The stock price for Emergent BioSolutions Inc. (EBS) took a sharp hit earlier this month when the company announced a delay in shipping Anthrax Vaccines in the fourth quarter.  While the company has been growing revenues and earnings at a steady clip for the last three quarters, the shipment delay will disrupt the pattern of revenue growth and cause sales to be a bit below management’s range of guidance.

The stock dropped more than 20% intra-day after the announcement was made, but paired losses to less than 10% by the end of the day.  Part of the recovery was likely due to the fact that the company will make up the majority of this shortfall in the first quarter of 2009 when the shipments come back online.

Emergent BioSolutions is a relatively small company with a very important role.  The company has the sole US approved vaccine for Anthrax and provides the government with doses on a continual basis.  It’s pretty nice to have a business model where the government buys as much inventory as you can manage to produce.  Most recently, EBS has signed a contract to supply an additional 14.5 million doses to the Strategic National Stockpile (SNS) and the contract runs through the third quarter of 2011.  Sales for this agreement should come in at about $404 million.

EBS should enjoy a long and prosperous relationship with the US government – and possibly other governments as well.  That is because the vaccines have a typical shelf life of just three years.  While technology may improve to extend this shelf life to four years, the fact remains that the company will have to continue to replenish aging doses and thus maintain a recurring revenue stream.

While the company has made its name (and the majority of its profit) from the Anthrax vaccine, EBS is working hard to diversify its product base.  Currently it has three products in stage II trials to treat Typhoid, Hepatitis B, and Tuberculosis.  Even though its primary business offers a stable source of cash flow, there is always a chance that a competitor could develop a better vaccine which would compete with EBS’ product.  So diversifying the product line is certainly important to investors.

At a current price near $23, the stock appears a bit risky.  While the business is certainly one I would want to own, the current investment environment requires caution and a healthy margin for error.  In order to justify an investment in EBS, I would much rather try to pick up the shares under $20.  But if that price were reached, it would certainly be a good candidate for the ZachStocks Growth Model.

About 47% of the stock is controlled by the CEO, Fuad El-Hibri.  While heavy insider ownership is usually a positive for small-cap stocks, investors should be aware of a shelf filing which allows Mr. El-Hibri to liquidate about 1.1 million shares.  This would likely be a short-term burden for the stock considering the fact that it is relatively thinly traded and there are only about 13.5 million shares in float.  Still, this pending sale could be the catalyst to allow us to purchase at a discount to the current price.

EBS Notes
FD: Author does not have a position in EBS
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Additional Reading:
TopStocks – Stocks with an Exceptional 2008
Trader Mark – Emergent BioSolutions hits IBD