Emergent shareholders lose faith on contract delay

While good things are supposed to come to those who wait, investors in Emergent BioSolutions expressed their displeasure at the potential delay in the awarding of a valuable government contract for 25m doses of a new-generation recombinant anthrax vaccine (rPA) by sending shares in the group down by 11%.

Yesterday, the company announced that the department of Health and Human Services (HHS) had asked it to submit product development plans to the FDA, ahead of it granting any award to the companies vying for a multi-million dollar rPA contract. While Emergent tried to put a positive spin on events, claiming that the extra step would reduce the development risk of the rPA vaccine, investors were busily calculating how much additional time it would add to the award of the contract that many believe could be worth between $200m-$400m.

The share price fall was compounded by the fact that many investors had already pushed out their expectations of positive news from the HSS from the end of 2008 to the first quarter of the year, and once again to the second half of this year. The latest set-back could mean that the HSS will not award the contract before the end of 2009.

The government’s decision will also impact PharmAthene who is believed to be the second company likely to benefit from the government procurement process. Its shares also dipped 8% yesterday to $2.50.

State benefits

Like other small vaccine companies involved in bio-defence contracts, Emergent’s fortunes and share price are highly dependent on the often long and unpredictable procurement processes of governments.

At present, the HHS is the group’s primary customer, and the group has done well from the association, which has been helped by having the only approved anthrax vaccine currently on the market in the form of its BioThrax jab. 

In September 2007, Emergent signed a contract with HHS to supply it with 18.75m doses of BioThrax until June 2009, representing more than $400M in sales. A second HHS contract for an additional 14.5m doses of BioThrax running until the third quarter of 2011, and worth between $364m-$404m, was awarded in October 2008.

Selling over done

Investors appear to have forgotten these contracts, which have not only given the group cash of $105m, but also provided it with clear and visible earnings for the next two years, something that other biotechs could only wish for.

As such, the severity of Emergent’s share price fall yesterday, which looked overdone, might have also been due to the fact that the group is thought to have 14% of stock shorted. The stock was the best performer across the global pharmaceutical industry last year, notching up a fivefold increase in value by surging from $5 to $26. (Emergent tops slim list of stock market winners for 2008, January 9, 2009).

Today the market appeared to have taken stock and the shares had regained some ground, up almost 6% in early trading to $11.55.

Pipeline development

What the money from the group’s existing contracts will also do is make it possible for Emergent to focus on developing non-government related vaccines, and spreading risk. Of the six phase II products in the pipeline at the moment three are non-anthrax related vaccines addressing tuberculosis, hepatitis B and typhoid. There is also a phase I streptococcus vaccine in development.

So while the wait for the latest government contract may be an irritation, with few other companies able to offer the next-generation vaccine, and Emergent itself in good financial health, a little patience might have to be required on the part of investors.

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