recently, on August 26, Emergent named Marvin White to the company’s Board of Directors. Mr. White currently serves as CEO and as a member of the Board of Aptevo Therapeutics Inc. and previously sat on Emergent’s Board from 2010-2016.
EBS faces significant customer-concentration risk, as it derives a substantial portion of its revenue from the sale of vaccines to the USG. In 2019, EBS derived 61% of total revenue from the USG.
The company operates in a highly competitive field. Although Emergent’s BioThrax is the only currently FDA-approved vaccine for anthrax, several other companies (Altimmune, Pfenex, Soligenix, Immunovaccine and NanoBio Corp.) are developing competing products.
COMPANY DESCRIPTION
Emergent BioSolutions makes vaccines and other products intended to protect civilian and military populations from emerging infectious diseases and chemical, biological or nuclear attacks. The USG is the company’s primary customer, and provides it with significant product development funding.
VALUATION
Since reaching this peak, wherein the stock had entered overbought territory on the 14-day, 14-week, and 14-month scale, the shares have now retreated nearly 40%. With its 14-day relative strength index now sitting at a nearly oversold level of 33, and with the stock now trading at the 38.2% Fibonacci retracement level as measured between its highs and lows over the past year, we believe that it will return to growth.
On November 19, BUY-rated EBS closed at $80.56, down $0.16.
Source: Argus
