Summary
- Emergent BioSolutions has key niche differentiators that strengthen the operating model, with exposure to defence & public health threats.
- They hold the only FDA approved anthrax vaccine in their portfolio, and ~60% of total revenues are backed by US Government contract agreements.
- The stock has bounced formed solid support this year, in an ascending channel that has corrected since August, with volatility to the downside.
- We see a 33% value gap skewed to the upside with fair multiples and value relative to peers.
- We hold a bullish outlook for the company, and set a $122 price target over the coming 12 months, with Q3 financials an upcoming catalyst.
Investment Thesis
We view Emergent BioSolutions (NYSE:EBS) as a strong contender for Covid-19 exposure alongside key exposures to military defence and infectious disease. The company has global niche in biopharmaceuticals, where is holds key differentiators in therapies that protect against public health threats.
Within the portfolio are vaccines and medicines that address a suite of infectious disease segments, including travel-related pathologies and bio-agents. EBS is perhaps most insulated by vaccination production for the bio-threat anthrax. Most importantly, this includes BioThrax, the only FDA approved anthrax vaccine, alongside raxibacumab, a treatment for the same. This gives the company direct exposure to the US federal agency segment, particularly in military defence. The portfolio also includes the drug Narcan, which is the gold standard in reversal or opioid overdose. Also included in the portfolio include the smallpox vaccination ACAM2000, alongside Vivotif and Vaxchora, indicated for vaccination against typhoid fever and cholera, respectively. EBS also has a large contract manufacturing and research development segment, that strengthens the bastion around the company and top-line earnings potential.
We believe the company is well positioned to competently execute current operations whilst leveraging its niche operating model to Covid-19. Contrary to other companies who have reversed guidance this year, EBS have upgraded guidance for 2020 from Q2 earnings. Furthermore, management are of firm belief organic revenue will expand to $2 billion by year 2024, in line with their growth vision over this period. Better than expected contract manufacturing YTD has bolstered this perspective, in our view. Furthermore, EBS were able to mobilise swiftly in developing their own coronavirus treatment candidates, whilst also linking contract development and manufacturing expertise to large biotech players like Johnson & Johnson (JNJ) and AstraZeneca (AZN). Whilst doing so, the company has maintained government service capacity, including key government clients this year. This highlights the strengths in EBS's exposure to contract manufacturing, and really illustrates the solid positioning of the company's portfolio in contrast to the coronavirus pandemic.
As such, shareholders have enjoyed around 80% in returns YTD, albeit with downside exposure since early August. Nonetheless, investors have been rewarded adequately for this exposure, with a Sortino ratio over 1 since this period. We believe investors should factor this number in moving forward, as it highlights how the stock holds up during periods of downside volatility.
