Equity Research Report: Emergent Biosolutions 3Q17

Download the Report in PDF: EBS Report 

Download the Valuation in Excel: Emerging Biosolutions Valuation

Emergent Biosolutions Inc.: 3Q17

Recommendation: BUY

Target Price                                        : $49.86

Closing Price                                      : $40.86

Upside (Downside) Potential             : 22.0%

Company Profile

Emergent BioSolutions Inc. develops, manufactures, and commercializes immunobiotics such as vaccines and immune globulins that assist the body’s immune system. The company’s biodefense segment develops, manufactures, and commercializes drugs such as BioThrax, a vaccine for the prevention of anthrax, for use against biological agents. Other products in preclinical development include drugs for the treatment of patients after they are exposed to anthrax and botulinum toxin. Emergent’s commercial segment develops products for use against infectious diseases.

Stock Statistics

Market Cap                          : $1.676 M

Shares Outstanding             : 40.2 M

52 Weeks Range                 : $ 25.96-44.86

YTD Performance               : +21.2%

Revenue growth and margin improvement. Emergent’s 9M17 revenue increased by 9% yoy to $367.1 million driven by other product sales. Product sales increased by 24%, where Biothrax sales decreased by 7% due to the timing of delivery to Strategic National Stockpile (SNS) and other product sales increased by 417% yoy due to the delivery of VIGIV, Trobigard, RSDL, and BAT. Revenue from contract manufacturing increased by 62% to $52.7 million, supported by the CMO fill/finish expansion, including the ability to handle live-viral. Gross R&D decreased 15% due to the completion of multiple US government contract and lower development program grants.

Acquisition and Contracts. Emergent Biosolutions completed the acquisition of ACAM2000 (the only FDA approved smallpox vaccine) from Sanofi with remaining contract value of $160 million to deliver the vaccines to Strategic National Stockpile (SNS). We expect it will contribute around $80 million to FY18 revenue. Emergent has also completed the acquisition of raxibacumab (FDA approved anthrax monoclonal antibody) that includes a multiyear BARDA contract with remaining value of $130 million to supply the SNS.

Emergent other contract includes a five year follow on contract by DoD to supply RSDL with value of $ 171 million and a contract with Department of State to supply Trobigard (nerve agent antidote) with value of $25 million.

For contract and grants, EBS is awarded $63 million by BARDA to develop antidote for cyanide poisoning and $23 million by DoD to develop multi-drug injector for nerve agent antidote delivery. Should this product succeed and approved by FDA, it could be sold to a broader customer base such as hospital. List of Emergents’ contract is available on the table below.

Management Expectation. On the conference call, management states a target revenue of $540-560m, EBITDA of $150-160m and net income between $70-80m. We believe this target is attainable due to the significant margin improvement attained in 9M17 compared to last year. EBITDA margin improved in 9M17 to 27.5% compared to 21.3% in the previous period while net income margin improved to 13.3% from 8%. We believe Emergent will be able to maintain this margin in the future due to the niche focus it has and good government relationship. To increase the top line, management continue looking for M&A opportunities that is a revenue generator and is an accretive transaction.

Future Outlook. We believe Biothrax sales will still contribute between 25-30% of Emergent’s total revenue in the next 5 years. We expect Emergent to receive regulatory approval in 5 other European countries in addition to Germany approval in 2017. Expectation on Biothrax sales is also supported by European Union stockpiling program of Medical Countermeasure (McM), as a contingent supply to counter chemical and biological terrorist attack.

RSDL and Raxibacumab sales is expected to contribute 7-9% of total revenue in the next 5 years, driven mainly by the growth in RSDL demand from both US and European countries.

Contract manufacturing is also expected to drive 14% of Emergent’s revenue in the next 5 years, supported by the fill/finish expansion and Emergent’s status as Center for Innovation in Advanced Development and Manufacturing (CIADM), one out of three in US and flexible manufacturing ability to accommodate change in demand.

Valuation. We value Emergent Biosolutions using FCFF method with WACC of 8.03% and terminal growth rate of 2%. We recommend BUY for Emergent Biosolutions with TP $49,.86, implying 22% upside from  Friday’s closing price. Our target price implies PER FY18  26.86x and PER FY19 18.09x or EV/EBITDA FY18 9.74x and EV/EBITDA FY19 7.73x. This is lower than competitors median EV/EBITDA FY18 and FY 19 of 12.32x and 10.58x, but is in line with competitors’ median PER. We continue to be bullish on Emergent Biosolutions and watching closely on the development of NuThrax and future contracts awarded.

Published by Journeyman

A global macro analyst with over four years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research focusing on Emerging Markets at a well-known independent research firm. He read voraciously, spending most of his free time following The Economist magazine and reading topics on finance and self-improvement. When off duty, he works part-time for Getty Images, taking pictures from all over the globe. To date, he has over 1200 pictures over 35 countries being sold through the company.

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