On May 05, 2016 Emergent BioSolutions Inc. (NYSE:EBS) reported financial results for the quarter ended March 31, 2016 (Press release, Emergent BioSolutions, MAY 5, 2016, View Source;p=RssLanding&cat=news&id=2165800 [SID:1234511995]).

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Q1 2016 FINANCIAL HIGHLIGHTS
Total revenues of $111.0 million
GAAP net income of $4.0 million, or $0.10 per diluted share
Adjusted net income of $7.5 million, or $0.16 per diluted share
EBITDA of $17.3 million, or $0.36 per diluted share
Adjusted EBITDA of $19.6 million, or $0.40 per diluted share
RECENT BUSINESS ACCOMPLISHMENTS

Centers for Disease Control and Prevention (CDC) confirmed intent to award a follow-on procurement contract for BioThrax (Anthrax Vaccine Adsorbed) on October 1, 2016
Supplemental Biologics License Application (sBLA) for Building 55 licensure submitted to the Food and Drug Administration
Form 10 filed with the Securities and Exchange Commission to advance the Company’s spin-off of Aptevo Therapeutics
Emergard (military-grade auto-injector device) selected by the U.S. Department of Defense and Battelle as a platform for nerve agent antidote delivery
RSDL (Reactive Skin Decontamination Lotion Kit) for removal and neutralization of chemical warfare agents approved in Israel
"We achieved strong first quarter financial results and accomplished key operational goals, including submitting the sBLA for Building 55, our large-scale BioThrax manufacturing facility, and filing the Form 10 to advance our spin-off of Aptevo Therapeutics," said Daniel J. Abdun-Nabi, President and Chief Executive Officer of Emergent BioSolutions. "We are extremely pleased that the CDC has now confirmed its intention to award a follow-on BioThrax procurement contract on October 1, 2016. With our large-scale manufacturing facility coming online, we anticipate this will be a multi-year contract requiring significantly increased deliveries in order to satisfy the U.S. government’s stated requirements for a licensed anthrax vaccine in the Strategic National Stockpile."

UPDATE ON CDC BIOTHRAX PROCUREMENT CONTRACT
By letter dated April 1, 2016, the CDC informed the Company of its intent to award a follow-on BioThrax procurement contract, thereby ensuring an uninterrupted supply of BioThrax into the Strategic National Stockpile. The Company’s current BioThrax procurement contract with the CDC is scheduled to expire on September 30, 2016. The CDC reaffirmed their intent in a follow-up letter dated April 26, 2016, in which the CDC stated that their acquisition planning process is ongoing and that they project to issue an award for a follow-on BioThrax procurement contract on October 1, 2016.

In its April 26 letter, the CDC further stated that it anticipates continuing to purchase doses of BioThrax in Q2 and Q3 of 2016 under the Company’s current procurement contract, although it did not specify the number of doses to be purchased. The CDC did state that they anticipate the quantity to be less than the total remaining doses available to be purchased under the current contract. The Company believes these letters from the CDC reflect their transition planning associated with procuring BioThrax manufactured from the Company’s large-scale manufacturing facility, Building 55, under a new multi-year follow-on contract expected to be in place on October 1, 2016.

Until such time as the Company can secure greater clarity on the number of BioThrax doses to be delivered in Q2 and Q3, expected within the next 60 days, the Company believes it is prudent to temporarily postpone its financial guidance for 2016.

2016 FINANCIAL PERFORMANCE
(I) Quarter Ended March 31, 2016 (unaudited)

Revenues

Product Sales
For Q1 2016, product sales were $71.7 million, an increase of 292% as compared to 2015. This increase was driven by an increase in BioThrax sales due to the Company’s decision to suspend shipments to the CDC in the first quarter of 2015 following the discovery of foreign particles in a limited number of vials in two manufactured lots of BioThrax in January 2015. As a result, there were no revenues for BioThrax product sales to the CDC for the three months ended March 31, 2015. The decrease in Other Biodefense revenues is due to a one-time milestone payment of $7 million recognized in 2015 for FDA approval of Anthrasil.

(in millions) Three Months Ended
March 31,
2016 2015 % Change
Product Sales
BioThrax $ 59.10 $ – NA %
Other Biodefense $ 4.70 $ 12.00 (61 )%
Total Biodefense $ 63.80 $ 12.00 433 %
Total Aptevo Products $ 7.90 $ 6.30 26 %
Total Product Sales $ 71.70 $ 18.30 292 %

Contract Manufacturing
For Q1 2016, revenue from the Company’s contract manufacturing operations was $7.6 million, a decrease of 38% as compared to 2015. The decrease was primarily due to the timing of fill/finish services to third parties and revenue from the production of an Ebola vaccine in 2015.

Contracts, Grants and Collaborations
For Q1 2016, contracts, grants and collaborations revenue was $31.7 million, a decrease of 4% as compared to 2015.

Operating Expenses

Cost of Product Sales and Contract Manufacturing
For Q1 2016, cost of product sales and contract manufacturing was $28.5 million, an increase of 52% as compared to 2015. The increase was primarily attributable to increased sales of BioThrax to the CDC.

Research and Development
For Q1 2016, gross research and development (R&D) expenses were $34.2 million, a decrease of 12% as compared to 2015. The decrease primarily reflects lower contract service costs associated with product candidates in the Biodefense business segment and product candidates and technology platform development activities associated with the Aptevo business segment.

For Q1 2016, net R&D expenses were $2.4 million, a decrease of 56% as compared to 2015. Net R&D expenses, which are more representative of the Company’s actual out-of-pocket investment in product development, are calculated as gross research and development expenses less contracts, grants and collaboration revenues.

(in millions) Three Months Ended
March 31,
2016 2015 % Change
Research and Development Expenses (Gross) $ 34.2 $ 38.7 (12 )%
Adjustments:
Contracts, grants and collaborations revenues 31.7 33.1 (4 )%
Net Research and Development Expenses $ 2.4 $ 5.6 (56 )%

Selling, General and Administrative
For Q1 2016, selling, general and administrative expenses were $39.8 million, an increase of 15% as compared to 2015. The increase was primarily attributable to costs associated with the Aptevo spin-off and professional services to support the Company’s strategic growth initiatives.

Net Income

For Q1 2016, GAAP net income was $4.0 million versus a net loss of $21.5 million in 2015. For Q1 2016, GAAP net income per diluted share is computed using the if-converted method. This method requires GAAP net income to be adjusted to reflect the add back of interest expense and amortization of debt issuance cost, both net of tax, associated with the Company’s 2.875% Convertible Senior Notes due 2021. As a result, GAAP net income per diluted share for Q1 2016 is increased in the amount of $0.9 million, from $4.0 million to $4.9 million. With 48.4 million diluted shares outstanding, GAAP net income per diluted share for Q1 2016 was $0.10.

RECONCILIATION OF GAAP NET INCOME/(LOSS) TO ADJUSTED NET INCOME/(LOSS), EBITDA AND ADJUSTED EBITDA

This press release contains three financial measures (Adjusted Net Income/(Loss), EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and adjusted EBITDA) that are considered "non-GAAP" financial measures under applicable Securities & Exchange Commission rules and regulations. These non-GAAP financial measures should be considered supplemental to and not a substitute for financial information prepared in accordance with generally accepted accounting principles. The Company’s definition of these non-GAAP measures may differ from similarly titled measures used by others. Adjusted Net Income/(Loss) adjusts for specified items that can be highly variable or difficult to predict, or reflect the non-cash impact of charges resulting from purchase accounting. EBITDA reflects net income excluding the impact of depreciation, amortization, interest expense and provision for income taxes. Adjusted EBITDA also excludes specified items that can be highly variable and the non-cash impact of certain purchase accounting adjustments. The Company views these non-GAAP financial measures as a means to facilitate management’s financial and operational decision-making, including evaluation of the Company’s historical operating results and comparison to competitors’ operating results. These non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s operations that, when viewed with GAAP results and the reconciliations to the corresponding GAAP financial measure, may provide a more complete understanding of factors and trends affecting the Company’s business.

The determination of the amounts that are excluded from these non-GAAP financial measures are a matter of management judgment and depend upon, among other factors, the nature of the underlying expense or income amounts. Because non-GAAP financial measures exclude the effect of items that will increase or decrease the Company’s reported results of operations, management strongly encourages investors to review the Company’s consolidated financial statements and publicly filed reports in their entirety.

Reconciliation of GAAP Net Income/(Loss) to Adjusted Net Income/(Loss)
(in millions, except per share value) Three Months Ended March 31,
2016 2015 Source
GAAP Net Income/(Loss) $ 4.0 $ (21.5 ) NA
Adjustments:
Spin-off and acquisition-related costs (transaction & integration) 2.3 1.1 SG&A
Non-cash amortization charges 2.7 2.6 COGS, SG&A,
Other Income
Impact of purchase accounting on inventory step-up - 0.1 SG&A
Tax effect (1.5 ) (1.1 ) NA
Total Adjustments 3.5 2.7 NA
Adjusted Net Income/(Loss)
Adjusted Net Income/(Loss) per Diluted Share $
$ 7.5
0.16 $
$ (18.8
(0.50 )
) NA

Reconciliation of GAAP Net Income/(Loss) to EBITDA and Adjusted EBITDA
(in millions, except per share value) Three Months Ended
March 31,
2016 2015
GAAP Net Income/(Loss) $ 4.0 $ (21.5 )
Adjustments:
+ Depreciation & Amortization 8.5 8.1
+ Provision For/(Benefit From) Income Taxes 3.3 (8.3 )
+ Total Interest Expense 1.5 1.7
Total Adjustments 13.3 1.5
EBITDA
EBITDA per Diluted Share $
$ 17.3
$0.36 $
$ (20.0
(0.53 )
)
Additional Adjustments:
+ Acquisition-related costs (transaction & integration) 2.3 1.1
+ Impact of purchase accounting on inventory step-up - 0.1
Total Additional Adjustments 2.3 1.2
Adjusted EBITDA
Adjusted EBITDA per Diluted Share $
$ 19.6
0.40 $
$ (18.8
(0.50 )
)