This vaccine maker just announced that it has initiated development of two product candidates for the treatment and prevention of coronavirus disease (COVID-19).
Emergent BioSolutions Inc (EBS)
From Argus Weekly Staff Report
Our rating on Focus List selection Emergent BioSolutions Inc. (EBS), a maker of vaccines and other products that address public health threats, is BUY. We believe that EBS is on track to post solid earnings growth over the next several years, driven by strong U.S. military demand for its anthrax and smallpox vaccine portfolios, as well as continued sales of its Narcan nasal spray for the treatment of opioid overdoses. We also expect it to benefit from its new product pipeline, including its antibody candidates for the treatment of serious influenza A and the Chikungunya virus spread by mosquitoes.
Although Emergent relies heavily on sales to the U.S. government, a fact that can often lead to uneven quarterly results due to contract timing, it is working to diversify its revenue by developing new products for both government and nongovernment customers, and by expanding internationally.
The company has three revenue drivers: Product Sales (roughly 86% of 4Q sales); Contract Developing and Manufacturing Services (7%); and Contracts and Grants (7%). In 4Q, Product Sales grew 43% to $310.8 million, driven by 60% growth in Narcan sales, to $66.9 million, a $78.5 million contribution from ACAM2000, and 75% growth in Other product sales, to $72.5 million. Conversely, sales of anthrax vaccines fell 31% to $92.9 million, as the USG began to transition its purchases toward the company’s next-generation anthrax vaccine, AV7909. Management expects an acceleration of AV7909 sales in 2020. Contract Developing and Manufacturing Services sales fell 5% to $25.5 million, reflecting contracted service work in 4Q18 that did not recur in 4Q19.
We think that EBS shares are attractively valued at current prices. From a technical standpoint, the stock achieved a golden cross in October 2019, as its 50-day moving average rose above its 200-day; the stock has advanced nearly 7% from this event, and, despite a recent decline over the past week, has remained above its 200-day average for the entire time. With its relative strength index at a modest 47, we expect that the stock would have significant room to run higher before running the risk of becoming overbought. On the fundamentals, EBS shares trade at 16.7-times our 2020 EPS estimate, below the average multiple of 25.1 for peer biotech companies. They are also trading at 15.1-times our 2021 estimate.
Based on the company’s heavy reliance on sales to the USG, and the uneven quarterly results, we believe that a modest valuation discount is warranted. However, we think the current discount is too great given our expectations for more than 20% annual earnings growth in 2020. Our revised target price of $67 implies a 2020 P/E of 19.0, still below the peer average, and a potential return of about 14% from current levels.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, March 5, 2020