Is The Worst Over For Emergent Biosolutions Stock?

[Updated: 4/22/2021] EBS Stock Update

Emergent Biosolutions (NYSE: EBS) has been in the news lately but for the wrong reasons. Earlier this month, we advised caution on EBS stock when it was revealed that a “human error” in the company’s plant resulted in the contamination of a batch of Johnson & Johnson’s (NYSE: JNJ) Covid-19 vaccine. EBS stock has taken a hit of 30% so far this month and has lost half of its value since mid-February. While the FDA has finished inspecting the company’s manufacturing unit in Baltimore, things did not go as planned for the company with the regulator making nine observations primarily on quality issues, including the movement of workers in the facility with unsealed bags of medical waste, poor decontamination practices, and chipping paint on the walls and floors. Given the string of bad news surround Emergent over the recent months, what’s next for EBS stock?

We believe that the worst is behind EBS stock now. While the observations made by the FDA pertaining to the quality issues are concerning, they appear to be things that can be fixed in a reasonable timeframe. For now, Emergent has paused production and is working with the U.S. FDA to resolve the identified issues. In our view, EBS stock will likely trend higher in the near term now that the FDA inspection is over and the company is focused on addressing the observations. Although the stock can potentially fall further if the company fails to address the concerns highlighted by the U.S. FDA, we think this scenario is unlikely. Given the current pandemic and the shortage of vaccines globally, it is important for everyone involved for these issues to be resolved at the earliest so that production can resume at the Baltimore plant.

EBS stock is down 11% over the last five trading days and using the recent trend (11% fall in a week) and ten years of historical stock data, the Trefis AI engine finds that EBS stock will likely move 9% over the next one month (twenty-one trading days), outperforming the broader indices. According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price using historical stock data, returns for EBS stock average around 4.6% in the next one-month (twenty-one trading days) period after experiencing a 5% fall in a week (five trading days). Notably, the stock is likely to beat S&P500 returns by 2.7% over the next month (twenty-one trading days).

But how would these numbers change if you are interested in holding EBS stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Emergent Biosolutions stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just one day!

[Updated: 4/1/2021] EBS Baltimore Plant Update

Johnson & Johnson (NYSE: JNJ) confirmed yesterday that a batch of its Covid-19 vaccine was contaminated by ingredients from AstraZeneca’s vaccine at Emergent Biosolutions’ manufacturing plant in Baltimore due to a “human error.” While Johnson & Johnson said it will still be on track to deliver the promised quantity to the federal government by the end of April, this development doesn’t bode well for Emergent, which is a contract manufacturer for bulk vaccine substance for both Johnson & Johnson and AstraZeneca.

This development is a negative for Emergent because the company is yet to receive the U.S. FDA nod for vaccine production. Johnson & Johnson’s vaccine shots which are made using a substance from Emergent cannot be used until the FDA gives its nod to Emergent. While this nod was anticipated soon, the mix-up that led to a waste of 15 million doses has investors worrying about a potential delay in the FDA review of Emergent’s Baltimore plant.

EBS stock was 8% lower in after-hours trading. Given the recent developments, we believe that it may be best for investors to wait for the FDA review of Emergent before entering the stock at current levels of $93, which still reflects a little under 2x move from its March 2020 lows of $50. Our dashboard on EBS Stock Growth Since 2017 analyzes the factors driving the growth in Emergent Biosolutions stock over recent years.

[Updated: 2/25/2021] EBS Stock Outlook

The stock price of Emergent Biosolutions, a biopharmaceutical company focused on vaccines and antibody therapeutics for infectious diseases, and opioid overdoses, has seen a 17% drop over the last ten trading days, while it’s down 19% over the last five trading days, and we believe the stock may rebound in the near term. The recent drop can largely be attributed to certain analyst reports downgrading the overall ranking on EBS stock, and profit taking at higher levels of $125 it was trading at last week (before the recent drop), reflecting a 2.5x surge from the levels seen during the March 2020 lows. However, the company recently reported better than estimated quarterly results, and it also re-affirmed its 2021 guidance. The company has signed multiple contracts with pharmaceutical companies, including Johnson & Johnson, Novavax, Vaxart, and AstraZeneca, for developing vaccines under its contract development and manufacturing business. In fact, Emergent has Covid-19 vaccine contract from Johnson & Johnson and AstraZeneca. This has aided the company’s top-line which grew a stellar 41% y-o-y in 2020, and it is estimated to grow another 30% in 2021, and this will likely bode well for EBS stock growth in the near term.

Looking at the recent rally, the 17% drop for EBS stock over the last ten days compares with 0.7% gains seen in the broader S&P 500 index. Now, is EBS stock poised to decline further? It doesn’t look that way. Given the large 19% correction in just five trading days, and based on our machine learning analysis of trends in the stock price over the last few years, we believe that there is a strong chance of a rise in EBS stock over the next month (twenty-one trading days). See our analysis on Emergent Biosolutions Stock Chances of Rise for more details. Curious about the possibility of rising over the next quarter? Check out the EBS Stock AI Dashboard: Chances Of Rise And Fall for a variety of scenarios on how EBS stock could move.

Five Days: EBS -19%, vs. S&P500 0.1%; Underperformed market

(Extremely rare event)

• Emergent Biosolutions stock declined 19% over a five-day trading period ending 2/24/2021, compared to a broader market (S&P500) rise of 0.1%
• A change of -19% or more over five trading days is a 1% likelihood event, which has occurred 12 times out of 1256 in the last five years

Ten Days: EBS -17%, vs. S&P500 0.7%; Underperformed market

(20% likelihood event)

• Emergent Biosolutions stock declined 17% over the last ten trading days (2 weeks), compared to the broader market (S&P500) rise of 0.7%
• A change of -17% or more over ten trading days is a 20% likelihood event, which has occurred 248 times out of 1240 in the last five years

[Updated: 9/9/2020] EBS 2020 Stock Performance Compared To 2008 Crisis

Emergent Biosolutions stock has rallied 111% since late March (vs. about 53% for the S&P 500) to its current level around $105. The stock fell to a low of $50 in late March when a rapid increase in the number Covid-19 cases outside China resulted in heightened fears of an imminent global economic downturn. The stock is now 52% above the $65 levels it reached in mid-February. Are the gains warranted? We largely think that they are, and we believe that the stock is likely to continue to see higher levels in the coming quarters, as vaccine development gains pace. Our conclusion is based on the recent developments around the company’s business. We also compare Emergent Biosolutions stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

How Did EBS Stock Fare During The 2008 Downturn?

We see EBS stock gained from levels of around $8 in October 2007 (the pre-crisis peak) to roughly $18 in March 2009 (as the markets bottomed out) – implying that the stock gained as much as 120% of its value from its approximate pre-crisis peak. This marked a massive outperformance compared to the broader S&P, which fell by about 51%.

However, EBS stock declined post the 2008 crisis to about $13 in early 2010 – dropping 30% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

In comparison, EBS stock lost 22% of its value between the market peak on February 19 to the low on March 23, and it has already recovered back 111% since then. The S&P in comparison fell by about 34% and rebounded by about 54%.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely put investor concerns about the near-term survival of companies to rest. The flattening of Covid cases in badly hit U.S. and European cities is also giving investors confidence that developed countries have put the worst of the pandemic behind them.

Emergent Biosolutions has signed multiple contracts with pharmaceutical companies, including Johnson & Johnson, Novavax, Vaxart, and AstraZeneca, for developing vaccines under its contract development and manufacturing business, which is expected to provide a significant jump in segment sales going forward. For perspective, CDMO accounted for 18% of total sales in Q2, compared to 7% in the prior year quarter. In the wake of these developments, the company has revised its guidance upward, and it now projects sales of $1.55 billion at mid-point of the range, reflecting a stellar 40% y-o-y growth in 2020.

One may argue that the stock has already rallied 111% since March lows. However, it’s not that the gains for the company are limited to 2020. CDMO business will likely continue to see strong growth over the coming years, in line with the overall demand for vaccines. Going by consensus revenue estimates, after a 40% jump in 2020, the top line is expected to expand by another 20% in 2021. Looking at earnings, average consensus estimate of $6.81 per share in 2020 and $7.58 in 2021 is significantly higher than $2.91 figure the company posted in 2019. EBS stock is currently trading at just 15x its forward earnings, which appears attractive for a company looking to grow at a strong pace. For comparison, the stock traded at 50x levels in 2018 and 2019, as shown in our analysis here. We thus believe that there is a significant upside for EBS stock in the near to medium term.

[Updated: 8/10/2020] Buy Or Sell EBS Stock

Despite a stellar 2.6x rise since the March 23 lows of this year, at the current price of around $130 per share we believe Emergent Biosolutions, best known for its vaccines, antibody therapeutics, and biodefense related medical devices, looks attractive and it has more room for growth. Emergent stock has rallied from $50 to $130 off the recent bottom compared to the S&P which moved 50%, with resumption of economic activities as lockdowns are gradually lifted. Emergent stock is also up 180% from levels seen in late 2017, a little over two years ago.

Emergent stock has been on a strong rally this year. It declined marginally from $54 in early January to under $50 on March 23, significantly outperforming the broader markets, with the S&P500 down over 30% during the same period, and the stock rallied to near $130 now. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential given its multiple contracts to help drugmakers develop Covid-19 vaccines, along with solid performance in the first half, and a robust outlook in the near to medium term.

Though most of the 180% growth in the stock since 2017 actually came in this year, it is justified by the roughly 2x growth seen in Emergent’s revenues from 2017 to 2019. However, the Net Margins contracted over 65%, and Shares Outstanding grew over 20%, resulting in an EPS decline of around 46%. Given the company’s recent performance, and its role in Covid-19 vaccines, its P/E multiple has expanded from around 50x in 2018 and 2019 to 123x currently, based on trailing earnings. We believe the stock is likely to see more upside despite the recent rally. Our dashboard, ‘What Factors Drove 180% Change in Emergent Biosolutions Stock between 2017 and now?‘, has the underlying numbers.

So what’s the likely trigger and timing for further upside?

The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower prescriptions being issued. This trend has impacted the sales of several pharmaceutical companies. However, Emergent benefited in the current pandemic with its sales surging 35% to $587 million in the first half of 2020. Not only did the company see its revenue grow, its Net Margins expanded significantly resulting in Net Income of $80 million compared to a loss of $35 million in the first half of 2019. So what’s going so well for Emergent?

The company has signed multiple contracts with pharmaceutical companies, including Johnson & Johnson, Novavax, Vaxart, and AstraZeneca, for developing vaccines under its contract development and manufacturing business, which accounted for 18% of total sales in Q2, compared to 7% in the prior year quarter. Also, the company has revised its guidance upward, and it now projects sales of $1.55 billion at mid-point of the range, reflecting 40% y-o-y growth. Going by consensus earnings estimate of $6.81, EBS stock is currently trading at just 19x its forward earnings, compared to levels of 50x seen in 2018 and 2019, before the Covid-19 pandemic. We thus believe that there is a significant upside for EBS stock in the near to medium term.

It is not that the company’s benefits are limited to 2020, most of the contracts are multi-year, and the company’s management stated that it now expects the top line to hit the $2 billion mark by 2024, reflecting a strong 80% growth between 2019-2024. As such, the company will likely see steady earnings growth over the coming years. Looking at the broader market, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to boost market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

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