Emergent Biosolutions Inc's Unexpected Surprise

By Markets Fool.com

It was supposed to be a fairly unexciting fourth-quarter earnings call forEmergent BioSolutions . Back in January, the biotech preannounced its revenue and income numbers -- in a fairly tight range -- so it could talk about the numbers at the JP Morganannual healthcare conference.

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For the most part, the numbers released Thursday fell within the ranges previously announced. Technically, the revenue was slightly higher than Emergent BioSolutions had estimated -- $450.1 million versus an estimate of $445 to $450 million -- but what's $100,000 among friends?

All told, it was a pretty good year for Emergent BioSolutions. Revenue increased 44% from 2013 to 2014 thanks to the addition of Cangene's products, which it acquired in February of last year, and adjusted net income was up 44% year over year. Adjusted earnings per share were only up 15% year over year, to $1.18per share for 2014, because the company had to issue convertible senior notes to pay for the Cangene acquisition.

So much for unexciting...
Along with the revenue and income estimations, Emergent BioSolutions gave 2015 guidance in January for revenue between $510 million and $540 million, a 17% increase over 2014 at midpoint, and adjusted net income of $60 million to $70 million, a 20% increase over 2014 at midpoint. But the company suspended that guidance on Thursday because of a manufacturing issue with BioThrax. Emergent BioSolutions isn't sure how much of the anthrax vaccine, which made up 81% of 2014 revenue, it will be able to sell this year.

During routine inspections, Emergent BioSolutions discovered foreign particles in a limited number of vials in two lots of BioThrax. A "lot" is finished product that was manufactured independently of the other lots. Those two lots will be rejected and thrown away, which isn't that big of a deal in and of itself. The bigger question is whether the issue that caused the foreign particles to get into the vials extends beyond those two lots.

As a precaution, Emergent BioSolutions has quarantined 13 additional lots in inventory until it can figure out what caused the problem. At this point, there's no reason to think there's anything wrong with those lots; but if they all have to be thrown out, there could be a $65 million hit to its previous guidance.

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The company expects that the investigation will be wrapped up in 60 days, so it's unlikely that the company will register sales of BioThrax in the first quarter. Fortunately, if the problem is limited to those two lots, the impact will be negligible because it can just ship the product out in the subsequent quarters and still make its goal for the year. The drug is destined for the CDC stockpile; therefore, a shipping delay will not affect demand as much as it would have if patients had been actually using the product.

Emergent BioSolutions is still manufacturing the final product, but has suspended the final steps where the bulk product is put into vials. This might be a clue as to where management suspects the foreign particles were introduced. Assuming that's the case and the issue can be wrapped up quickly, it shouldn't be hard to get the backlog of product manufactured this quarter into vials and shipped. This will allow the company to catch up and potentially meet its revenue guidance forecast from January.

Here's hoping the first quarter earnings call is far less exciting.

The article Emergent Biosolutions Inc's Unexpected Surprise originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Emergent BioSolutions and owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.