Founded in 1998 as BioPort, Emergent Biosolutions is a biopharmaceutical company that develops what it refers to as "immunobiotics" - advanced vaccines produced using biotechnology. Currently, the Maryland-based company makes over 97% of its revenue from the sale of BioThrax, its FDA-approved Anthrax vaccine, to the U.S. government departments of Health and Human Services (HHS), as well as the Department of Defense (DoD).
Following the terrorist attacks of 911 and the subsequent anthrax scare, the U.S. government has made fighting bioterrosism a strong priority. In addition to purchasing Emergent's products, the government also funds some of its research aimed at developing new vaccines. Any shift in the government's stance would have a dramatic impact on Emergent's performance.
Emergent’s revenue comes from two distinct sources: the contractual sale and delivery of its products, as well as grants for research and development that it receives from the U.S. government and several smaller private sources. Both of these revenue streams have greatly increased over the past few years, as total revenue has nearly doubled from $83.5 million in 2004 to $152.7 million in 2006. This increase can be largely attributed to the sale of almost 14 million doses of BioThrax to the U.S. government for the Strategic National Stockpile (SNS) and the vaccination of government personnel.
In fact, sales of BioThrax have allowed Emergent Biosolutions to remain profitable, a rarity among small-cap biotechnology companies. Operating income has also doubled over the past few years, from $16.8 million in 2004 to $38.0 million in 2006. Income numbers for the first three quarters of 2007 are above the milestones set in 2006. The profits from the sale of BioThrax have allowed Emergent to reinvest in the research and development of other drugs in its pipeline, improving development prospects for the future.
|Source: EBS 10-K||2004||2005||2006|
|Total Revenue ($M)||83.49||130.69||152.73|
|Operating Income ($M)||16.77||21.34||38.03|
|Research and Development ($M)||10.12||18.38||45.50|
As mentioned, two major business segments operate within Emergent: biodefense and commercial. The biodefense segment focuses on the development, manufacture, and commercialization of products that are designed for countering biological weapons used for terrorism. Revenues in this segment, which made up almost 97% of the company’s total revenue in 2006, relate to the sale of BioThrax.
The commercial segment, which made up the other 3% of Emergent Biosolution’s revenue in 2006, develops, manufactures, and commercializes products for use in the fight against infectious diseases. In this segment, revenue primarily represents grants and payments for milestones in development.
|Source: EBS 10-K||Biodefense Segment||Commercial Segment||General Operating Expenses||Total|
|2006 Total Revenue ($M)||147.71||5.02||--||152.73|
|2006 Net Income (including Other Income)($M)||55.07||(24.54)||(7.74)||22.79|
|2006 Research and Development ($M)||22.22||22.43||0.85||45.50|
Threat of Bioterrorism - During 2001, several letters contaminated with anthrax – a naturally occurring mold that can create fatal infections in humans – were delivered by mail to members of the media and U.S. government. The 22 infections and five deaths associated with the attacks have led to an increase in both governmental and public awareness of the threat of bioterrorism. The highest risk category includes diseases as anthrax and botulism, two targets of drugs being developed by Emergent. If awareness, threats, or attacks of this type of bioterrorism increase, Emergent could see larger revenue streams.
Government Funding - Currently, over 95% of Emergent Biosolutions’s revenue comes from contracts with the U.S. government. As the company itself notes in its filings, Emergent’s current government contracts do not translate into secured future contracts with the same departments. In fact, these contracts require annual review by the government and may be unilaterally terminated or modified at any point. The timing of securing contracts can also be unpredictable, leading to inconsistent streams of revenue.
Military Policies - Currently, anthrax vaccinations are mandatory for selected groups of uniformed personnel deployed in high-risk areas and Department of Defense officials carrying out certain services. In 2007, the armed services began the mandatory vaccination of 195,000 additional troops, and this trend may continue. Since Emergent is the only producer of an FDA-approved anthrax vaccine, an increase in mandatory vaccinations will result directly in a greater revenue stream for Emergent. Furthermore, recently enacted legislation provides more funding for bioterrorism countermeasures, and the new Bioshield II Bill or Bioshield I Amendment may be signed into law in the near future, creating broader protection against bioterrorism and calling for a larger Strategic National Stockpile. This would again increase the demand for BioThrax and other biodefense drugs.
Drug Development Risks - With the exception of BioThrax, all of Emergent’s products (such as vaccines for botulism, typhoid, and hepatitis B) are still in its pipeline, undergoing clinical trials in the early stages of development. As with any biotherapeutic product, failure is common and may occur at any point. Since the long-term success of Emergent Biosolutions is contingent upon the ongoing clinical success of its products, an investor of the company is in a sense betting on whether drugs in its pipeline will be proven effective and in accordance with the FDA’s strict safety standards.
Pharmaceutical and biotechnolgy companies like Emergent primarily face competition from companies that are developing or producing similar products, on a product-for-product basis. In other words, the capability to develop drugs will not necessarily lead to future financial success unless those drugs are cheaper or more effective than similar drugs on the market. Thus, an overall financial look at several competing firms is not complete, and it is most useful to first consider Emergent’s competition for each of their major products.
BioThrax - Emergent’s anthrax vaccine faces competition from several other companies: VaxGen, Avecia, Avant Immunotherapeutics (AVAN), and Biosante Pharmaceuticals (BPA). VaxGen formerly held a U.S. Government contract worth $877.5 million, but Health and Human Services terminated the contract after the company failed to meet several critical developmental milestones. Avecia holds a $3.9 million grant to develop Thraxine, its vaccine. While the compound for Thraxine is expected to be completed in 2008, it is still in very early stages of clinical trials. Avant’s contract for the vaccine was terminated in 2005, but they have received additional private funding and are continuing their development. Biosante is working in a development agreement with the U.S. Army to develop its anthrax program.
Anthrax Immune Globulin - Anthrax immune globulin (AIG) is used for treatment after exposure, and Emergent’s version of AIG faces competition from Human Genome Sciences (HGSI) and Cangene. Both Human Genome Sciences and Cangene have a clinically effective product (ABthrax and Anthrax Immunoglobulin, respectively), but their prices are well above the projected price per dose of Emergent’s product.
Botulinum Immune Globulin - Two companies are competing with Emergent’s development of a post-exposure botulism treatment: Cangene and XOMA (XOMA). Both of these firms are still in the developmental stages, similar to Emergent Biosolutions.
Typhoid Vaccine - Two generic drugs, Ty21a and ViCPS, are currently available in the U.S., but immunization from these drugs builds over several doses, and estimates suggest that the vaccines are only 50-80% effective. Emergent’s form is one-dose, and has completed Phase I testing.
Hepatitis B Vaccine - Emergent’s vaccine is therapeutic and intended to treat chronic carriers of the disease. Phase II of its trials was initiated in 2007. This form of the vaccine has no competition, as other vaccines focus on preventing infection.
|Emergent Biosolutions (EBS)||Human Genome Sciences (HGSI)||Avant Immunotherapeutics (AVAN)||Biosante Pharmaceuticals (BPA) |
|2006 Total Revenue ($M)||152.73||25.76||4.93||14.44|
|2006 Net Operating Income($M)||38.03||(251.17)||(22.37)||2.79|
|Current Pipeline (Number of Products in Phase II or later)||3||4||7||3|