Emergent Biosolutions (EBS) traded sharply higher after releasing earnings Friday morning. The company reported a 68% increase in sales, leading to earnings of $0.48 per share. Investors celebrated by driving the stock price up 16% on volume that was more than three times the normal level. The stock appears to be breaking out of a very attractive pattern and should get the attention of technical traders as they pour through charts over the weekend.
The fundamental strength for the quarter was largely related to an FDA approval which extends the shelf life of the company’s BioThrax vaccine which is used to treat anthrax. As part of a contract with Health and Human Services, EBS was entitled to a large lump sum payment which helped to make the quarter. The longer shelf life gives BioThrax even more of a competitive edge against other possible substitutes for the vaccine.
The Strategic National Stockpile (SNS) has extended its contract with Emergent and will now be continuing to buy vaccines from the company through late 2011. At this point, EBS has a virtual monopoly on the market as the SNS will buy virtually every dose that Emergent is able to produce. And investors are not particularly worried that the purchasing contract will be allowed to expire in two years as there is no significant risk of a competing vaccine on the market right now.
Recently, we completed our commitments under the current contract and look forward to seamlessly transitioning into initiating deliveries under a follow on contract that provides sales through late 2011. Beyond the follow on contract, we expect that the U.S. government will continue to procure BioThrax® for the strategic national stockpile. ~R. Don Elsey, CFO
But management is not sitting on its laurels, content to collect payments from the SNS. Instead, they are aggressively pursuing additional revenue sources as they work to find vaccines for largely unmet medical needs. In particular the compoany is working on a cure for tuberculosis and investors will be watching carefully to see how much progress the company can make.
Management has reaffirmed guidance for 2009 and expects revenue of roughly $225 to $240 million. With current revenues for the last six months of nearly $138 million, it is likely that management is “sandbagging” by keeping guidance at a relatively conservative level in order to ensure that they will be able to beat that guidance when the actual numbers are released. Most investors seem to have figured this out as the the frantic buying of the stock indicates.
Looking at the financial stability, it appears EBS is in a very solid position. At the end of the second quarter, the company was sitting on $102.5 million in cash. That’s a significant increase from the $91 million at the end of 2008, but actually the picture is even better. On top of the cash balance is accounts receivable of $55.4 million – the bulk of which is the payment due from the HHS for the FDA approval. There’s no need to be skeptical as to whether that capital will be paid as managment noted the bulk of these payments were received early in the third quarter. So at this point the cash balance is likely much higher.
The debt load is also relatively conservative. According to the press release, the company only has $21.2 million in long-term debt, but investors should also look at the $19.3 million classified as “Current portion of long-term debt.” This $19.3 will need to be repaid in the next 12 months (that’s the definition of current portion), but with an ample cash balance, the payment will not be an issue.
With a stock price currently just above $16, and earnings expected to cross $1.00 per share this year, it looks as if EBS is a good value. Essentially investors are able to pick up a strong cash-flow positive company with a shot at a wildcard win. Consider what would happen if the company actually landed a TV or tuburculosis cure. The chance for sales to skyrocket is quite good. Yet, buying the stock today doesn’t imply the same risk that is normally inherent with a drug discovery company. If nothing new is developed, investors still have a strong company with a motivated customer in a healthy financial position.
FD: Author does not have a position in EBS
Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies
