Emergent BioSolutions: A Turnaround In Sight With OTC Narcan Amidst Ongoing Opioid Crisis

Introduction

Emergent BioSolutions (NYSE:EBS) is a life sciences company focused on providing innovative solutions to public health threats (PHTs). The company has a diverse product portfolio, an active product development pipeline, and contract development and manufacturing services. Emergent addresses five key PHT categories: chemical, biological, radiological, nuclear and explosives (CBRNE), emerging infectious diseases (EID), public health crises such as the opioid crisis and COVID-19 pandemic, and acute, emergency, and community care. Emergent generates revenue from product sales, contract services, and non-dilutive contract and grant funding for R&D initiatives.

Emergent has recently obtained FDA approval for over-the-counter, or OTC, Narcan, which is expected to generate substantial and stable revenue for the company. The following article explores Emergent's prospects in this regard.

Emergent's Financials

To start off, let's delve into Emergent's most recent financial report, which shows a decline in performance during Q1 2023 compared to Q1 2022. The company's total revenues decreased by 46%, dropping from $307.5 million to $165.1 million in the previous year. Furthermore, the net loss exhibited a significant increase, rising from $3.7 million to $183 million, with a per-share net loss increase from $0.07 to $3.65. It's important to note that sudden and drastic income changes are, for better or worse, typical for their business, which heavily relies on external factors such as pandemic response and government contracts.

The company restructured its revenue categories in 2023 and saw changes in product contributions. Anthrax MCM sales decreased by 80%, while NARCAN increased by 8%, Other Products by 23%, and Smallpox MCM decreased by 69%. Total product sales declined by 40% compared to the previous year. CDMO services and leases also dropped by 74% and 80%, respectively, resulting in a total CDMO decrease of 75%, and contracts and grants decreased by 32%.

For 2023, the company's total revenue forecast remained unchanged, ranging between $1,100 and $1,200 million. However, the net loss and adjusted net loss forecasts were revised to slightly higher losses, and adjusted EBITDA is expected to be between $100 million and $150 million, with a revised adjusted gross margin percentage between 39% and 42%. At the product/service level, revenue forecasts for Anthrax MCM and Smallpox MCM remain unchanged, while NARCAN and Other Products were revised upward and downward, respectively, and CDMO revenue was revised downward.

As a result of the mounting net losses, Emergent's stock has plummeted by over 70% in the past year.

FDA Approves Emergent's OTC Narcan: First Non-Prescription Naloxone for Opioid Overdose

On March 29th, Emergent received FDA approval for the OTC nonprescription use of Narcan, a nasal spray containing naloxone hydrochloride for treating opioid overdoses. Narcan 4mg is the first FDA-approved naloxone product available without a prescription. This milestone follows a unanimous recommendation from an FDA Advisory committee in February.

The approval of OTC Narcan aims to increase accessibility to naloxone, expand its availability, and ultimately reduce opioid overdose deaths across the United States. Over 100,000 deaths were attributed to drug overdoses, primarily synthetic opioids such as illegal fentanyl, in the 12 months ending October 2022. Emergent plans to launch the OTC Narcan nasal spray by late summer.

The introduction of OTC Narcan presents a significant opportunity for Emergent. By offering a life-saving, easy-to-use treatment without the need for a prescription, the company can tap into a broader market and potentially save countless lives. As opioid overdose deaths continue to rise, the demand for accessible overdose reversal treatments is expected to grow. This new market segment not only has the potential to drive revenue growth for Emergent but also reinforces the company's commitment to addressing public health crises and creating a positive societal impact.

OTC Narcan: A Substantial Market Opportunity in Addressing the Ongoing Opioid Crisis

A deeper analysis of the market opportunity can be broken down into several key aspects:

1. Growing opioid crisis: The opioid epidemic has been escalating in recent years, with synthetic opioids such as illegal fentanyl contributing to a substantial number of overdose deaths. With over 100,000 deaths in the 12 months ending October 2022, the need for accessible and effective overdose reversal treatments is evident. The OTC Narcan can address this pressing issue by making it more readily available to those at risk and their families, friends, or caregivers.
2. Expanding target market: The approval of OTC Narcan opens up a broader target market, as individuals can now purchase the life-saving treatment without the need for a prescription. This expanded accessibility can encourage more people to keep Narcan on hand as a precaution, ultimately leading to more sales and increased revenue for Emergent.
3. Public awareness and education: As awareness of the opioid crisis and the availability of OTC Narcan increases, more people may become interested in purchasing the product to protect themselves or their loved ones. This increased public awareness can be further bolstered by educational campaigns and public health initiatives promoting the importance of carrying naloxone in combating the opioid crisis.
4. Partnerships and collaborations: Emergent could explore partnerships with pharmacies, drugstore chains, and other retail outlets to increase the visibility and availability of OTC Narcan. Collaborations with healthcare providers, addiction treatment centers, and community organizations could also help raise awareness and drive adoption of the product as a standard component of emergency preparedness.
5. Government and institutional support: With the opioid crisis recognized as a significant public health issue, there may be opportunities for financial support or incentives from government bodies and institutions. This could lead to wider distribution of OTC Narcan, further increasing its market penetration and, consequently, its impact on addressing the opioid crisis.

My Analysis & Recommendation

Emergent BioSolutions faced significant challenges during the second half of 2022 and Q1 2023, with a substantial decline in revenue across all categories. However, the recent FDA approval of OTC Narcan presents a promising opportunity for the company to expand into a broader market and potentially boost revenue growth. With the opioid crisis escalating, the demand for accessible and effective treatments such as OTC Narcan continues to soar. Emergent, already a leading supplier of naloxone products, has a strong market reputation. Additionally, their existing manufacturing and distribution infrastructure and expertise provide them with a competitive advantage in the industry. Consequently, Emergent is well-positioned to play a significant role in addressing this public health crisis and capitalize on the increasing demand for OTC Narcan.

Unlike fluctuating crises, such as pandemics, the persistent nature of the opioid crisis ensures a consistent demand for OTC Narcan, making it a reliable revenue source for the company. With a diverse product portfolio and dedication to tackling public health threats, Emergent holds the potential for long-term growth. Despite a decline in stock value over the past year, the recent approval of OTC Narcan may signal a turnaround for the company. Given the positive market outlook for OTC Narcan and Emergent's expertise in addressing public health crises, I recommend investors consider a long position in Emergent ("Buy") as a growth opportunity in the biotech sector. However, investors should closely monitor the company's capacity to execute its growth strategies effectively and manage potential risks associated with the ongoing opioid crisis and other public health challenges.

Risks to Thesis

When the facts change, I change my mind.

While the investment thesis for Emergent BioSolutions presents a compelling case for potential growth, there are several key risks that investors should consider before taking a long position:

1. Competition: The OTC approval of Narcan may result in the emergence of competing products from other manufacturers, thereby intensifying competition in the market. Although some manufacturers already produce Narcan spray, they will still need to submit a supplemental application for OTC approval. This heightened competition could potentially drive prices down, ultimately affecting the profitability of Emergent's naloxone product sales.

2. Regulatory and reimbursement risks: The regulatory environment for pharmaceutical products can be unpredictable, and any changes in regulations or reimbursement policies could impact the sales and profitability of Emergent's products. For example, if the government implements pricing restrictions on naloxone products, it could limit Emergent's revenue potential.

3. Execution: Profiting from the OTC Narcan opportunity relies on Emergent's successful implementation of marketing, distribution, and partnership strategies. Any shortcomings in these domains may hinder market penetration and affect revenue growth. For instance, Emergent has already faced public criticism for setting the OTC Narcan price at approximately $50, which many consider unreasonably high for those who need it most.

4. Dependence on government contracts: As a significant portion of Emergent's revenues come from government contracts and grants, any changes in government priorities or budget cuts could negatively impact the company's financial performance.

5. Uncertainty related to public health threats: Emergent's financial performance is heavily influenced by its ability to respond to public health threats, which can be unpredictable. Any shifts in these threats or the emergence of new crises could impact the demand for Emergent's products and services.

6. Debt obligations: Emergent's significant debt obligations pose a substantial risk factor for the company. While the company has been able to manage its debt thus far, any significant changes in interest rates, refinancing terms, or the company's ability to generate sufficient cash flow could impact its ability to service its debt. Additionally, the company's debt load may limit its flexibility to pursue growth opportunities or respond to unexpected challenges. Any failure to meet its debt obligations could result in default, leading to potential legal and financial consequences that could harm the company's reputation and shareholder value.