Emergent BioSolutions (NYSE: EBS), a biotech company specializing in vaccines and bioterrorism related products, lost more than 25 percent of its value in one trading day on June 22^nd.  Details on why this happened and what the future would bring were sketchy at first but are slowly becoming available.  Only one thing is certain; as the story evolves it’s clear that the stock’s decline may be offering a mixture of high risk as well as an opportunity for value investors, although it’s still very early in the process and the company is clearly on the defensive.

All is Not Clear Yet for EBS

In my June 30 BTP Flash Alert, I recommended buying EBS up to $33, based on the notion that the dust had cleared.  In this note, I want to flesh out the details further.  The current controversy started on June 22 when the U.S. Department of Health and Human Services (HHS) announced that it was requesting 29.4 million doses of BioThrax, EBS’ vaccine for anthrax, a bacterium whose spores can be weaponized by turning them into powder and releasing them into the air leading to a deadly pneumonia. The same contract announced that HHS would be requesting up to another 27 million of a “next generation” anthrax vaccine, which is still in development and is named NuThrax.

The sell-off of EBS shares was because investors expected that HHS would order 19 million doses of BioThrax for 2017 alone based on previous contracts and somewhat hazy guidance from the company itself.  We contacted EBS but received no response. However, Wells Fargo analyst David Maris reported that EBS is expecting the 29.4 million doses to be a “front-end-loaded” order of BioThrax that will be filled in 2016-2018 with the 27 million doses of NuThrax to follow in 2017-2019.   The problem is that the 29.4 million doses of BioThrax is less than the nearly 45 million doses that EBS had sold to the government in its previous five year contract. 

A second issue is that NuThrax, the next generation vaccine, is still in clinical trials and may or may not receive approval.   I should note that there are some law firms that are looking to sue EBS for the losses to investors based on what they perceive as a lack of warning from the company on this event happening.  I don’t know what success they may have or not, but it is not uncommon to see lawyers involved when stocks tank under similar circumstances.

What Does EBS Have Going for Itself Now?

The stock has taken a beating, but the story is still evolving since there are still some valid questions to consider.  For one, EBS still has the only FDA approved anthrax vaccine and it is a profitable company which is selling its product and continuing with its business plan.  This means that if there is an anthrax attack EBS is the only game in town.  Its problem is that its future growth is now being questioned, and for good reason. 

But here is what I’m thinking; EBS is suddenly a value stock, selling at 15 times earnings.  Analysts lowered earnings estimates for the June quarter, with the current average estimate being a loss of 17 cents per share on $111.2 million in revenues reduced from a three cent per share loss expected prior to June 22nd.  EBS has been expanding its production capacity and recently received approval for a new manufacturing facility, Building 55, where it will manufacture NuThrax.  If it wasn’t expecting approval of NuThrax, it’s unlikely that the company would spend the money to build out a new facility.

EBS is also in the process of spinning off its money losing oncology division, which should take some pressure off of its earnings in the future.  And it just received a $21.9 million request from the U.S. government to manufacture a Zika virus vaccine based on a government template.  So despite the BioThrax setback, EBS has not lost its primary customer – the U.S. government – which is clearly expanding its relationship with the company.  The Zika vaccine contract is a manufacturing deal, which means that it’s fairly easy money since there are no development costs involved.  In my opinion, the Zika story is the most intangible variable here as it could prove to be a positive for the company.

One final thought to consider is that the earnings results for the June quarter will likely make or break the stock.  The quarterly expectation of a loss of 17 cents per share is a fairly low bar.  If EBS can beat that and exceed its revenue expectations, without any accounting gimmicks, it could be a boost to the stock. Also important will be the guidance that the company provides as well as how it answers questions in its conference call about the BioThrax issue and the future of NuThrax with HHS.  So where does that leave us?  Aggressive value investors can add to the position and see what develops.  Less aggressive investors should hold on to the stock until the earnings report barring another down leg.   I’ve placed a hard $24 dollar stop under the shares which will limit further losses if things turn for the worse before the earnings report.  Finally, be aware of the fact that if EBS misses the reduced earnings expectations things could get really ugly. I own the stock and added to the position in the past few days.

This Week’s Portfolio Changes:

ProShares Ultra Short Biotech ETF (BIS) – stopped out at $44.38 on 6/27/16.  Recommended 6/10/16 via Flash Alert.  Bought at the close 6/10/16 at $39.14. Total Return = 13.38%.

Sell Amgen (AMGN) – Bought on 2/1/16 at 152.75. Sold on 6/27/2016 at $149.  Total Return = -2.45%.

Sell Biorad Laboratories (BIO) – Bought on 5/16/15 at $146.25.  Sold on 6/24/16 at $138.  Total Return = -5.64%.

White Wave Foods Company (WWAV) – Buy range raised from $42 to $46.  Bought 3/21/16 at $40.64. 7/01/2016 closing price $47.29. Dr. Duarte owns shares in WWAV.