Wednesday, October 22, 2008

Readers Idea: Emergent BioSolutions (EBS)

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I asked readers last week if they had any stocks on their screens that fulfilled some criteria in this quite brutal market

I am curious on your watch lists and holdings if you technical types out there can find stocks over both their 50 and 200 day moving averages. It is amazing how few there are.

If you know of any that we do not hold, market capitalization is over $250 million, and is profitable and growing - without a lot of debt, please add a comment to this blog entry with symbol.

I received quite a few responses in the blog and via email. Ironically I asked this on a day the market was up, and within 24 hours in this market where nothing lasts long many of these names plunged below their 50 day moving average where they remain, thereby disqualifying them. A lot of the names were very small banking or financial companies which apparently did not drink the Kool Aid of high risk and are being rewarded. But there were some interesting names I have not heard of so I'll outline a few in the coming days - always looking for interesting growth stories in niches I've never heard of.

Our first candidate is Emergent BioSolutions (EBS) - website here.

Emergent BioSolutions Inc. is a leading biopharmaceutical company dedicated to one simple mission —to protect life. We develop, manufacture and commercialize immune related biologics, vaccines and biotherapeutics that assist the body’s immune system to prevent or treat infectious and other life threatening diseases. Our marketed product, BioThrax® (Anthrax Vaccine Adsorbed), is the only vaccine licensed by the U.S. Food and Drug Administration for the prevention of anthrax infection. Our product pipeline also includes: two “next generation” anthrax vaccines, two anthrax therapeutics (immunoglobulin and monoclonal), two botulinum vaccines and a botulinum therapeutic, an oral typhoid vaccine, a next generation tuberculosis vaccine, a hepatitis B immunotherapy, and a chlamydia vaccine.

The chart has unbelievable character considering the market it is operating in.

In either a bull market or a sideways market this is the type of chart one would give their left arm to buy. Every dip to that 200 day moving average is bought aggressively and the stock is acting stellar. The dip we saw in early August was off an earnings report in which they missed and effectively lowered revenue guidance and yet the stock is STILL rebounding.

While the company is loosely categorized as biotechnology - it is a unique niche which can be construed as "defense" vaccines i.e. things Homeland Security or our armed forces would be interested in. Which leads us to "who are the customers?" In this day and age every customer is called into question due to lack of access to credit, but when it is the US government who has shown limitless pockets (thanks to foreign creditors) that is one less issue to deal with. And they know where their bread is buttered.
  • Biopharmaceutical company Emergent BioSolutions Inc. spent $560,000 lobbying the federal government in the second quarter, according to a recent disclosure form. The Rockville, Md.-based company lobbied on appropriations and the government stockpiling of biodefense vaccines. Emergent BioSolutions holds a three-year, $448 million contract with the Department of Health and Human Services for the anthrax vaccine BioThrax.
  • Besides Congress, Emergent lobbied the departments of Defense and Health and Human Services in the April-June period, according to the form posted online July 14 by the House clerk's office.
Their Anthrax vaccine is the main product right now, but as their product chart shows they have multiple (7) products in stage 2 (of 3) testing - they are targeting typhoid, hepatitis B, tuberculosis, botulinum, etc.

The current market cap is about $500M and unlike most young biotechs they actually make money. As mentioned above they lowered estimates for the year, but still look to be on target for roughly $0.69 EPS for 2008, and near a buck for 2009. So the forward multiple is not outrageous as a $16 stock. Here is their last earnings report
  • Total revenues for the second quarter of 2008 grew 88 percent to $43.5 million from $23.2 million in 2007, primarily driven by growth in sales of BioThrax® (Anthrax Vaccine Adsorbed).
  • Net income for the second quarter of 2008 was $1.8 million, or $0.06 per share, in comparison to a net loss of $5.0 million, or $0.17 per share, for the comparable period in 2007.
  • For the second quarter of 2008, product sales increased by $19.8 million, or 88 percent, to $42.3 million from $22.5 million for the comparable period of 2007, primarily due to a 98 percent increase in the number of doses of BioThrax delivered.
  • Cash and cash equivalents at June 30, 2008 was $84.0 million compared to $105.7 million at December 31, 2007 and $92.7 million at March 31, 2008. The net decrease in cash and cash equivalents resulted primarily from net cash used in operating activities and investing activities of $0.7 million and $22.5 million, respectively, offset by net cash provided by financing activities of $1.6 million. (cash is king; no huge debt load here)
Outlook
  • For 2008, the company reaffirms its expectations for full year total revenues of $180 to $195 million, but with a revised bias toward the lower end of the range. The company also reaffirms net income of approximately $20 million.
Gross margins are an astounding 80%. The big risk here is right now this is a 1 trick pony - all Anthrax vaccine, all the time.

There is also a disputed and messy buyout deal hanging over the company with privately held Protein Sciences
  • Though, Emergent also is trying to diversify its pipeline beyond government-reliant contracts. While it acquired another anthrax vaccine candidate in the second quarter, the company also has been attempting to buy Protein Sciences, a Meriden, Conn.-based company that has developed a flu vaccine called FluBok.
  • That planned acquisition, however, has been a black cloud during the second quarter for Emergent, which has sued Protein Sciences and its top executives in New York State Supreme Court for what it describes as moves to botch the deal and disparage Emergent’s name. Protein Sciences executives refutes those claims. Both companies say the other has broken the terms of the initial sales agreement, and the resolution -- and whether Emergent will still purchase Protein Sciences -- remains up in the air.
In the last earnings report the company described their stance with the following...

With respect to our proposed acquisition of the assets of Protein Sciences, bringing the transaction to closure is taking longer than expected. FluBlok® would be a good opportunity for us to leverage our core expertise in product development, manufacturing and government contracting in pursuit of creating value for our pipeline. We continue to be committed to working toward achieving a positive resolution in the near term. One possible solution may be to restructure the transaction as a merger and to offer additional up front consideration.

This hasn't seemed to affect the stock price one iota. October 1st another large contract was announced This is essentially an extension of a deal with Health and Human Services - $100M a year. But it gives the company visibility far out in the future which is very dear in this market.
  • Biotechnology company Emergent BioSolutions Inc. said Wednesday it will receive between $364 million and $404 million for new contracts to supply the U.S. government with anthrax vaccines The new contracts, with the Department of Health and Human Services, run through the third quarter of 2011 and call for an additional 14.5 million doses of the BioThrax anthrax vaccine. The potential value of the contract, though, is tied to delivery of a product with a four-year expiration date.
By the end of 2008 the company is hoping to have a deal with the Department of Defense.

The next earnings report is November 6th and we're keeping an eye on this one due to strength of chart and factors listed above. Another major catalyst would be a signing with the Department of Defense. If there is somehow a pullback to that 200 day moving average, which appears unlikely, we'll be in there buying as well. Or maybe even to the 50 day moving average since a chart like this is found in only about 1 in 500 stocks in the current market.

No position

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