Description

Emergent Biosolutions “EBS” is the antithesis of a typical biotech and may provide a hidden hedge to the market panic caused by the Coronavirus. EBS’s traditional business is to provide the US government with vaccines stockpiled against a biological attack. The company has more recently expanded into countering opioid overdoses with the acquisition of its Narcan product used by both patients and first responders. Though its relationship with the department of Health and Human Services, the Company has also built facilities designed to rapidly move new vaccines and therapeutics into production. It is through this partnership that we believe EBS could be asked to produce the first vaccines for Coronavirus.

EBS has historically primarily been a vaccine vendor to the US Government. It is currently the sole supplier of Anthrax ($173mm) and Smallpox vaccine ($240mm) to the government. These vaccines have a finite shelf life which means that about 20-25% of the stockpile must be replaced every year. EBS has recently renegotiated its Smallpox contract for 10 years at a significantly higher rate valued at $2 billion over the life of the contract. This part of the business is highly predictable on an annual basis (deliveries sometimes shift between quarters) and carries high margins.

In October 2018 the company acquired Adapt and its NARCAN nasal spray, the first needle-free formulation of naloxone for the emergency treatment of opioid overdose. Each dose comes prepackaged in an easy to use nasal spray that fits in a pocket making it popular with EMTs and patients alike. Some States have even mandated that if a doctor prescribes an opioid, then the NARCAN nasal spray must also be prescribed in case of an accidental overdose. In 2019, NARCAN contributed $280mm in sales.

One important risk factor to consider is that EBS’s patents surrounding this product are being challenged in court by Teva, with a ruling expected later this year. While the outcome of any litigation is inherently uncertain, we believe EBS is more likely than not to prevail for several reasons:

1)      EBS knew about the suit when it acquired Adapt and was able to conduct its own due diligence prior to closing the deal;

2)      EBS has settled a similar suit with Perrigo whereby Perrigo agreed not to enter the market until 2033;

3)      Independent patent consultants hired by at least one equity analyst believes all the patents to be strong and some very strong.

Perhaps the timeliest business segment for EBS is its Contract development and manufacturing services ($80mm in 2019).  The Company describes “these services include process development, formulation and analytical development, drug substance manufacturing and drug product manufacturing and packaging for supply through launch and commercial supply pharma and biotech. The biologics technology platforms consist of mammalian, microbial, viral, plasma and advanced therapies.” More importantly, EBS was encouraged to enter this business by the department of Health and Human Services, specifically so that small biotech firms that developed critical products could get them into production quickly. Based on the press stories regarding the COVID-19 vaccines designed by both Moderna and Novavax we believe there is a very high likelihood of EBS being selected to manufacture at least the initial does required for human trials. Should these trials be successful, EBS as the incumbent will also have a natural advantage in manufacturing the vaccine for mass distribution. While it is difficult to predict the dollar value of such a contract, we believe that the headline effect for the stock will be extremely positive.

EBS is currently trading at about 10x this year’s expected EBITDA (assuming no impact for a coronavirus deal). This is well below its recent trading levels (13x in ’17, 24x in ’18 and 15x in ’19). The company is generating strong free cash flow and has considerable upside from its likely selection as a manufacturer of the COVID-19 vaccines.

Catalyst

1. Announcement of selcetion by US Govt of EBS to produce Covid tests or vaccines

2. Positive win in patent suit.