(By Michael Vodicka) With rising political tension gripping an increasingly interconnected world, the threat of a military conflict is a very real possibility. And with the progression of advanced chemical weapons and resources, chemical warfare is something that defense departments across the world are increasingly concerned about and developing technologies to combat.
But don't take it from me; the federal government is saying the same thing. According to the Centers for Disease Control and Prevention (CDC), weaponized anthrax is one of the greatest possible threats to the public. While those circumstances have significant implications on a human level, it is also creating big opportunities for companies that specialize in defending against these chemical agents.
One of those companies is Emergent BioSolutions, Inc. (EBS), a biotechnology specialist that develops and manufactures vaccines and therapeutics for defense and commercial markets across the world.
The company's main product is an anthrax vaccine called BioThrax, a vaccine for pre-exposure protection against anthrax infection. This product had a huge impact on the company's second-quarter results from early May. Revenue jumped to $34.4 million from just $5.6 million last year, driven by a 636% increase in the number of doses of BioThrax delivered.
That huge increase in sales for BioThrax was driven by the company's $1.25 billion contract with the Strategic National Stockpile (SNS) a national repository of health vaccines in the Department of Health and Human Services. That contract is set to run through September of 2016. Looking forward, Emergent BioSolutions has plans to further enhance BioThrax and gain additional market share. It is currently working on a post-exposure product, additional dose optimization and extending the product's shelf life to five years. It is also developing a shortened vaccination schedule to just two doses. And to meet that anticipated demand, Emergent is constructing a large-scale manufacturing facility called Building 55 with the capacity to produce 25 million doses of BioThrax per year on a single line. If needed, the facility would have the ability to add another line also capable of producing 25 million units per year.
But it's not just all about BioThrax, Emergent BioSolutions is also focused on attacking the Tuberculosis market. As it stands, approximately 2 billion people, or one-third of the world's population, are estimated to be infected with the bacteria and are at risk of developing tuberculosis. According to the WHO, approximately 1.5 million people die from TB every year. It is the second leading cause of death from infectious disease worldwide
Emergent BioSolution's TB booster vaccine MVA85A is an advanced clinical-stage B vaccine candidate. Long-term approval and distribution of the vaccine would have a big impact on sales and earnings.
These product development strategies are being driven by the company's strong financial profile. As of last quarter, Emergent BioSolutions had $150 million in cash and equivalents and just $3.3 million in long-term debt.
Although there are more than a few reasons to be bullish on Emergent BioSolutions, small-cap biotechs are risky investments. In this case, Emergent BioSolutions has a large concentration of its sales and earnings from one customer, the SNS, which is a government agency. If the federal government cuts spending and the current contract lapses, it could be a sharp hit to the company's sales and earnings.
Estimates and Valuation
Emergent reaffirmed second-quarter revenue between $70 and $80 million as it continues to churn out more vaccinations for the SNS. That has analyst's looking for full-year earnings of 62 cents, down from 66 cents three months ago. The full-year 2013 estimate is 97 cents, a bullish 56% growth projection.
That bullish tone in sales and estimates has helped to sweeten the valuation picture. The current PEG ratio of .57X is an all-time low and a sharp discount to the median of 1.67X over the last three years. That lower valuation says that the market isn't super excited about the company right now, but further growth of its anthrax product and approval of its TB vaccination represent more upside.(click to enlarge)