ITEM 2. PROPERTIES
Emergent BioSolutions Inc. and Subsidiaries
Emergent BioSolutions Inc. (the "Company" or "Emergent"(“Emergent,” the “Company,” “we,” “us,” and “our”) is a global life sciences company focused on providing specialty products for civilianinnovative preparedness and military populations that addressresponse solutions addressing accidental, deliberate, and naturally occurring public health threatsPublic Health Threats ("PHTs," eachPHTs"). The Company's solutions include a “PHT”product portfolio, a product development portfolio, and a contract development and manufacturing ("CDMO"). services portfolio.
We operate as 1 operating segment.
2. Summary of significant accounting policies
Basis of presentation and consolidation
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). The accompanying consolidated financial statements include the accounts of Emergent and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Reclassifications of certain prior period amounts have been made to conform to the current period presentation.
During the year ended December 31, 2022, the Company revised the reporting that the chief operating decision maker ("the CODM") reviews in order to assess Company performance. The CODM manages the business with a focus on two reportable segments: (1) Products segment consisting of Government - MCM and Commercial products and (2) Services segment focused on CDMO services.
Going Concern
The consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
As of December 31, 2022, there is $598.0 million outstanding on the our senior revolving credit facility ("Revolving Credit Facility") and $362.8 million on our senior term loan facility ("Term Loan Facility" and together with the Revolving Credit Facility, the "Senior Secured Credit Facilities") that mature in October 2023, which is within one year of the date that the consolidated financial statements for the year ended December 31, 2022 are issued. The Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued as a result of these pending maturities. This evaluation considered the potential mitigating effect of management’s plans that have not been fully implemented. Management evaluated the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company's plan to alleviate the substantial doubt includes amending its existing Senior Secured Credit Facilities that are due October 2023.
On February 14, 2023, the Company entered into a Consent, Limited Waiver, and Third Amendment to the Amended and Restated Credit Agreement (the “Third Credit Agreement Amendment”, "Credit Agreement" and as amended, the "Amended Credit Agreement") relating to the Senior Secured Credit Facilities. Pursuant to the Third Credit Agreement Amendment, the requisite lenders consented to our sale of our travel health business to Bavarian Nordic substantially in accordance with the terms of the Sale Agreement. The proceeds from the transaction will be deposited into a cash collateral account with the Administrative Agent and will, unless otherwise agreed to by the Company and the requisite lenders, be used to repay the outstanding Term Loan Facility on the expiration of the Limited Waiver (as described below). We currently expect the transaction to close in the second quarter of 2023, but we can provide no assurance that the transaction will close prior to the October 2023 maturity of the Term Loan Facility, or at all.
Pursuant to the Third Credit Agreement Amendment the requisite lenders have agreed to a limited waiver of any defaults or events of default that result from (a) any violation of the financial covenants set forth in the Senior Secured Credit Facilities with respect to the fiscal quarters ending December 31, 2022 and March 31, 2023 and (b) the going concern qualification or exception contained in the audited financial statements for the fiscal year ending December 31, 2022. This limited waiver will expire on the earlier to occur of (i) any other event of default and (ii) April 17, 2023. During this period the Company is working with lenders under the Senior Secured Credit Facilities in connection with replacing such facilities before their October 2023 maturity with revised terms and conditions. The Company does not expect to be in compliance with debt covenants in future periods without additional sources of liquidity or future amendments to the Credit Agreement.
While the Company is in the process of replacing and expects to replace the Senior Secured Credit Facilities before they mature, management cannot conclude that it is probable that the Company will be able to obtain such debt refinancing on commercially reasonable terms or at all until a new credit facility is in place. The Company is currently working with its lenders to refinance the Senior Secured Credit Facilities with revised terms and conditions. The extent to which the Company will be able to affect such refinancing, replacement or maturity extension on terms that are favorable or at all is dependent on a number of uncertain factors, including then-prevailing credit and other market conditions, economic conditions, particularly in the pharmaceutical and biotechnology industry, disruptions or volatility caused by factors such as COVID-19, regional conflicts, inflation, and supply chain disruptions. In addition, rising interest rates could limit our ability
to refinance the Senior Secured Credit Facilities when they mature or cause us to pay higher interest rates upon refinancing.
The Company has $642.6 million of cash on hand at December 31, 2022. On January 9, 2023, the Company announced the 2023 organizational restructuring Plan (the “Plan”) intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. The Plan includes a reduction of the Company’s current workforce by approximately five percent.
Use of estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect thereported amounts and disclosures reported in the consolidated financial statementsfor asset impairments, revenue recognition, allowances for doubtful accounts, inventory, depreciation and accompanying notes.amortization, business combinations, contingent consideration, stock-based compensation, income taxes, and other contingencies. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluations could change.assumptions. These estimates are sometimes complex, sensitive to changes in assumptions and require fair value determinations using Level 3 fair value measurements. Actual results may differ materially from those estimates.
Estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, allowances for doubtful accounts, inventory, depreciation and amortization, business combinations, contingent consideration, stock-based compensation, income taxes, and other contingencies.
Cash, cash equivalents and restricted cash
Cash equivalents are highly liquid investments with a maturity of 90 days or less at the date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions. Also, the Company maintains cash balances with financial institutions in excess of insured limits. The Company does not anticipate any losses with such cash balances. Restricted cash includes cash that is not readily available for use in the Company's operating activities. Restricted cash is primarily comprised of cash pledged under letters of credit.
Fair value measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value include:
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| Level 1 — | Observable inputs for identical assets or liabilities such as quoted prices in active markets; |
| Level 2 — | Inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
| Level 3 — | Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use. |
On a recurring basis, the Company measures and records money market funds (level(Level 1), contingent purchase considerations (level 3) and interest-rate swap arrangements (leveland time deposits (Level 2) and contingent purchase consideration (Level 3) using fair value measurements in the accompanying financial statements. On a non-recurring basis, the Company measures its IPR&D assets (level 3) using fair value measurements. The carrying amounts of the Company's short-term financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. The
carrying amounts of the Company’s long-term variable interest rate debt arrangements approximates(Level 2) approximate their fair values due to variable interest rates which fluctuate with changes in market rates.values.
Significant customers and accounts receivable
Billed accounts receivable are stated at invoice amounts and consist mostly of amounts due from the USG, commercial CDMO customers, as well as amounts due under reimbursement contracts with other government entities and non-government organizations. OurThe Company's branded and generic opioid overdose reversal product is sold commercially through physician-directed or standing order prescriptions at retail pharmacies, as well as state health departments, law enforcement agencies, state and local community based organizations, substance abuse centers and federal agencies. If necessary, the Company records a provisionreserve for doubtful receivablescredit losses to allow for amounts which may be unrecoverable. This provision is based upon an analysis of the Company's prior collection experience, customer creditworthiness and current economic trends. Amounts determined to be uncollectible are charged or written-off against the reserve. Unbilled accounts receivable relates to various service contracts for which work has been performed thoughand the Company has a right to bill but invoicing has not yet occurred. Contract assets include revenues recognized in advance of billings and the Company does not have a right to invoice the customer under the terms of the contract. The Company has receivables from contracts containing lease components. At each reporting period, the Company assesses whether it is probable that the Company will collect all future lease payments. The Company considers payment history and current credit status when assessing collectability. The Company does not adjust our receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale.
Concentration Risk
Customers
The Company has long-term contracts with the USG that expire at various times from 20202023 through 2029.2036. The Company has derived a significant portion of its revenue from sales of ACAM2000 and Anthrax Vaccinesour Government - MCM products under contracts with the USG. The Company's current USG contracts do not necessarily increase the likelihood that it will secure future comparable contracts with the USG. The Company expects that a significant portion of the business will continue to be under government contracts that present a number of risks that are not typically present in the commercial contracting process. USG contracts for ACAM 2000ACAM2000 and Anthrax Vaccines and other medical countermeasures products are subject to unilateral termination or modification by the government. The Company may fail to achieve significant sales of ACAM 2000its medical countermeasures products, including ACAM2000 and Anthrax Vaccines to customers in addition to the USG, which would harm itstheir growth opportunities. The Company may not be able to manufacture Anthrax Vaccines consistently in accordance with FDA specifications. The Company's other product sales, largely Nasal Naloxone Products, are largely sold commercially through physician-directed or standing order prescriptions at retail pharmacies, as well as to state health departments, local law enforcement agencies, community-based organizations, substance abuse centers and other federal agencies. In 2022, we filed our supplemental New Drug Application for NARCAN® (naloxone HCI) Nasal Spray, as an over-the-counter emergency treatment which if approved would further broaden our customer base. Our CDMO customers are generally third-party pharmaceutical companies. Refer to Footnote 11, "Revenue recognition" for more information regarding significant customers.
Although the Company seeks to expand its customer base and to renew its agreements with its customers prior to expiration of a contract, a delay in securing a renewal or a failure to secure a renewal or securing a renewal on less favorable terms may have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s trade receivablesaccounts receivable do not represent a significant concentration of credit risk. The USG accounted for approximately 61%43%, 76%50% and 78%64% of total revenues for 2019, 20182022, 2021 and 2017, respectively, and approximately 69% and 76% of total2020, respectively. The Company’s accounts receivable as of December 31, 20192022 and 2018, respectively. Because accounts receivable consists2021, consist primarily of amounts due from the USG or other large multi-national highly reputable customers for product sales, andCDMO services or from government agencies under government grants and development contracts, managementgrants. Management does not deem the credit risk to be significant.
Financial Institutions
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
Lender Counterparties
There is lender counterparty risk associated with the Company's revolving credit facility and derivatives instruments. There is risk that the Company’s revolving credit facility investors and derivative counterparties will not be available to fund as obligated. If funding under the revolving credit facility is unavailable, the Company may have to acquire a replacement credit facility from different counterparties at a higher cost or may be unable to find a suitable replacement. The Company seeks to manage risks from its revolving credit facility and derivative instruments by contracting with experienced large
financial institutions and monitoring the credit quality of its lenders. As of December 31, 2019,2022, the Company diddoes not anticipate nonperformance by any of its counterparties.
Inventories, net
Inventories are stated at the lower of cost or net realizable value with cost being determined using a standard cost method, which approximates average cost. Average cost consists primarily of material, labor and manufacturing overhead expenses (including fixed production-overhead costs) and includes the services and products of third-party suppliers.
The Company analyzes its inventory levels quarterly and writes down, in the applicable period, inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected customer demand. The Company also writes off, in the applicable period, the costs related to short-dated, contaminated or expired inventory. Costs of purchased inventories are recorded using weighted-average costing. The Company determines normal capacity for each production facility and allocates fixed production-overhead costs on that basis.
The Company records inventory acquired in business acquisitionscombinations utilizing the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
Property, plant and equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation and impairments. Depreciation is computed usingsubject to reviews for impairment whenever events or changes in circumstances indicate that the straight-line method overcarrying amount of the following estimated useful lives:
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Buildings | 31-39 years |
Building improvements | 10-39 years |
Furniture and equipment | 3-15 years |
Software | 3-7 years or product life |
Leasehold improvements | Lesser of the asset life or lease term |
Upon retirement or sale, theasset may not be recoverable. The cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gainnormal, recurring or loss is credited or charged to operations. Repairsperiodic repairs and maintenance costsactivities related to property, plant and equipment are expensed as incurred. The cost for planned major maintenance activities, including the related acquisition or construction of assets, is capitalized if the repair will result in future economic benefits.
Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset.
The Company capitalizes internal-use software when both (a) the software is internally developed, acquired, or modified solely to meet the entity’s internal needs and (b) during the software’s development or modification, no substantive plan either exists or is being developed to market the software externally. Capitalization of qualifying internal-use software costs begins when the preliminary project stage is completed, management with the relevant authority, implicitly or explicitly, authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended.
The Company generally depreciates or amortizes the cost of its property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets, which are summarized as follows:
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| Land | Not depreciated |
| Buildings | 31-39 years |
| Building improvements | 10-39 years |
| Furniture and equipment | 3-15 years |
| Software | 3-7 years |
| Leasehold improvements | Lesser of the asset life or lease term |
Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.
The Company determines the fair value of the property, plant and equipment acquired in a business combination utilizing either the cost approach or the sales comparison approach. The cost approach is determined by establishing replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.
Income taxes
Income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basesbasis and net operating loss and research and development ("R&D") tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.
Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recognized under the asset and liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws in the year of enactment. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). Further information on the tax impacts of the Tax Reform Act is included in Note 12 of the Company’s consolidated financial statements.
The Company's ability to realize deferred tax assets depends upon future taxable income as well as the limitations discussed below. For financial reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized prior to expiration. The Company considers future taxable income and ongoing tax planning strategies in assessing the need for valuation allowances. In general, if the Company determines that it is more likely than not to realize more than the recorded amounts of net deferred tax assets in the future, the Company will reverse all or a portion of the valuation allowance
established against its deferred tax assets, resulting in a decrease to the provision for income taxes in the period in which the determination is made. Likewise, if the Company determines that it is not more likely than not to realize all or part of the net deferred tax asset in the future, the Company will establish a valuation allowance against deferred tax assets, with an offsetting increase to the provision for income taxes, in the period in which the determination is made.
Under sections 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a "loss corporation", as defined therein, there are annual limitations on the amount of net operating losses and deductions that are available. The Company has recognized the portion of net operating losses and research and developmentR&D tax credits acquired that will not be limited and are more likely than not to be realized.
Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company makes certain estimates and assumptions, in (1) calculating the Company's income tax expense, deferred tax assets and deferred tax liabilities, (2) determining any valuation allowance recorded against deferred tax assets and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The Company's estimates and assumptions may differ significantly from tax benefits ultimately realized.
Acquisitions
In determining whether an acquisition is a business combination versus an asset acquisition, the accounting guidance requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If that threshold is met, the set of assets and activities is not a business and therefore treated as an asset acquisition. If that threshold is not met, the entity evaluates whether the set meets the definition of a business. If an acquired asset or asset group does not meet the definition of a business, the transaction is accounted for as an asset acquisition. Otherwise, the acquisition is treated as a business combination.
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the merger or acquisition at their respective fair values with limited exceptions and generally use Level 3 fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair values that do not reflect the Company's intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company's consolidated financial statements after the date of the merger or acquisition. If the Company determines the assets acquired do not meet the definition of a business under the acquisition method of accounting, the transaction will be accounted for as an asset acquisition and recorded at cost rather than a business combination and, therefore, no goodwill will be recorded.
The fair values of intangible assets, including acquired in-process research and development ("IPR&D"), are determined utilizing information available at or near the merger or acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets. Upon successful completion of each project, the Company will make a separate determination as to the remaining useful life of the asset and begin amortization. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset lives, can materially affect the Company’s results of operations.
The fair values of identifiable intangible assets related to current products and product rights are primarily determined by using an income approach through which fair value is estimated based on each asset’s discounted projected net cash flows. The Company's estimates of market participant net cash flows consider historical and projected pricing, margins and expense levels, the performance of competing products where applicable, relevant industry and therapeutic area growth drivers and factors, current and expected trends in technology and product life cycles, the time and investment that will be required to develop products and technologies, the ability to obtain marketing and regulatory approvals, the ability to manufacture and commercialize the products, the extent and timing of potential new product introductions by the Company’s competitors, and the life of each asset’s underlying patent, if any. The net cash flows are then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the
risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to IPR&D are determined using an income approach, through which fair value is estimated based on each asset’s probability-adjusted future net cash flows, which reflect the different stages of development of each product and the associated probability of successful completion. The net cash flows are then discounted to present value using an appropriate discount rate. Indefinite-lived intangible assets are tested for impairment annually or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized.
Asset Impairment Analysis
Goodwill and Indefinite-lived Intangible Assets
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized but is reviewed for impairment. Goodwill is allocated to the Company's reporting units, which are components of our business for which discrete cash flow information is available one level below its operating segment. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment annually as of October 1 and earlierat interim if an event or other circumstance indicates that we may not recover the carrying value of the asset. If the Company believes that as a result of its qualitative assessment it is more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is greater than its carrying amount, the quantitative impairment test is not required. If however it is determined that it is not more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is greater than its carrying amount, a quantitative test is required.
The quantitative goodwill impairment test is performed using a two-stepone-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including goodwill.amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the quantitative impairment test is not necessary.impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative goodwill impairment test is required to be performed to measure the amount of impairment loss, if any. The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit’s identifiable net assets excluding goodwill is compared to the fair value of the reporting unit as if the reporting unit had been acquired in a business combinationis impaired and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company used a qualitative assessment for ourexcess up to the total amount of goodwill impairment testing for 2019 and 2018. The qualitative evaluation completed duringincluded in the years ended December 31, 2019 and 2018 indicated 0 impairment losses.reporting unit.
TheWhen the Company has material indefinite lived intangible assets associated with in-process research and development (IPR&D) which were acquired as part of the acquisitions completed in the fourth quarter of 2018. Following("IPR&D") a qualitative assessment indicatingis performed. If the qualitative assessment indicates that it is not more likely than not that the fair value of the indefinite lived intangible asset exceeds its carrying amount, impairment of other intangible assets not subject to amortization involves a comparison ofthe Company
compares the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Determining fair value requires the exercise of judgment about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The Company used a quantitative assessment for our IPR&D impairment testing for 2019flows (see Note 5, "Intangible assets and determined there was an impairment loss of $12.0 million, which was recorded as a component of R&D expense (see Notes 4 Acquisitions and 5 Fair value measurements)goodwill).
Long-lived Assets
Long-lived assets such as intangible assets and property, plant and equipment are not required to be tested for impairment annually. Instead, long-lived assetsthey are tested for impairment whenever circumstances indicate that the carrying amount of the asset may not be recoverable, such as when the disposal of such assets is likely or there is an adverse change in the market involving the business employing the related assets. If an impairment analysis is required, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first requires a comparison
of undiscounted future cash flows to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, the asset would not be deemed to be recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value. Fair value is typically determined by discounting the future cash flows associated with that asset. If the intent is to hold the asset for sale and certain other criteria are met, the impairment test involves comparing the asset’s carrying value to its fair value less costs to sell. To the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized in an amount equal to the difference. Significant judgments used for long-lived asset impairment assessments include identifying the appropriate asset groupings and primary assets within those groupings, determining whether events or circumstances indicate that the carrying amount of the asset may not be recoverable, determining the future cash flows for the assets involved and assumptions applied in determining fair value, which include, reasonable discount rates, growth rates, market risk premiums and other assumptions about the economic environment.
Contingent Consideration
In connection with the Company's acquisitions accounted for as business combinations, the Company records contingent consideration associated with sales-based royalties, sales-based milestones and development and regulatory milestones at fair value. The fair value model used to calculate these obligations is based on the income approach (a discounted cash flow model) that has been risk adjusted based on the probability of achievement of net sales and achievement of the milestones. The inputs the Company uses for determining the fair value of the contingent consideration associated with sales-based royalties, sales-based milestones and development and regulatory milestones are Level 3 fair value measurements. The Company re-evaluates the fair value on a quarterly basis. Changes in the fair value can result from adjustments to the discount rates and updates in the assumed timing of or achievement of net sales and/or the achievement of development and regulatory milestones. Any future increase or decrease in the fair value of the contingent consideration associated with sales-based royalties and sales-based milestones along with development and regulatory milestones are based on an increasedassessment of the likelihood that the underlying net sales or milestones will be achieved.
The associated payments which will become due and payable for sales-based royalties and milestones result in a charge to cost of product sales and contract development and manufacturing in the period in which the increase is determined. Similarly, any future decrease in the fair value of contingent consideration associated with sales-based royalties and sales-based milestones will result in a reduction in cost of product sales and contract development and manufacturing.sales. The changes in fair value for potential future sales-based royalties associated with product candidates in development will result in a charge to cost of product sales and contract development and manufacturing services expense in the period in which the increase is determined.
The associated payment orCompany's acquisitions accounted for as asset acquisitions may also include contingent consideration payments which will become dueto be made for sales-based royalties, sales-based milestones and payable for development and regulatory milestones will resultmilestones. The Company assesses whether such contingent consideration meets the definition of a derivative. Contingent consideration payments in a chargean asset acquisition not required to researchbe accounted for as derivatives are recognized when the contingency is resolved, and development expense in the period in which the increaseconsideration is determined. Similarly, any future decrease in thepaid or becomes payable. Contingent consideration payments required to be accounted for as derivatives are recorded at fair value on the date of the acquisition and are subsequently remeasured to fair value at each reporting date.
Leases
The Company has operating leases for developmentcorporate offices, R&D facilities and regulatory milestonesmanufacturing facilities. The Company determines if an arrangement is a lease at inception. Operating leases with future minimum lease payments in excess of 12 months and total lease payments greater than $0.4 million are included in right-of-use (ROU) assets and liabilities. The Company has elected to record expense on a cash basis for leases with minimum lease payments of 12 months or less and/or total lease payments less $0.4 million.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses an implicit rate when readily determinable. At the beginning of a lease, the operating lease ROU asset also includes any concentrated lease payments expected to be paid and excludes lease incentives. The Company's lease ROU asset may include options to extend or terminate the lease when it is reasonably certain that the Company will result inexercise those options.
Lease expense for lease payments is recognized on a reduction in researchstraight-line basis over the lease term. The Company has lease agreements with lease and development expense.non-lease components, which are accounted for separately.
Revenue recognition
On January 1, 2018 the Company adopted ASC topic 606 using the modified retrospective approach applied to those contracts in effect as of January 1, 2018. Under this transition method, results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with historical accounting under Topic 605. See further discussion of the adoption of Topic 606, including the impact to our 2018 financial statements within the recently issued accounting standards section below.
The Company recognizes revenue when the Company's customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services by analyzing the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. To indicate the transfer of control for the Company’s product sales and contract development and manufacturing services, it must have a present right to payment, legal title must have passed to the customer, and the customer must have the significant risks and rewards of ownership. Revenue for long-term development contracts is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with transferring control of the good or service over time.
Multiple performance obligations
At contract inception, the Company assesses the products or services promised in a contract and identifies a performance obligation for each promise to transfer to the customer a product or service that is distinct, including evaluating whether the contract includes a customer option for additional goods or services which could represent a material right. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606. Contracts sometimes include more than one product, a lease, or options for customers to purchase additional products or services in the future. Customer options that provide a material right to the customer, such asfuture for free or discounted products or services, giveat a discount, which gives rise to a separate performance obligation.obligations. For contracts with multiple performance obligations, the Company allocates the contract price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers, however when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price. Allocation of the transaction price is determined at the contracts’ inception.
Transaction price and variable consideration
Once the performance obligations in the contract have been identified, the Company estimates the transaction price of the contract. The estimate includes amounts that are fixed as well as those that can vary based on expected outcomes of the activities or contractual terms. The Company's variable consideration includes for examplenet profit received from sales of the Company's generic Nasal naloxone product, certain products sold on a net basis, cost-plus-fee contract terms and consideration transferred under its development contracts with the USG as consideration received can vary based on developmental progression of the product candidate(s).candidate. When a contract's transaction price includes variable consideration, the Company evaluates the variable consideration to determine whether the estimate needs to be constrained; therefore, the Company includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration estimates are updated at each reporting date. There were no significant constraints or material changes to the Company's variable consideration estimates as of or during the twelve monthsyear ended December 31, 2019.2022.
In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer with a significant benefit of financing the transfer of goods or services to the customer, which is called a significant financing component. The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less.
Product sales
CBRNE
The primary customer for the Company's CBRNE products and the primary source of funding for the development of its CBNRE product candidate portfolio is the USG. The Company's contracts for the sale of CBRNE products generally have a single performance obligation. Certain product sales contracts with the USG include multiple performance obligations, which generally include the marketed product, stability testing associated with that product, expiry extensions and plasma collection. The USG contracts for the sale of the Company's CBRNE products are normally multi-year contracts. AV7909 and Trobigard are product candidates that are not approved by the FDA or any other health agency, but are procured by certain government agencies under special circumstances.
The transaction price for product sales are based on a cost build-up model with a mark-up. For our product sales, we recognize revenue at a "pointpoint in time"time when the Company’s performance obligations have been satisfied and control of the products transfer to the customer. To indicate the transfer of control the Company will have a present right to payment, legal title must have passed to the customer, and the customer must have the significant risks and rewards of ownership. This “pointpoint in time”time depends on several factors, including delivery, transfer of legal title, transition of risk and rewards of the product to the customer and the Company's right to payment.
The Company's contracts for the sale of the Company's Government - MCM products include certain acceptance criteria before title passes to the customer. The primary customer for the Company's Government - MCM products and the primary source of funding for the development of its MCM product candidate portfolio is the USG. The USG contracts for the sale of the Company's CBRNEGovernment - MCM products also include certain acceptance criteria before title passes toare normally multi-year contracts with annual options.
For the USG.
Opioid and travel healthCompany’s commercial products,
Revenues are recognized when upon transfer of control of the goods are transferred to our customers, in an amount thatthe Company reflects estimates of the consideration that the Company expects to be entitled to in exchange for those goods or services.expects. Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. AllowancesEstimates of variable consideration include allowances for returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government
rebates, chargebacks and rebates under managed care plans are considered in determining the variable consideration. Revenues from sales of productsplans.
Revenue is recognized to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with such variable consideration is subsequently resolved. Product sales revenue is recognized when control has transferred to the customer, which occurs at a point in time, which is typically upon delivery to the customer. Provisions for variable consideration revenues from sales of products are recorded at the net sales price, which includes estimates of variable consideration for which provisions are established and which relate to returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government rebates, chargebacks and rebates under managed care plans.price. Calculating certain of these provisions involves estimates and judgments and the Company determines their expected value based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, the Company's expectations regarding future utilization rates for these programs and channel inventory data. These provisions reflect the Company's best estimate of the amount of consideration to which the Company is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company reassesses the Company's provisions for variable consideration at each reporting date. Historically, adjustments to estimates for these provisions have not been material.
Provisions for returns, specialty distributor fees, wholesaler fees, government rebates and rebates under managed care plans are included within current liabilities in the Company's consolidated balance sheets. Provisions for chargebacks and prompt payment discounts are shown as a reduction in accounts receivable.
Contract development and manufacturingCDMO services
The Company performs contract development and manufacturingCDMO services for third parties. Under these contracts, activities can include pharmaceuticaldrug substance and drug product process development, manufacturing and filling services for injectable and other sterile products, inclusive ofand development services such as pharmaceutical product process development, process design, technicaltechnology transfer, manufacturing validations, laboratory analytical development support, aseptic filling, lyophilization, final packaging, stability studies, and accelerated and ongoing stability studies.suite-reservations. These contracts vary in duration, activities, and number of performance obligations. Performance obligations identified under these arrangements may include drug substance and/or drug product manufacturing, technology transfer activities, and suite-reservations.
Drug substance, drug product manufacturing, development services and technology transfer performance obligations are recognized as revenue over-time because the Company’s performance does not create an asset with a duration that is less than one year, generally include a single performance obligation as the customer benefits from our performance upon full completion of our services. The performance obligation is satisfied whenan alternative use and the Company must have a presenthas an enforceable right to payment because legal title has passedfor performance completed as work is performed. In drug product arrangements, the customer typically owns and supplies the active pharmaceutical ingredient (API), that is used in the manufacturing process; in drug substance arrangements, the customer provides certain seed material that is used in the manufacturing process. The transaction price generally contains both a fixed and variable component. The fixed component is stated in the agreement as a fixed price per unit with no contractual provision for a refund or price concession and the variable component generally results from pass-through costs that are billed at cost-plus over the life of the contract. The Company uses an input method to measure progress toward the satisfaction of the related performance obligations based on costs incurred as a percentage of total costs to complete which the Company believes best depicts the transfer of control of goods or services promised to its customers.
Suite reservations are classified as leases when the customer directs the use of the identified suite and obtains substantially all the economic benefits from the manufacturing capacity. If a customer reserves more than one suite, the allocation of contract value is based on relative selling price which varies due to size, location, capacity, production capability for drug product or drug substance, and the time of planned use. The associated revenue is recognized on a straight-line basis over the period of performance. For arrangements that contain both lease and non-lease components, consideration in the contract is allocated on a relative standalone selling price basis.
The Company’s CDMO customer contracts generally include provisions entitling the Company to a termination penalty when the contract is terminated prior to the customer, the goods arecontract’s nominal end date. The termination penalties in the customer’s possession with allcustomer contracts vary but are generally considered substantive for accounting purposes and create enforceable rights and obligations throughout the risksstated duration of the contract. The Company accounts for a contract cancellation as a contract
modification. The determination of the contract termination penalty is based on the terms stated in the related customer agreement. As of the modification date, the Company updates its estimate of the transaction price, subject to constraints, and rewardsrecognizes the amount over the remaining performance period or measure of ownership,progress under the arrangement.
For contracts that contain lease components, the Company assesses the collectability of the lease payments. If the collectability of the lease payments is probable, the Company recognizes lease income over the term of the lease on a straight-line basis. If collectability is not deemed probable at any time during the term of the lease, the Company’s lease income is limited to the lesser of (i) the lease payments that have been collected from the lessee, or the straight-line recognition of the contract value. If the collectability assessment changes to probable after the Company has determined collectability is not deemed probable, any difference between the lease income that would have been recognized if collectability had always been assessed as probable and the efficacy of the goods has been confirmed. The Company recognizes revenue atlease income recognized to date is recognized as a "point in time" based on when the performance obligationcurrent-period adjustment to lease income. Changes to the customer is satisfied.collectability of operating leases are recorded as adjustments to lease income in the consolidated statements of operations in the period that they occur.
Contracts and grants
The Company generates contract and grant revenue primarily from cost-plus-fee contracts associated with development of certain product candidates. Revenues from reimbursable contracts are recognized as costs are incurred, generally based on allowable costs incurred during the period, plus any recognizable earned fee. The Company uses this input method to measure progress as the customer has the benefit of access to the development research under these projects and therefore benefits from the Company's performance incrementally as research and developmentR&D activities occur under each project. We consideroccur. When applicable, the Company considers fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract. We analyzecontract, the cost-to-cost measure of progress. The Company analyzes costs for contracts and reimbursable grants to ensure reporting of revenues gross versus net is appropriate. Revenue for long-term development contracts is considered variable consideration, because the deliverable is dependent on the successful completion of development and is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with satisfying the performance obligation over time. The USG contracts for the development of the Company's CBRNEMCM product candidates are normally multi-year contracts.
Research and development
We expense research and developmentThe Company expenses R&D costs as incurred. The Company's research and developmentR&D expenses consist primarily of:
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▪ | personnel-related expenses; |
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▪ | fees to professional service providers for, among other things, analytical testing, independent monitoring or other administration of the Company's clinical trials and obtaining and evaluating data from the Company's clinical trials and non-clinical studies; |
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▪ | costs of contract development and manufacturing services for clinical trial material; and |
▪personnel-related expenses;
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▪ | costs of materials used in clinical trials and research and development. |
Comprehensive income▪costs of CDMO services for clinical trial material; and
▪costs of materials intended for use and used in clinical trials and R&D.
Comprehensive income (loss)
Comprehensive income (loss) is comprised of net income (loss) and other changes in equity that are excluded from net income.income (loss). The Company includes translation gains and losses incurred when converting its subsidiaries' financial statements from their functional currency to the U.S. dollar in accumulated other comprehensive income (loss) as well as gains and losses on its pension benefit obligation and derivative instruments.
Translation and Remeasurement of Foreign Currencies
For our non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net income (loss) and are recorded in accumulated other comprehensive income (loss), a separate component of equity. For subsidiaries where the functional currency of the assets and liabilities differ from the local currency, non-monetary assets and liabilities are translatedremeasured at the rate of exchange in effect on the date assets were acquired while monetary assets and liabilities are translatedremeasured at current rates of exchange as of the balance sheet date. Income and expense items are translatedremeasured at the average foreign currency rates for the period. TranslationRemeasurement adjustments of these subsidiaries are included in other income (expense), net in our consolidated statements of income.operations.
EarningsNet income (loss) per common share
The Company calculates basic earningsBasic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed using
For the years ended December 31, 2019 and 2018, the Company calculated diluted earnings per share using
the treasury method by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the year ended December 31, 2017, the Company calculated diluted earnings per share using the if-converted method by dividing the adjusted net income by the adjusted weighted average number of shares of common stock outstanding during the period. The adjusted net income was adjusted for interest expense and amortization of debt issuance cost, both net of tax, associated with the Company's 2.875% Convertible Senior Notes due 2021 (the "Notes"). The weighted average number of diluted shares wasperiod, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised and are not anti-dilutive.
Treasury stock
When stock is acquired for purposes other than formal or constructive retirement, the exercise of stock options and the vesting of restricted stock units along with the assumptionpurchase price of the conversionacquired stock is recorded in a separate treasury stock account, which is separately reported as a reduction of equity.
When stock is retired or purchased for formal or constructive retirement, the purchase price is initially recorded as a reduction to the par value of the Notes, each at the beginning of the period. During the fourth quarter of 2017, the Company issuedshares repurchased, with any excess purchase price over par value recorded as a notice of termination of conversion rightsreduction to additional paid-in capital related to the Notesseries of shares repurchased and issued 8.5 millionany remainder excess purchase price recorded as a reduction to retained earnings. If the purchase price exceeds the amounts allocated to par value and additional paid-in capital related to the series of shares repurchased and retained earnings, the remainder is allocated to additional paid-in capital related to other series of commonshares.
To determine the cost of treasury stock due to conversions that occurredis either sold or reissued, the Company uses the last in, 2017. Afterfirst out method. If the dateproceeds from the re-issuance of conversiontreasury stock are greater than the cost, the excess is recorded as additional paid-in capital. If the proceeds from re-issuance of treasury stock are less than the cost, the excess cost first reduces any additional paid-in capital arising from previous treasury stock transactions for that class of stock, and during the years ended December 31, 2019 and 2018, the Notes are strictly debt instruments and, therefore, no longer impact the diluted earnings per share calculation.any additional excess is recorded as a reduction of retained earnings.
Accounting for stock-based compensation
The Company has 1one stock-based employee compensation plan, the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan (the "Emergent Plan"), under which the Company may grant various types of equity awards including stock options, restricted stock units and performance stock units. For all of our share-based awards, the Company recognizes forfeitures and compensation costs when they occur.
The terms and conditions of equity awards (such as price, vesting schedule, term and number of shares) under the Emergent Plan is determined by the compensation committee of the Company's board of directors, which administers the Emergent Plan. Each equity award granted under the Emergent Plan vests as specified in the relevant agreement with the award recipient and no option can be exercised after either seven or ten years from the date of grant depending on the grant date.grant. The Company chargesrecords the estimated fair value of awards against incomein expense on a straight-line basis over the requisite service period, which is generally the vesting period. Where awards are made with non-substantive vesting periods (for instance, where a portion of the award vests upon retirement eligibility), the Company estimateestimates and recognizerecognizes expense based on the period from the grant date to the date the employee becomes retirement eligible.
The Company determines the fair value of restricted stock units using the closing market price of the Company's common stock on the day prior to the date of grant. The Company's performance stock units settle in the Company's stock. The fair value is determined on the date of the grant using the number of shares expected to be earned and the ending market value of the stock on the day prior to the grant date. The number of shares expected to vest is determinedadjusted each reporting period by assessing the probability that the performance criteria will be met and the associated targeted payout level that is forecasted will be achieved.
The Company utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted. Set forth below is a discussion of the Company's methodology for developing each of the assumptions used:
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▪ | Expected dividend yield — the Company does not pay regular dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. |
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▪ | Expected volatility — a measure of the amount by which a financial variable, such as share price, has fluctuated (historical volatility) or is expected to fluctuate (implied volatility) during a period. The Company analyzed its own historical volatility to estimate expected volatility over the same period as the expected average life of the options. |
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▪ | Risk-free interest rate — the range of U.S. Treasury rates with a term that most closely resembles the expected life of the option as of the date on which the option is granted. |
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▪ | Expected average life of options — the period of time that options granted are expected to remain outstanding, based primarily on the Company's expectation of optionee exercise behavior subsequent to vesting of options. |
▪Expected dividend yield — the Company does not pay regular dividends on its common stock and does not anticipate paying any dividends in the foreseeable future.
▪Expected volatility — a measure of the amount by which a financial variable, such as share price, has fluctuated (historical volatility) or is expected to fluctuate (implied volatility) during a period. The Company analyzed its own historical volatility to estimate expected volatility over the same period as the expected average life of the options.
▪Risk-free interest rate — the range of U.S. Treasury rates with a term that most closely resembles the expected life of the option as of the date on which the option is granted.
▪Expected average life of options — the period of time that options granted are expected to remain outstanding, based primarily on the Company's expectation of option exercise behavior subsequent to vesting of options.
Pension plans
The Company maintains defined benefit plans for employees in certain countries outside the U.S., including retirement benefit plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increase, and pension adjustments. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. Actuarial gains and losses are deferred in accumulated other comprehensive income (loss), net of tax and are amortized over the remaining service attribution periods of the employees under the corridor method. Differences between the expected long-term return on plan assets and the actual annual return are amortized to net periodic benefit cost over the estimated remaining life as a component of selling, general and administrative expenses in the consolidated statements of operations.
Derivative Instrumentsinstruments and Hedging Activitieshedging activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company has entered into interest rate swaps to manage exposures that arise from the Company's payments of variable interest rate debt under its senior secured credit agreements.
The Company's interest rate swaps qualify for hedge accounting as cash flow hedges. All derivatives are recorded on the balance sheet at fair value. Hedge accounting provides for the matching of the timing of gain or loss recognition on these interest rate swaps with the recognition of the changes in interest expense on the Company's variable rate debt. For derivatives designated as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The cash flows from the designated interest rate swaps are classified as a component of operating cash flows, similar to interest expense.
Recently issued accounting standards
Recently Adopted
ASU 2016-2, Leases (Topic 842) ("ASU 2016-2")
In February 2016, the FASB issued ASU 2016-2. ASU 2016-2 increased transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors. The Company adopted the new standard effective January 1, 2019 using the modified retrospective approach. An entity that applies the transition provisions at the beginning of the period of adoption records its cumulative adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented (i.e., January 1, 2019). In this case, an entity continues to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year it adopts the standard.
The Company utilized the transition package of certain practical expedients permitted: ASC 842-10-65-1(f) and ASC 842-10-65-1(g). The Company made an accounting policy election that kept leases with an initial term of 12 months or less off of the balance sheet which resulted in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. In addition, the Company has made an accounting policy election, by class of underlying asset, to not separate non-lease components from lease components and instead to account
for each separate lease component, and the non-lease components associated with that lease component, as a single lease component.
As of January 1, 2019 the total right of use assets increased $13.4 million, while total operating lease liabilities increased $14.0 million. There was no adjustment to the opening balance of retained earnings as of January 1, 2019. The standard has not materially affect the Company's consolidated net earnings. The Company continues to apply the legacy guidance from the old lease accounting standard, including its disclosure requirements, in the comparative periods presented (see Note 14).
ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-9")
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-9. ASU No. 2014-9 (known as ASC 606) supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method resulting in an adjustment to opening retained earnings of $32.5 million for the cumulative effect of initially applying the new standard.
Under ASC 606, the Company finalized the review of its portfolio of revenue contracts that were not complete as of the adoption date and made its determination of its revenue streams as well as completed extensive contract specific reviews to determine the impact of the new standard on its historical and prospective revenue recognition. Because many of the Company's significant contracts with customers have unique contract terms, the Company reviewed all its non-standard agreements in order to determine the effect of adoption. The Company tested a sample of remaining agreements to verify that there were no changes in accounting based on the assumption that these contracts had similar characteristics and that the effects on the financial statements would not differ materially from applying this guidance to the individual contracts. To estimate the financial impacts of the adoption, the Company did not apply the contract modification practical expedient and retrospectively restated long-term contracts for any contract modifications.
The opening balance sheet adjustment as of January 1, 2018, was the result of the Centers for Innovation in Advanced Development and Manufacturing ("CIADM") contract with the Biomedical Advanced Research and Development Authority ("BARDA"). Under ASC 606 at January 1, 2018, the Company determined that the performance obligation under the arrangement is to provide ongoing manufacturing capability to the USG and would recognize the consideration received in the initial 7 years year base period on a straight-line basis over a 24-year period as the capability being created during the base period of the contract is being provided to the customer over both the base period contract term as well as 17 additional option periods. As the Company’s performance obligation is providing the USG with continuous access to its production capabilities throughout the contract duration, a time-based measure resulting in straight-line revenue recognition is proportionate to the Company’s progress in satisfying the performance obligation when compared to the total progress. This measure of progress is most reflective of the Company satisfying the performance obligation over time. Beginning in June 2013, the Company was expected to be able to stand ready and be available to respond to the USG and importantly to respond to any task orders that may be issued during the base period and additional option periods. Being able to stand ready to perform in the event of an outbreak is of importance to the USG and by entering into this arrangement with the Company, the USG expected to receive the benefit of having access to Company’s readiness and its capability to immediately respond to public health threats. The Company concluded the identified stand-ready performance obligations represent a series of distinct services that are substantially the same and have the same pattern of transfer to the customer.
In addition, the Company determined the CIADM contract includes a significant financing component which is included in the transaction price. The Company calculated the financing component using an interest rate the Company had on its other debt obligations at inception of the contract. The difference in revenue recognized under ASC 605 vs. ASC 606, as of the adoption date, was primarily attributable to the difference in the overall consideration or transaction price resulting from different accounting treatment related to options within the contract and the inclusion of a significant financing component under ASC 606.
Prior to the adoption of ASC 606, the Company recognized revenue under the CIADM contract on a straight-line basis, based upon its estimate of the total payments to be received under the contract. The Company analyzes the estimated payments to be received on a quarterly basis to determine if an adjustment to revenue was required. As a result of the adoption of ASC 606, as of January 1, 2018, there was an increase in the deferred revenue liability of $42.4 million and an increase in deferred tax assets of $9.9 million with an offsetting reduction to retained earnings of $32.5 million.
ASU 2018-2, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-2")
In February 2018, the FASB issued ASU 2018-2. ASU 2018-2 provides the option to reclassify certain income tax effects related to the Tax Cuts and Jobs Act passed in December of 2017 between accumulated other comprehensive income and retained earnings and also requires additional disclosures. ASU 2018-2 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of ASU 2018-2 is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The adoption of ASU 2018-2 did not have a material impact on the Company's consolidated financial statements.
Not Yet Adopted
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13")
In June 2016, the FASB issued ASU 2016-13. ASU 2016-13 provides guidance on measurement of credit losses on financial instruments that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and that requires entities to use a new, forward-looking “expected loss” model that is expected to generally result in the earlier recognition of allowances for losses. The guidance became effective for annual periods beginning after December 15, 2019, including interim periods within those years, but early adoption is permitted. The Company has evaluated the effects of this standard and determined that the adoption will not have a material impact on the Company's consolidated financial statements.
ASU 2017-4, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-4")
In January 2017, the FASB issued ASU 2017-4. ASU 2017-4 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. ASU 2017-4 is effective for annual and interim goodwill tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820) ("ASU 2018-13")
In August 2018, the FASB issued ASU 2018-13. ASU 2018-13 improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.
ASU 2018-14, Compensation -Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14")
In August 2018, the FASB issued ASU 2018-14. ASU 2018-14 modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for all entities for fiscal years ending after December 15, 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-14 on its consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")
In August 2018, the FASB issued ASU 2018-15. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for all entities for fiscal years beginning after December 15, 2019, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-15 on its consolidated financial statements.
ASU 2019-12, Simplifications to Accounting for Income Taxes ("ASU 2019-12")
In December 2019, the FASB issued ASU 2019-12. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including deferred taxes for goodwill and allocating taxes for members of a consolidated group. ASU 2019-12 is effective for all entities for fiscal years beginning after December
15, 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements.
3. Revenue recognition
The Company operates in 1 business segment. Therefore, results of the Company's operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting.
For the years ended December 31, 2019, 2018 and 2017 the Company's revenues disaggregated by the major sources was as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S Government | | Non-U.S. Government | | Total | | U.S Government | | Non-U.S. Government | | Total | | U.S Government | | Non-U.S. Government | | Total |
| Product sales | $ | 568.8 |
| | $ | 334.7 |
| | $ | 903.5 |
| | $ | 526.1 |
| | $ | 80.4 |
| | $ | 606.5 |
| | $ | 374.8 |
| | $ | 46.7 |
| | $ | 421.5 |
|
| Contract development and manufacturing services | — |
| | 80.0 |
| | 80.0 |
| | — |
| | 98.9 |
| | 98.9 |
| | — |
| | 68.9 |
| | 68.9 |
|
| Contracts and grants | 105.9 |
| | 16.6 |
| | 122.5 |
| | 71.5 |
| | 5.5 |
| | 77.0 |
| | 65.1 |
| | 5.4 |
| | 70.5 |
|
| Total revenues | $ | 674.7 |
| | $ | 431.3 |
| | $ | 1,106.0 |
| | $ | 597.6 |
| | $ | 184.8 |
| | $ | 782.4 |
| | $ | 439.9 |
| | $ | 121.0 |
| | $ | 560.9 |
|
Contract liabilities
When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations are reflected as contract liabilities on the consolidated balance sheets and are deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of contract liabilities:
|
| | | |
| (in millions) | |
| December 31, 2017 | $ | 30.5 |
|
| Adoption of new accounting standard (ASC 606) | 42.4 |
|
| January 1, 2018 | 72.9 |
|
| Deferral of revenue | 29.3 |
|
| Revenue recognized | (29.1 | ) |
| Balance at December 31, 2018 | 73.1 |
|
| Deferral of revenue | 46.7 |
|
| Revenue recognized | (30.9 | ) |
| Balance at December 31, 2019 | $ | 88.9 |
|
Transaction price allocated to remaining performance obligations
As of December 31, 2019, the Company had expected future revenues of approximately $600 million associated with performance obligations that have not been satisfied. The Company expects to recognize a majority of these revenues within the next 24 months, with the remainder recognized thereafter. However, the amount and timing of revenue recognition for unsatisfied performance obligations can materially change due to timing of funding appropriations from the USG and the overall success of the Company's development activities associated with its PHT product candidates that are then receiving development funding support from the USG under development contracts. In addition, the amount of future revenues associated with unsatisfied performance obligations excludes the value associated with unexercised option periods in the Company's contracts (which are not performance obligations as of December 31, 2019).
Contract assets
The Company considers unbilled accounts receivables and deferred costs associated with revenue generating contracts, which are not included in inventory or property, plant and equipments, as contract assets. As of December 31, 2019 and 2018, the Company had contract assets associated with deferred costs of $34.0 million and $1.2 million, respectively, which is included in prepaid expenses and other current assets and other assets on the Company's consolidated balance sheets.
Accounts receivable
Accounts receivable including unbilled accounts receivable contract assets consist of the following:
|
| | | | | | | |
| | December 31, |
| (in millions) | 2019 | | 2018 |
| Billed, net | $ | 227.3 |
| | $ | 234.0 |
|
| Unbilled | 43.4 |
| | 28.5 |
|
| Total, net | $ | 270.7 |
| | $ | 262.5 |
|
As of December 31, 2019 and 2018, the Company's accounts receivable balances were comprised of 69% and 76%, respectively, from the USG. As of December 31, 2019 and 2018 allowance for doubtful accounts were de minimis.
4. Acquisitions
Adapt
On October 15, 2018, the Company acquired Adapt, a company focused on developing new treatment options and commercializing products addressing opioid overdose and addiction. Adapt's NARCAN® (naloxone HCI) Nasal Spray marketed product is the first needle-free formulation of naloxone approved by the FDA and Health Canada for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression. This acquisition included approximately 50 employees, located in the U.S., Canada, and Ireland, including those responsible for supply chain management, research and development, government affairs, and commercial operations. The products and product candidates within Adapt's portfolio are consistent with the Company's mission and expand the Company's core business of addressing public health threats.
The total purchase price revised for adjustments is summarized below:
|
| | | |
| (in millions) | October 15, 2018 |
| Cash | $ | 581.5 |
|
| Equity | 37.7 |
|
| Fair value of contingent purchase consideration | 48.0 |
|
| Preliminary purchase consideration | 667.2 |
|
| Adjustments | 1.5 |
|
| Final purchase consideration | $ | 668.7 |
|
The Company issued 733,309 shares of Common Stock at $60.44 per share, the closing price of Emergent's share price on October 15, 2018, for a total of $44.3 million (inclusive of adjustments). The $44.3 million value of the common stock shares issued has been adjusted to a fair value of $37.7 million considering a discount for lack of marketability due to a two-year lock-up period beginning on October 15, 2018. The remaining consideration payable for the acquisition consists of up to $100 million in cash based on the achievement of certain sales milestones through 2022 which the Company has determined the fair value of to be $48.0 million as of the acquisition date. The fair value of the contingent purchase consideration is based on management’s assessment of the potential future realization of the contingent purchase consideration payments. This assessment is based on inputs that have no observable market (Level 3). The obligation is measured using a discounted cash flow model.
This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of Adapt were recorded as of October 15, 2018, the acquisition date, at their respective fair values, and combined with those of the Company. The
Company reflects measurement period adjustments in the period in which the adjustments occur. The adjustments during the measurement period resulted from receipt of additional financial information associated with certain acquired contract assets and the value of associated contingent purchase consideration. These adjustments did not impact the Company's statements of operations.
The table below summarizes the final allocation of the purchase price based upon fair values of assets acquired and liabilities assumed at October 15, 2018.
|
| | | | | | | | | |
| (in millions) | October 15, 2018 | Measurement Period Adjustments | Updated October 15, 2018 |
| Fair value of tangible assets acquired and liabilities assumed: | | | |
| Cash | $ | 17.7 |
| $ | — |
| $ | 17.7 |
|
| Accounts receivable | 21.3 |
| — |
| 21.3 |
|
| Inventory | 41.4 |
| — |
| 41.4 |
|
| Prepaid expenses and other assets | 7.8 |
| 3.0 |
| 10.8 |
|
| Accounts payable | (32.2 | ) | — |
| (32.2 | ) |
| Accrued expenses and other liabilities | (50.4 | ) | — |
| (50.4 | ) |
| Deferred tax liability, net | (62.4 | ) | (0.5 | ) | (62.9 | ) |
| Total fair value of tangible assets acquired and liabilities assumed | (56.8 | ) | 2.5 |
| (54.3 | ) |
| | | | |
| Acquired in-process research and development | 41.0 |
| — |
| 41.0 |
|
| Acquired intangible asset | 534.0 |
| — |
| 534.0 |
|
| Goodwill | 149.0 |
| (1.0 | ) | 148.0 |
|
| Total purchase price | $ | 667.2 |
| $ | 1.5 |
| $ | 668.7 |
|
The Company determined the fair value of the intangible asset using the income approach, which is based on the present value of future cash flows. The fair value measurements are based on significant unobservable inputs that are developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products.
The fair value of the intangible asset acquired for Adapt's marketed product NARCAN® Nasal Spray was valued at $534.0 million. The Company has determined the useful life of the NARCAN® Nasal Spray intangible asset to be 15 years. The Company calculated the fair value of the NARCAN® Nasal Spray intangible asset using the income approach with a present value discount rate of 10.5%, which is based on the weighted-average cost of capital for companies with profiles substantially similar to that of Adapt. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from the NARCAN® Nasal Spray intangible asset were based on key assumptions including: estimates of revenues and operating profits; and risks related to the viability of and potential alternative treatments in any future target markets.
The intangible asset associated with IPR&D acquired from Adapt is related to a product candidate. Management determined that the acquisition-date fair value of intangible assets related to IPR&D was $41.0 million. The fair value was determined using the income approach, which discounts expected future cash flows to present value. The Company calculated the fair value using a present value discount rate of 11%, which is based on the weighted-average cost of capital for companies with that profiles substantially similar to that of Adapt and IPR&D assets at a similar stage of development as the product candidate. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value the IPR&D. The projected cash flows for the product candidate were based on key assumptions including: estimates of revenues and operating profits, considering its stage of development on the acquisition date; the time and resources needed to complete the development and approval of the product candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a product candidate, such as obtaining marketing approval from the FDA and other regulatory agencies; and risks related to the viability of and potential for alternative treatments in any future target markets. Non-amortizing IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development effort and are evaluated for impairment annually. During the year ended December 31, 2019, the Company recorded an impairment charge of $12.0 million to the IPR&D asset. The fair value of the IPR&D intangible asset is $29.0 million at December 31, 2019 (see Note 8).
The Company determined the fair value of the inventory using the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
The Company recorded approximately $148.0 million in goodwill related to the Adapt acquisition, which is calculated as the purchase price paid in excess of the fair value of the tangible and intangible assets acquired representing the future economic benefits the Company expects to receive as a result of the acquisition. The goodwill created from the Adapt acquisition is associated with early stage pipeline products. The goodwill generated from the Adapt acquisition is not expected to be deductible for tax purposes.
PaxVax
On October 4, 2018, the Company completed the acquisition of PaxVax Holding Company Ltd. ("PaxVax"), a company focused on developing, manufacturing, and commercializing specialty vaccines that protect against existing and emerging infectious diseases. This acquisition includes Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral vaccine licensed by the FDA for the prevention of typhoid fever, Vaxchora® (Cholera Vaccine, Live, Oral), the only FDA-licensed vaccine for the prevention of cholera, adenovirus 4/7 and additional clinical-stage vaccine candidates targeting chikungunya and other emerging infectious diseases, European-based current good manufacturing practices ("cGMP") biologics manufacturing facilities, and approximately 250 employees including those in research and development, manufacturing, and commercial operations with a specialty vaccines sales force in the U.S. and in select European countries. The products and product candidates within PaxVax's portfolio are consistent with the Company’s mission and will expand the Company’s core business of addressing PHTs. In addition, the acquisition expands the Company's manufacturing capabilities.
At the closing, the Company paid a cash consideration of $273.1 million (inclusive of closing adjustments). This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of PaxVax were recorded as of October 4, 2018, the acquisition date, at their respective fair values, and combined with those of the Company.
The table below summarizes the final allocation of the purchase consideration based upon the fair values of assets acquired and liabilities assumed at October 4, 2018.
|
| | | | | | | | | |
| (in millions) | October 4, 2018 | Measurement Period Adjustments | Updated October 4, 2018 |
| Fair value of tangible assets acquired and liabilities assumed: | | | |
| | | | |
| Cash | $ | 9.0 |
| $ | — |
| $ | 9.0 |
|
| Accounts receivable | 4.1 |
| — |
| 4.1 |
|
| Inventory | 19.7 |
| — |
| 19.7 |
|
| Prepaid expenses and other assets | 12.2 |
| (0.3 | ) | 11.9 |
|
| Property, plant and equipment | 57.8 |
| — |
| 57.8 |
|
| Deferred tax assets, net | 3.8 |
| 1.8 |
| 5.6 |
|
| Accounts payable | (3.5 | ) | — |
| (3.5 | ) |
| Accrued expenses and other liabilities | (33.6 | ) | (0.4 | ) | (34.0 | ) |
| Total fair value of tangible assets acquired and liabilities assumed | 69.5 |
| 1.1 |
| 70.6 |
|
| | | | |
| Acquired in-process research and development | 9.0 |
| (9.0 | ) | — |
|
| Acquired intangible assets | 133.0 |
| — |
| 133.0 |
|
| Goodwill | 61.6 |
| 7.9 |
| 69.5 |
|
| Total purchase consideration | $ | 273.1 |
| $ | — |
| $ | 273.1 |
|
The fair value of the intangible assets acquired for PaxVax's marketed products are valued at a total of $133.0 million. The Company has determined that the weighted average useful lives of the intangible assets to be 19 years.
The Company determined the fair value of the intangible assets using the income approach, which is based on the present value of future cash flows. The fair value measurements are based on significant unobservable inputs that are
developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products.
The Company calculated the fair value of the Vivotif and Vaxchora intangible assets using the income approach with a present value discount rate of 14.5% and 15%, respectively, which is based on the weighted-average cost of capital for companies with profiles substantially similar to that of PaxVax. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from these intangible assets were based on key assumptions including: estimates of revenues and operating profits; and risks related to the viability of and potential alternative treatments in any future target markets.
The intangible asset associated with IPR&D acquired from PaxVax is related to a product candidate. The Company has adjusted the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. The Company estimates the fair value based on the income approach.
The Company determined the fair value of the inventory using the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
The Company determined the fair value of the property, plant and equipment utilizing either the cost approach or the sales comparison approach. The cost approach is determined by establishing replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.
The Company recorded approximately $69.5 million in goodwill related to the PaxVax acquisition, calculated as the purchase price paid in the acquisition that was in excess of the fair value of the tangible and intangible assets acquired representing the future economic benefits the Company expects to receive as a result of the acquisition. The goodwill created from the PaxVax acquisition is associated with early stage pipeline products along with potential contract development and manufacturing services. The majority of the goodwill generated from the PaxVax acquisition is expected to be deductible for tax purposes.
The Company has incurred transaction costs related to the PaxVax acquisition of approximately $4.5 million for the year ended December 31, 2018, which have been recorded in selling, general and administrative expenses.
Acquisition of ACAM2000 business
On October 6, 2017, the Company completed the acquisition of the ACAM2000® (Smallpox (Vaccinia) Vaccine, Live) business of Sanofi Pasteur Biologics, LLC ("Sanofi"). This acquisition includes ACAM2000, the only smallpox vaccine licensed by the FDA, a current good manufacturing practices ("cGMP") live viral manufacturing facility and office and warehouse space, both in Canton, Massachusetts, and a cGMP viral fill/finish facility in Rockville, Maryland. With this acquisition, the Company also acquired an existing 10-year contract with the CDC, which expired in March 2018. This contract had a stated value up to $425 million, with a remaining contract value of up to approximately $160 million as of the acquisition date, for the delivery of ACAM2000 to the SNS and establishing U.S.-based manufacturing of ACAM2000. This acquisition added to the Company's product portfolio and expanded the Company's manufacturing capabilities.
At the closing, the Company paid $97.5 million in an upfront payment and $20 million in milestone payments earned as of the closing date tied to the achievement of certain regulatory and manufacturing-related milestones, for a total payment in cash of $117.5 million. The agreement includes an additional milestone payment of up to $7.5 million upon achievement of a regulatory milestone, which was achieved in November 2017. The $7.5 million milestone payment was made during the fourth quarter of 2018 and is reflected as a component of financing activities in the consolidated statement of cash flows. This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of the ACAM2000 business were recorded as of October 6, 2017, the acquisition date, at their respective fair values, and combined with those of the Company.
The contingent purchase consideration obligation is based on a regulatory milestone. At October 6, 2017, the contingent purchase consideration obligation related to the regulatory milestone was recorded at a fair value of $2.2 million. The Level 3 fair value of this obligation was based on a present value model of management's assessment of
the probability of achievement of the regulatory milestone as of the acquisition date. This assessment is based on inputs that have no observable market.
The total purchase price is summarized below:
|
| | | |
| (in millions) | Purchase Price |
| Amount of cash paid | $ | 117.5 |
|
| Fair value of contingent purchase consideration | 2.2 |
|
| Total purchase price | $ | 119.7 |
|
The table below summarizes the allocation of the purchase price based upon the fair values of assets acquired at October 6, 2017. The Company did not assume any liabilities in the acquisition. The Company has finalized the purchase price allocation related to this acquisition.
|
| | | |
| (in millions) | Purchase Price |
| Fair value of tangible assets acquired: | |
| Inventory | $ | 74.9 |
|
| Property, plant and equipment | 20.0 |
|
| Total fair value of tangible assets acquired | 94.9 |
|
| | |
| Acquired intangible asset | 16.7 |
|
| Goodwill | 8.1 |
|
| Total purchase price | $ | 119.7 |
|
The fair value measurements are based on significant unobservable inputs that are developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products. The Company determined the fair value of the ACAM2000 intangible asset using the income approach, which is based on the present value of future cash flows, with a present value discount rate of 15.50%, based on the weighted-average cost of capital for substantially similar companies. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from ACAM2000 intangible asset were based on key assumptions, including: estimates of revenues and operating profits, the life of the potential commercialized product and associated risks, and risks related to the viability of and potential alternative treatments in any future target markets. The Company has determined the ACAM2000 intangible asset will be amortized over 10 years.
The Company determined the fair value of the inventory using the probability adjusted comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
The Company determined the fair value of the property, plant and equipment utilizing either the cost approach or the sales comparison approach. The cost approach is determined based on the replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.
The Company recorded approximately $8.1 million in goodwill related to the ACAM2000 acquisition, calculated as the purchase price paid in the acquisition that was in excess of the fair value of the tangible and intangible assets acquired and represents the future economic benefits the Company expects to receive as a result of the acquisition. Goodwill generated from the ACAM2000 acquisition is not expected to be deductible for tax purposes.
Acquisition of raxibacumab asset
On October 2, 2017, the Company completed the acquisition of raxibacumab, a fully human monoclonal antibody therapeutic product approved by the U.S. Food and Drug Administration ("FDA") for the treatment and prophylaxis of inhalational anthrax, from Human Genome Sciences, Inc. and GlaxoSmithKline LLC (collectively referred to as "GSK"). The all-cash transaction consists of a $76 million upfront payment and up to $20 million in product sale and
manufacturing-related milestone payments. The Company recorded an asset (including transaction costs) of $77.6 million, at date of acquisition, which is recorded within intangible assets, net line item of the consolidated balance sheets. The Company has determined that substantially all of the value of raxibacumab is attributed to the raxibacumab asset and therefore the raxibacumab acquisition is considered an asset acquisition. During the twelve months ended December 31, 2019, a contingent milestone was achieved which resulted in a payment of $10.0 million with a corresponding increase in intangible assets.
5. Fair value measurements
The Company’s recurring fair value measurement items recorded on a recurring basis primarily consist of contingent consideration liabilities, interest rate swaps and investments in money market funds.
Contingent consideration
The contingent consideration liabilities have been generated from our acquisitions. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders if future events occur or conditions are met. The Company’s contingent consideration is measured initially and subsequently at each reporting date at fair value. The changes in the fair value of contingent consideration obligations are primarily due to the expected amount and timing of future net sales and achieving regulatory milestones, which are inputs that have no observable market (Level 3). Any changes in expectations for the Company’s products are classified in the Company's statement of operations as cost of product sales and contract development and manufacturing. Any changes in expectations for the Company’s product candidates are recorded in research and development expense for regulatory and development milestones.
The following table is a reconciliation of the beginning and ending balance of the contingent consideration liabilities measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2019 and 2018.
|
| | | |
| (in millions) | |
| Balance at December 31, 2017 | $ | 12.3 |
|
| Expense included in earnings | 3.1 |
|
| Settlements | (3.4 | ) |
| Additions due to acquisition | 48.0 |
|
| Balance at December 31, 2018 | $ | 60.0 |
|
| Expense included in earnings | 24.8 |
|
| Milestone achievement - asset acquisition | 10.0 |
|
| Measurement period adjustment | 1.5 |
|
| Settlements | (67.1 | ) |
| Balance at December 31, 2019 | $ | 29.2 |
|
Interest rate swaps
The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporatethe Company incorporates credit valuation adjustments in the fair value measurements to appropriately reflect both ourits own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of ourthe Company's derivative contracts for the effect of nonperformance risk, we haveit has considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swaps fall into Level 2 in the fair value hierarchy. See note 10Note 7, "Derivative Instruments "instruments" for further details on the interest rate swaps.
New Accounting Standards
Money market fundsAccounting Standards Update ("ASU") 2020-04 (ASU 2020-04), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, which was further amended in January 2021. ASU 2020-04 provides relief for impacted areas as it relates to impending reference rate reform. It contains optional expedients and exceptions to debt arrangements, contracts, hedging relationships, and other areas or transactions that are impacted by reference rate reform. This guidance is effective upon issuance for all entities and elections of certain optional expedients are required to apply the provisions of the guidance. The Company adopted ASU 2020-04 during the year ended December 31, 2022 with no material impact to our consolidated financial statements.
3. Inventories, net
Inventories, net consist of the following:
| | | | | | | | | | | |
| | December 31, |
| 2022 | | 2021 |
| Raw materials and supplies | $ | 143.4 | | | $ | 217.5 | |
| Work-in-process | 116.2 | | | 95.8 | |
| Finished goods | 92.2 | | | 37.5 | |
Total inventories, net (1) | $ | 351.8 | | | $ | 350.8 | |
| | | |
1) During the year ended December 31, 2022, the Company acquired certain assets through an asset acquisition, the Transaction, and the related inventories of $28.6 million were included in the Company's inventories balances as of December 31, 2022. |
Inventories, net is stated at the lower of cost or net realizable value.
During the year ended December 31, 2021, the Company recorded inventory write-offs related to its Bayview facility of $41.5 million and the charge was reflected as a component of cost of CDMO services on the Company's consolidated statements of operations. For additional information related the termination of the manufacturing services agreement (the “Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen”) as of December 31, 2022, refer to Note 11 "Revenue recognition".
4. Property, plant and equipment, net
Property, plant and equipment, net consists of the following:
| | | | | | | | | | | |
| | December 31, |
| 2022 | | 2021 |
| Land and improvements | $ | 54.9 | | | $ | 52.1 | |
| Buildings, building improvements and leasehold improvements | 327.9 | | | 269.7 | |
| Furniture and equipment | 567.5 | | | 513.5 | |
| Software | 65.6 | | | 60.7 | |
| Construction-in-progress | 185.5 | | | 223.2 | |
| Property, plant and equipment, gross | 1,201.4 | | | 1,119.2 | |
| Less: Accumulated depreciation and amortization | (383.8) | | | (319.1) | |
| Total property, plant and equipment, net | $ | 817.6 | | | $ | 800.1 | |
For the years ended December 31, 2022 and 2021, construction-in-progress primarily includes costs incurred related to construction to advance the Company's CDMO capabilities.
Property, plant and equipment, net is stated at cost, less accumulated depreciation and amortization. During the year ended December 31, 2022, the Company recorded accelerated depreciation of $12.7 million reflecting a shortening of the useful life of certain property, plant and equipment which were to be used in the manufacturing process to fulfill the Agreement with Janssen. For additional information related to the termination of the Agreement, refer to Note 11 "Revenue recognition".
Depreciation and amortization expense associated with property, plant and equipment was $83.4 million, $62.2 million and $50.1 million for the years ended December 31, 2022, 2021, and 2020, respectively.
5. Intangible assets and goodwill
The Company's intangible assets consist of products acquired via business combinations or asset acquisitions. Components of the Company’s intangible assets, excluding goodwill, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| Weighted Average Useful Life in Years | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
Products (1)(2) | 14.4 | | $ | 982.1 | | $ | 253.3 | | $ | 728.8 | | | $ | 798.0 | | $ | 193.5 | | $ | 604.5 | |
| Customer relationships | 0.0 | | 28.6 | | 28.6 | | — | | | 28.6 | | 28.6 | | — | |
| CDMO | 0.0 | | 5.5 | | 5.5 | | — | | | 5.5 | | 5.4 | | 0.1 | |
| Total intangible assets | 14.4 | | $ | 1,016.2 | | $ | 287.4 | | $ | 728.8 | | | $ | 832.1 | | $ | 227.5 | | $ | 604.6 | |
| | | | | | | | | |
(1) During the year ended December 31, 2022, the Company acquired certain assets through asset acquisitions, and the related intangible assets were assigned to the "Products" asset type, of which $156.9 million was related to the Transaction. |
(2) During the year ended December 31, 2022, the Company acquired certain assets through a royalty settlement, and the related intangible assets of $21.8 million were assigned to the "Products" asset type. |
For the years ended December 31, 2022, 2021, and 2020, the Company recorded amortization expense for intangible assets of $59.9 million, $58.5 million and $59.8 million, respectively, which is included in the amortization of intangible assets in the consolidated statements of operations.
The Company estimates its future amortization expense for our intangible assets as follows:
| | | | | |
| Year | As of
December 31, 2022 |
| 2023 | $ | 71.5 | |
| 2024 | 71.5 | |
| 2025 | 71.5 | |
| 2026 | 70.2 | |
| 2027 | 67.0 | |
| Thereafter | 377.1 | |
| Total remaining amortization | $ | 728.8 | |
The table below summarizes the changes in the carrying amount of goodwill by reportable segment:
| | | | | | | | | | | | | | | | | |
| Products (1) | | Services (2) | | Total |
| Balance at December 31, 2020 | $ | 260.0 | | | $ | 6.7 | | | $ | 266.7 | |
| Goodwill impairment | (41.7) | | | — | | | (41.7) | |
| Foreign currency translation adjustment | (0.1) | | | — | | | (0.1) | |
| Balance at December 31, 2021 | $ | 218.2 | | | $ | 6.7 | | | $ | 224.9 | |
| Goodwill impairment | — | | | (6.7) | | | (6.7) | |
| Foreign currency translation adjustment | — | | | — | | | — | |
| Balance at December 31, 2022 | $ | 218.2 | | | $ | — | | | $ | 218.2 | |
| | | | | |
(1) Amounts for the Company's Products segment include gross carrying values of $259.9 million as of December 31, 2022 and 2021, and $260.0 million as of December 31, 2020, and accumulated impairment losses of $41.7 million representing the aggregate impairment charges for the years ended December 31, 2022, 2021 and 2020. |
| | | | | |
(2) Amounts for the Company's Services segment include gross carrying values of $6.7 million as of December 31, 2022, 2021, and 2020, and accumulated impairment losses of $6.7 million representing the aggregate impairment charges for the year ended December 31, 2022. |
As a result of the Company's annual goodwill impairment test on October 1, 2022 the Company recorded a $6.7 million non-cash goodwill impairment charge included in "Goodwill impairment" in the Statements of Operations during the year ended December 31, 2022 in the CDMO - Services reporting unit within the Services segment. The CDMO - Services reporting unit and Services segment had no remaining goodwill balance as of December 31, 2022. The goodwill impairment charge resulted from a reduction in the estimated fair value of the CDMO-Services reporting unit due to changes to the long-term operating plan that reflected lower expectations for growth and profitability than previous expectations. The Company used a quantitative assessment, utilizing a income based (discounted cash flows) approach, Level 3 non-recurring fair value measurement, for our goodwill impairment testing for all of our reporting units in 2022. Outside of our CDMO - Services reporting unit, the assessments completed for all other reporting units during the year ended December 31, 2022 indicated no impairment.
On October 1, 2021, the Company reorganized its lines of business resulting in a change in the composition of two of its reporting units and performed its annual impairment testing using quantitative tests to determine fair values of the reporting units both before and after the reorganization of the lines of business and its reporting units. Using both a market based (comparable company multiple) and income based (discounted cash flows) approach, each a Level 3 non-recurring fair value measurement, the Company determined that there was a goodwill impairment of $41.7 million included in "Goodwill impairment" in the Statements of Operations in the Commercial products reporting unit within our Products segment. The Company used a qualitative assessment for our goodwill impairment testing for all other reporting units in 2021. The assessments completed for all other reporting units during the year ended December 31, 2021 indicated no impairment.
6. Fair value measurements
The table below presents information about the Company's money market fundsassets and liabilities that are based on quoted pricesregularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Total | Level 1 | Level 2 | Level 3 | | Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | | | | | | |
| Money market accounts | $ | 320.8 | | $ | 320.8 | | $ | — | | $ | — | | | $ | 152.4 | | $ | 152.4 | | $ | — | | $ | — | |
| Time deposits | 170.7 | | — | | 170.7 | | — | | | 200.0 | | — | | 200.0 | | — | |
| Derivative instruments | $ | 8.5 | | $ | — | | $ | 8.5 | | $ | — | | | $ | — | | $ | — | | $ | — | | $ | — | |
| Total | $ | 500.0 | | $ | 320.8 | | $ | 179.2 | | $ | — | | | $ | 352.4 | | $ | 152.4 | | $ | 200.0 | | $ | — | |
| Liabilities: | | | | | | | | | |
| Contingent consideration | $ | 6.8 | | $ | — | | $ | — | | $ | 6.8 | | | $ | 37.2 | | $ | — | | $ | — | | $ | 37.2 | |
| Derivative instruments | — | | — | | — | | — | | | 6.1 | | — | | 6.1 | | — | |
| Total | $ | 6.8 | | $ | — | | $ | — | | $ | 6.8 | | | $ | 43.3 | | $ | — | | $ | 6.1 | | $ | 37.2 | |
Contingent consideration
Contingent consideration liabilities associated with business combinations are measured at fair value. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders and owners if future events occur or conditions are met. These liabilities associated with business combinations are measured at fair value at inception and at each subsequent reporting date. The changes in active marketsthe fair value are primarily due to the expected amount and timing of future net sales, which are inputs that have no observable market. Any changes in fair value for identical assets (level 1). the contingent consideration liabilities related to the Company’s products are classified in the Company's statement of operations as cost of product sales. Any changes in fair value for the contingent consideration liabilities related to the Company’s product candidates are recorded in R&D expense for regulatory and development milestones.
The following table is a reconciliation of the beginning and ending balance of the contingent consideration liabilities measured at fair value during the years ended December 31, 2022, 2021 and 2020.
| | | | | |
| Contingent Consideration |
| Balance at December 31, 2019 | $ | 29.2 | |
| Expense included in earnings | 31.7 | |
| Settlements | (2.8) | |
| Balance at December 31, 2020 | $ | 58.1 | |
| Expense included in earnings | 2.9 | |
| Settlements | (23.8) | |
| Balance at December 31, 2021 | $ | 37.2 | |
| Expense included in earnings | 2.6 | |
| Settlements | (33.0) | |
| Balance at December 31, 2022 | $ | 6.8 | |
As of December 31, 20192022 and 2018,2021, the Company held cash in money market accountscurrent portion of $52.2the contingent consideration liability was $3.1 million and $0$32.7 million, respectively. These amounts arerespectively, and was included in cash and cash equivalents in"other current liabilities" on the consolidated balance sheets.The non-current portion of the contingent consideration liability is included in "other liabilities" on the consolidated balance sheets.
The recurring Level 3 fair value measurements for the Company's contingent consideration liability include the following significant unobservable inputs:
| | | | | | | | | | | | | | | |
| Contingent Consideration Liability | Fair Value as of December 31, 2022 | Valuation Technique | Unobservable Input | Range | |
| Royalty based | $6.8 million | Discounted cash flow | Discount rate | 9.9% | |
| Probability of payment | 25.0% - 50.0% | |
| Projected year of payment | 2023 - 2028 | |
Non-Variable Rate Debt
As of December 31, 2022 and 2021, the fair value of the Company's 3.875% Senior Unsecured Notes was $225.1 million and $433.3 million, respectively. The fair value was determined through market sources, which are Level 2 inputs and directly observable. The carrying amounts of the Company’s other long-term variable interest rate debt arrangements approximate their fair values (see Note 8, "Debt").
Non-recurring fair value measurements
Separate disclosure is required for assets and liabilities measured at fair value on a recurring basis from those measured at fair value on a non-recurring basis. As of December 31, 20192022 and 2018,December 31, 2021, other than those outlined in Note 5 "Intangible assets and goodwill", there were no material assets or liabilities measured at fair value on a non-recurring basis, except for the IPR&D assets acquired with the Adapt acquisitionbasis.
7. Derivative instruments and the assets acquired from PaxVax, Adapt. See Note 4. "Acquisitions" and Note 8. "Intangible assets and goodwill" for further details on the IPR&D assets.hedging activities
6. Inventories
Inventories consistRisk management objective of the following: |
| | | | | | | |
| | December 31, |
| (in millions) | 2019 | | 2018 |
| Raw materials and supplies | $ | 70.5 |
| | $ | 51.8 |
|
| Work-in-process | 89.7 |
| | 103.2 |
|
| Finished goods | 62.3 |
| | 50.8 |
|
| Total inventories | $ | 222.5 |
| | $ | 205.8 |
|
7. Property, plant and equipment
Property, plant and equipment consist of the following:
|
| | | | | | | |
| | December 31, |
| (in millions) | 2019 | | 2018 |
| Land and improvements | $ | 46.5 |
| | $ | 44.6 |
|
| Buildings, building improvements and leasehold improvements | 234.8 |
| | 216.2 |
|
| Furniture and equipment | 334.2 |
| | 293.9 |
|
| Software | 55.7 |
| | 55.2 |
|
| Construction-in-progress | 81.5 |
| | 71.8 |
|
| | 752.7 |
| | 681.7 |
|
| Less: Accumulated depreciation and amortization | (210.4 | ) | | (171.5 | ) |
| Total property, plant and equipment, net | $ | 542.3 |
| | $ | 510.2 |
|
For the years ended December 31, 2019 and 2018, construction-in-progress primarily includes costs related to construction of manufacturing capabilities.
Depreciation and amortization expense associated with property, plant and equipment was $49.5 million, $36.3 million and $32.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
8. Intangible assets and goodwill
The Company's intangible assets were acquired via business combinations or asset acquisitions. Changes in the Company’s intangible assets, excluding IPR&D and goodwill, consisted of the following:
|
| | | | | | | | | | | | | | |
| | | | December 31, 2019 |
| (in millions) | Estimated Life | | Cost | Additions | Accumulated Amortization | Net |
| Products | 9-22 years | | $ | 778.0 |
| $ | 10.0 |
| $ | 82.2 |
| $ | 705.8 |
|
| Corporate trade name | 5 years | | 2.8 |
| — |
| 2.8 |
| — |
|
| Customer relationships | 8 years | | 28.6 |
| — |
| 23.0 |
| 5.7 |
|
| Contract development and manufacturing | 8 years | | 5.5 |
| — |
| 4.0 |
| 1.5 |
|
| Total intangible assets | | | $ | 814.9 |
| $ | 10.0 |
| $ | 112.0 |
| $ | 712.9 |
|
|
| | | | | | | | | | | | | | |
| | | | December 31, 2018 |
| (in millions) | Estimated Life | | Cost | Additions | Accumulated Amortization | Net |
| Products | 9-22 years | | $ | 111.0 |
| $ | 667.0 |
| $ | 27.9 |
| $ | 750.1 |
|
| Corporate trade name | 5 years | | 2.8 |
| — |
| 2.7 |
| 0.1 |
|
| Customer relationships | 8 years | | 28.6 |
| — |
| 19.4 |
| 9.2 |
|
| Contract development and manufacturing | 8 years | | 5.5 |
| — |
| 3.3 |
| 2.2 |
|
| Total intangible assets | | | $ | 147.9 |
| $ | 667.0 |
| $ | 53.3 |
| $ | 761.6 |
|
For the years ended December 31, 2019, 2018, and 2017, the Company recorded amortization expense for intangible assets of $58.7 million, $25.0 million and $8.6 million, respectively, which is included in the amortization of intangible assets line item of the consolidated statements of operations. As of December 31, 2019, the weighted average amortization period remaining for intangible assets is 13.6 years.
Future amortization expense as of December 31, 2019 is as follows:
|
| | | |
| (in millions) | |
| 2020 | $ | 58.7 |
|
| 2021 | 57.3 |
|
| 2022 | 54.6 |
|
| 2023 | 54.4 |
|
| 2024 and beyond | 487.9 |
|
| Total remaining amortization | $ | 712.9 |
|
During the year ended December 31, 2019, the Company recorded the impact of an impairment charge of $12.0 million related to our intangible assets associated with the IPR&D acquired as part of our acquisition of Adapt. The $12.0 million impairment charge is reflected as a component of research and development expense on the consolidated statement of operations. The IPR&D intangible asset balance on the consolidated balance sheet at December 31, 2019 was $29.0 million.
The following table is a summary of changes in goodwill:
|
| | | | | | | |
| | Year ended December 31, |
| (in millions) | 2019 | | 2018 |
| Balance at beginning of the year | $ | 259.7 |
| | $ | 49.1 |
|
| Measurement period adjustments | 6.9 |
| | — |
|
| Additions | — |
| | 210.6 |
|
| Balance at end of the year | $ | 266.6 |
| | $ | 259.7 |
|
9. Long-term debt
The components of debt are as follows:
|
| | | | | | | |
| | December 31, |
| (in millions) | 2019 | | 2018 |
| Senior secured credit agreement - Term loan due 2023 | $ | 435.9 |
| | $ | 447.2 |
|
| Senior secured credit agreement - Revolver loan due 2023 | 373.0 |
| | 348.0 |
|
| 2.875% Convertible Senior Notes due 2021 | 10.6 |
| | 10.6 |
|
| Other | 3.0 |
| | 3.0 |
|
| Total debt | $ | 822.5 |
| | $ | 808.8 |
|
| Current portion of debt, net of debt issuance costs | (12.9 | ) | | (10.1 | ) |
| Unamortized debt issuance costs | (11.2 | ) | | (14.2 | ) |
| Debt, net of current portion | $ | 798.4 |
| | $ | 784.5 |
|
Senior secured credit agreement
On September 29, 2017, the Company entered into a senior secured credit agreement (the “2017 Credit Agreement”) with 4 lending financial institutions, which replaced the Company's prior senior secured credit agreement (the "2013 Credit Agreement").
On October 15, 2018, the Company entered into an Amended and Restated Credit Agreement (the "Amended Credit Agreement"), which modified the 2018 Credit Agreement. The Amended Credit Agreement (i) increased the revolving credit facility (the "Revolving Credit Facility") from $200 million to $600 million, (ii) extended the maturity of the Revolving Credit Facility from September 29, 2022 to October 13, 2023, (iii) provided for a term loan in the original principal amount of $450 million (the "Term Loan Facility," and together with the Revolving Credit Facility, the "Senior Secured Credit Facilities"), (iv) added several additional lenders, (v) amended the applicable margin such that borrowings with respect to the Revolving Credit Facility will bear interest at the annual rate described below, (vi) amended the provision relating to incremental credit facilities such that the Company may request one or more incremental term loan facilities, or one or more increases in the commitments under the Revolving Credit Facility (each an "Incremental Loan"), in any amount if, on a pro forma basis, the Company's consolidated secured net leverage ratio does not exceed 2.50 to 1.00 after such incurrence, plus $200 million and (vii) amended the maximum consolidated net leverage ratio financial covenant from 3.50 to 1.0 (subject to 0.50% step up in connection with material acquisitions) to the maximum consolidated net leverage ratio described below.
In October 2018, the Company borrowed $318.0 million under the Revolving Credit Facility and $450 million under the Term Loan Facility to finance a portion of the consideration for the PaxVax and Adapt acquisitions and related expenses.
For the year ended December 31, 2019, we did 0t capitalize debt issuance costs. For the year ended December 31, 2018 we capitalized $13.4 million, as a direct reduction to the Term Loan and the revolver.
Borrowings under the Revolving Credit Facility and the Term Loan Facility will bear interest at a rate per annum equal to (a) a eurocurrency rate plus a margin ranging from 1.25% to 2.00% per annum, depending on the Company's consolidated net leverage ratio or (b) a base rate (which is the highest of the prime rate, the federal funds rate plus 0.50%, and a eurocurrency rate for an interest period of one month plus 1%) plus a margin ranging from 0.25% to 1.00%, depending on the Company's consolidated net leverage ratio. The Company is required to make quarterly payments under the Amended Credit Agreement for accrued and unpaid interest on the outstanding principal balance, based on the above interest rates. In addition, the Company is required to pay commitment fees ranging from 0.15% to 0.30% per annum, depending on the Company's consolidated net leverage ratio, in respect of the average daily unused commitments under the Revolving Credit Facility. The Company is to repay the outstanding principal amount of the Term Loan Facility in quarterly installments based on an annual percentage equal to 2.5% of the original principal amount of the Term Loan Facility during each of the first two years of the Term Loan Facility, 5% of the original principal amount of the Term Loan Facility during the third year of the Term Loan Facility and 7.5% of the original principal amount of the Term Loan Facility during each year of the remainder of the term of the Term Loan Facility until the maturity date of the Term Loan Facility, at which time the entire unpaid principal balance of the Term Loan Facility will be due and payable. The Company has the right to prepay the Term Loan Facility without premium or penalty. The Revolving Credit Facility and the Term Loan Facility mature (unless earlier terminated) on October 13, 2023.
The Amended Credit Agreement also requires mandatory prepayments of the Term Loan Facility in the event the Company or its Subsidiaries (a) incur indebtedness not otherwise permitted under the Amended Credit Agreement or (b) receive cash proceeds in excess of $100 million during the term of the Amended Credit Agreement from certain dispositions of property or from casualty events involving their property, subject to certain reinvestment rights.
The Amended Credit Agreement contains financial covenants, which were then further amended in June 2019. The financial covenants require the quarterly presentation of a minimum consolidated 12-month rolling debt service coverage ratio of 2.50 to 1.00, and an amended maximum consolidated net leverage ratio of 4.95 to 1.00 for the quarter ended June 30, 2019, 4.75 to 1.00 for the quarter ended September 30, 2019, and 3.75 to 1.00, thereafter, which may be adjusted to 4.00 to 1.00 for a four quarter period in connection with a material permitted acquisition. The Amended Credit Agreement also contains affirmative and negative covenants, which were also amended in June 2019 to limit the amount of restricted payments as defined in the Amended Credit agreement to $25 million until the filing of the Company's December 31, 2019 Form 10-K. Negative covenants in the Amended Credit Agreement, among other things, limit the ability of the Company to incur indebtedness and liens, dispose of assets, make investments and enter into certain merger or consolidation transactions. As of the date of these financial statements, the Company is in compliance with affirmative and negative covenants.
2.875% Convertible senior notes due 2021
On November 14, 2017, the Company issued a notice of termination of conversion rights for its outstanding Notes, of which $250.0 million was outstanding as of the notice date. In connection with the notice of termination, bondholders were given the option to convert their notes into the Company’s stock at a rate of 32.386 per $1,000 of principal outstanding, plus a make-whole of an additional 3.1556 shares per $1,000 principal outstanding, in accordance with the terms of the indenture. The Company was not obligated to pay accrued or unpaid interest on converted notes, and bondholders who did not convert by the deadline of December 28, 2017 would retain their bonds but lose the conversion rights associated with the Notes and be paid interest of 2.875% until the earlier of maturity of the Notes in 2021 or the bonds being called and repaid in full by the Company. Between July 15, 2017 and the notification of termination of conversion rights, the Company accrued interest on the converted Notes of $2.4 million which was recorded as an increase in additional paid-in-capital on the balance sheet. Between November 14, 2017 and December 28, 2017 (the “conversion period”), approximately $239.4 million of bonds were converted into 8.5 million shares of the Company’s common stock, inclusive of shares issued as part of the make-whole provision. In addition, the Company recorded a reduction in additional paid-in-capital on the Company’s balance sheet of $3.6 million associated with debt issuance costs attributable to the converted notes. After giving effect to the converted bonds, the outstanding principal balance of the Notes as of December 31, 2019 was $10.6 million.
Future debt payments of long-term indebtedness are as follows:
|
| | | |
| (in millions) | December 31, 2019 |
| 2020 | $ | 14.1 |
|
| 2021 | 35.9 |
|
| 2022 | 33.7 |
|
| 2023 | 735.8 |
|
| 2024 and thereafter | 3.0 |
|
| Total debt | $ | 822.5 |
|
10.Derivative Instrumentsusing derivatives
The Company is exposed to certain riskrisks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company has entered into interest rate swaps to manage exposures that arise from payments of variable interest rate debt associated with the Company's senior secured credit agreement's paymentsagreements.
If current fair values of variabledesignated interest rate debt.swaps remained static over the next twelve months, the Company would reclassify $8.5 million of net deferred gains from accumulated other comprehensive income (loss) to the statement of operations over the next twelve month period. All outstanding cash flow hedges mature in October 2023.
As of December 31, 2019,2022, the Company had the following outstanding interest rate swap derivatives that were designated as cash flow hedges of interest rate risk:
|
| | | |
| | Number of Instruments | | Notional amount (in millions) |
| Interest Rate Swaps | 7 | | 350.0 |
| | | | | | | | | | | |
| Number of Instruments | | Notional amount |
| Interest Rate Swaps | 7 | | $350.0 |
The table below presents the fair value of the Company’s derivative financial instruments designated as hedges as well as their classification on the balance sheet. If current
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Asset Derivatives | | Fair Value of Liability Derivatives |
| | | December 31, | | | December 31 |
| Balance Sheet Location | 2022 | | 2021 | | Balance Sheet Location | 2022 | | 2021 |
| Interest Rate Swaps | Other Current Assets | $ | 8.5 | | | $ | — | | | Other Current Liabilities | $ | — | | | $ | 4.5 | |
| Other Assets | $ | — | | | $ | — | | | Other Liabilities | $ | — | | | $ | 1.6 | |
The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of designated interest rate swaps remained static overare determined using the next twelve months,market standard methodology of netting the Company would reclassify $0.5 milliondiscounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of net deferred lossesfuture interest rates (forward curves) derived from accumulated other comprehensive lossobservable market interest rate curves. We incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the statementrespective counterparty’s nonperformance risk. These credit valuation adjustments were not significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of operations overour derivative contracts for the next twelve months.
|
| | | | | | | | | | | | | | | |
| Asset Derivatives | Liability Derivatives |
| | December 31, 2019 | December 31, 2018 | December 31, 2019 | | December 31, 2018 |
| | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value |
| Interest Rate Swaps | Other Assets | $ | — |
| Other Assets | — |
| Other Liabilities | $ | 2.0 |
| | Other Liabilities | — |
|
The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income.income (loss):
| | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Amount of Gain/(Loss) Recognized in OCI on Derivatives | Location of Loss Reclassified from Accumulated OCI(L) into Income (Loss) | Amount of Loss Reclassified from Accumulated OCI(L) into Income (Loss) |
| December 31, | Year Ended December 31, |
| 2022 | | 2021 | 2022 | | 2021 |
| Interest Rate Swaps | $ | 8.5 | | | $ | (6.1) | | Interest expense | $ | (0.1) | | | $ | (5.8) | |
8. Debt
The components of debt are as follows:
| | | | | | | | | | | |
| | December 31, |
| 2022 | | 2021 |
| Senior secured credit agreement - Term loan due 2023 | $ | 362.8 | | | $ | 396.6 | |
| Senior secured credit agreement - Revolver loan due 2023 | 598.0 | | | — | |
| 3.875% Senior Unsecured Notes due 2028 | 450.0 | | | 450.0 | |
| Other | 3.0 | | | 3.0 | |
| Total debt | $ | 1,413.8 | | | $ | 849.6 | |
| Current portion of long-term debt, net of debt issuance costs | (957.3) | | | (31.6) | |
| Unamortized debt issuance costs | (8.0) | | | (8.5) | |
| Non-current portion of debt | $ | 448.5 | | | $ | 809.4 | |
|
| | | | | | | | | | | | |
| Hedging derivatives | Amount of Gain/(Loss) Recognized in OCI on Derivative | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income |
| | December 31, 2019 | December 31, 2018 | | December 31, 2019 | December 31, 2018 |
| Interest Rate Swaps | $ | 2.0 |
| — |
| Interest expense | $ | 0.6 |
| $ | — |
|
98
11.As of December 31, 2022 there was a $598.0 million outstanding revolver loan balance. There was no outstanding revolver loan balance as of December 31, 2021. During the year ended December 31, 2022, the Company reclassified the debt issuance costs associated with the revolver loan to a contra account to directly offset the loan balance in other current liabilities on the Company's consolidated balance sheets. As of December 31, 2022, the Company had approximately $1.3 million debt issuance costs associated with the revolver loan that were classified as an offset to other current liabilities. Prior to 2022, the debt issuance costs associated with the revolver load were included in other current assets and other assets on the Company's consolidated balance sheets. As of December 31, 2021, the Company had approximately $2.0 million and $1.6 million of debt issuance costs associated with the revolver loan that were classified as other current assets and other assets, respectively.
3.875% Senior Unsecured Notes due 2028
On August 7, 2020, the Company completed its offering of $450.0 million aggregate principal amount of 3.875% Senior Unsecured Notes due 2028 (the "Senior Unsecured Notes") of which the majority of the net proceeds were used to pay down the Revolving Credit Facility (as defined below). Interest on the Senior Unsecured Notes is payable on February 15th and August 15th of each year until maturity, beginning on February 15, 2021. The Senior Unsecured Notes will mature on August 15, 2028.
On or after August 15, 2023, the Company may redeem the Senior Unsecured Notes, in whole or in part, at the redemption prices set forth in the related Indenture, plus accrued and unpaid interest. Prior to August 15, 2023 the Company may redeem all or a portion of the Senior Unsecured Notes at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes plus a “make-whole” premium and accrued and unpaid interest. Prior to August 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of the Senior Unsecured Notes using the net cash proceeds of certain equity offerings at the redemption price set forth in the related Indenture. Upon the occurrence of a change of control, the Company must offer to repurchase the Senior Unsecured Notes at a purchase price of 101% of the principal amount of such Senior Unsecured Notes plus accrued and unpaid interest.
Negative covenants in the Indenture governing the Senior Unsecured Notes, among other things, limit the ability of the Company to incur indebtedness and liens, dispose of assets, make investments, enter into certain merger or consolidation transactions and make restricted payments.
Senior Secured Credit Agreement
Also on August 7, 2020, the Company entered into a Second Amendment (the "Second Credit Agreement Amendment") to its senior secured credit agreement, dated October 15, 2018, with multiple lending institutions relating to the Company’s senior secured credit facilities (the Credit Agreement, and as amended, the Amended Credit Agreement), consisting of Revolving Credit Facility and Term Loan Facility, and together with the Revolving Credit Facility, the Senior Secured Credit Facilities. The Second Credit Agreement Amendment amended, among other things, the definition of incremental facilities limit, the consolidated net leverage ratio financial covenant by increasing the maximum level, increased the permissible applicable margins based on the Company’s consolidated net leverage ratio and increased the commitment fee that the Company is required to pay in respect of the average daily unused commitments under the Revolving Credit Facility, depending on the Company’s consolidated net leverage ratio.
The Amended Credit Agreement includes (i) a Revolving Credit Facility of $600.0 million with a maturity date of October 13, 2023, and (ii) a Term Loan Facility with a principal amount of $450.0 million. The Company may request incremental term loan facilities or increases in the Revolving Credit Facility (each an Incremental Loan) as long as certain requirements involving our net leverage ratio will be maintained on a pro forma basis. Borrowings under the Revolving Credit Facility and the Term Loan Facility bear interest at a rate per annum equal to (a) a eurocurrency rate plus a margin ranging from 1.3% to 2.3% per annum, depending on the Company's consolidated net leverage ratio or (b) a base rate (which is the highest of the prime rate, the federal funds rate plus 0.5%, and a eurocurrency rate for an interest period of one month plus 1.0% plus a margin ranging from 0.3% to 1.3%, depending on the Company's consolidated net leverage ratio. The Company is required to make quarterly payments on the last business day of each calendar quarter under the Amended Credit Agreement for accrued and unpaid interest on the outstanding principal balance, based on the above interest rates. In addition, the Company is required to pay commitment fees ranging from 0.2% to 0.4% per annum, depending on the Company's consolidated net leverage ratio, for the average daily unused commitments under the Revolving Credit Facility. The Company is to repay the outstanding principal amount of the Term Loan Facility in quarterly installments on the last business day of each calendar quarter based on an annual percentage equal to 2.5% of the original principal amount of the Term Loan Facility during each of the first two years of the Term Loan Facility, 5.0% of the original principal amount of the Term Loan Facility during the third year of the Term Loan Facility and 7.5% of the original principal amount of the Term Loan Facility during each year of the remainder of the term of the Term Loan Facility until the maturity date of the Term Loan Facility, at which time the entire unpaid principal balance of the Term Loan Facility will be due and payable. The Company
has the right to prepay the Term Loan Facility without premium or penalty. The Revolving Credit Facility and the Term Loan Facility mature on October 13, 2023.
The Amended Credit Agreement also requires mandatory prepayments of the Term Loan Facility in the event the Company or its subsidiaries (a) incur indebtedness not otherwise permitted under the Amended Credit Agreement or (b) receive cash proceeds in excess of $100.0 million during the term of the Credit Agreement from certain dispositions of property or from casualty events involving their property, subject to certain reinvestment rights. The financial covenants under the Amended Credit Agreement currently require the quarterly presentation of a minimum consolidated 12-month rolling debt service coverage ratio of 2.5 to 1.0, and a maximum consolidated net leverage ratio of 4.5 to 1.0 (subject to an increase to 5.0 to 1.0 for an applicable four quarter period, at the election of the Company, in connection with a permitted acquisition having an aggregate consideration in excess of $75.0 million). Negative covenants in the Amended Credit Agreement, among other things, limit the ability of the Company to incur indebtedness and liens, dispose of assets, make investments, enter into certain merger or consolidation transactions and make restricted payments.
On February 14, 2023, the Company entered into a Consent, Limited Waiver, and Third Amendment to the Amended and Restated Credit Agreement relating to the Senior Secured Credit Facilities. Pursuant to the Third Credit Agreement Amendment, the requisite lenders consented to our sale of our travel health business to Bavarian Nordic substantially in accordance with the terms of the Sale Agreement. The proceeds from the transaction will be deposited into a cash collateral account with the Administrative Agent and will, unless otherwise agreed to by the Company and the requisite lenders, be used to repay the outstanding Term Loan Facility on the expiration of the Limited Waiver (as described below). We currently expect the transaction to close in the second quarter of 2023, but we can provide no assurance that the transaction will close prior to the October 2023 maturity of the Term Loan Facility, or at all.
Pursuant to the Third Credit Agreement Amendment the requisite lenders have agreed to a limited waiver of any defaults or events of default that result from (a) any violation of the financial covenants set forth in the Senior Secured Credit Facilities with respect to the fiscal quarters ending December 31, 2022 and March 31, 2023 and (b) the going concern qualification or exception contained in the audited financial statements for the fiscal year ending December 31, 2022. This limited waiver will expire on the earlier to occur of (i) any other event of default and (ii) April 17, 2023. During this period the Company is working with lenders under the Senior Secured Credit Facilities in connection with replacing such facilities before their October 2023 maturity with revised terms and conditions. The Company does not expect to be in compliance with debt covenants in future periods without additional sources of liquidity or future amendments to the Credit Agreement. See Footnote 2 "Summary of significant accounting policies" for Going Concern considerations related to noncompliance with our debt covenants and the limited waiver.
Debt Maturity
Future debt payments of long-term indebtedness are as follows:
| | | | | |
| Year | As of
December 31, 2022 |
| 2023 | $ | 961.5 | |
| 2024 | 0.3 | |
| 2025 | — | |
| 2026 | 2.0 | |
| 2027 | — | |
| Thereafter | 450.0 | |
| Total debt | $ | 1,413.8 | |
9. Stockholders' equity
Preferred stock
The Company is authorized to issue up to 15.0 million shares of preferred stock, $0.001 par value per share ("Preferred Stock"). Any Preferred Stock issued may have dividend rights, voting rights, conversion privileges, redemption characteristics, and sinking fund requirements as approved by the Company's board of directors.
Common stock
The Company currently has one class of common stock, $0.001 par value per share common stock ("Common Stock"), authorized and outstanding. The Company is authorized to issue up to 200.0 million shares of Common Stock. Holders of Common Stock are entitled to 1one vote for each share of Common Stock held on all matters, except as may be provided by law.
2021 Stock Repurchase program
On November 11, 2021, the Company announced that its Board of Directors authorized a stock repurchase program of up to an aggregate of $250.0 million of Common Stock (the "Share Repurchase Program"). The Share Repurchase Program expired on November 11, 2022. The Company utilized $187.9 million to purchase 4.4 million shares as of the program expiration date. The Share Repurchase Program did not obligate the Company to acquire any specific number of shares. Repurchased shares are available for use in connection with our stock plans and for other corporate purposes.
The following table details our stock repurchases under the Share Repurchase Program:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Shares of common stock repurchased | 1.8 | | | 2.6 | |
| Average price paid per share | $ | 42.36 | | | $ | 42.67 | |
| Total cost | $ | 75.5 | | | $ | 112.6 | |
Accounting for stock-basedshare-based compensation
The Company has one stock-basedshare-based employee compensation plan, the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan, (the "Emergent Plan"), which includes both stock options and performance and restricted stock units.
As of December 31, 2019,2022, an aggregate of 21.925.4 million shares of common stock were authorized for issuance under the Emergent Plan, of which a total of approximately 5.82.9 million shares of common stock remain available for future awards to be made to plan participants. The exercise price of each option must be not less than 100% of the fair market value of the shares underlying such option on the date of grant. AwardsOptions granted under the Emergent Plan have a contractual life of no more than 10seven years.
The Company utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted. Set forth below are the assumptions used in valuing the stock options granted:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 54%-62% | | 47-48% | | 39-48% |
| Risk-free interest rate | 1.54%-4.31% | | 0.43-0.94% | | 0.27-1.42% |
| Expected average life of options | 4.5 years | | 4.5 years | | 4.5 years |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 37-39% |
| | 38-39% |
| | 37-40% |
|
| Risk-free interest rate | 1.57-2.48% |
| | 2.54-3.03% |
| | 1.66-1.88% |
|
| Expected average life of options | 4.5 years |
| | 4.5 years |
| | 4.3 years |
|
Stock options, restricted stock units and performance stock units
The following is a summary of stock option award activity under the Emergent Plan:
|
| | | | | | | | | | |
| | Emergent Plan |
| (in millions, except share and per share data) | Number of Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2018 | 1,871,468 |
| | $ | 32.59 |
| | $ | 50.1 |
|
| Granted | 295,770 |
| | 60.16 |
| | |
| Exercised | (199,352 | ) | | 25.98 |
| | |
| Forfeited | (84,011 | ) | | 52.26 |
| | |
| Outstanding at December 31, 2019 | 1,883,875 |
| | $ | 36.74 |
| | $ | 34.5 |
|
| Exercisable at December 31, 2019 | 1,253,658 |
| | $ | 29.46 |
| | $ | 30.8 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Exercise Price | | Weighted Average Remaining Contractual Term (in Years) | | Aggregate Intrinsic Value |
| Stock options outstanding at December 31, 2021 | 1.2 | | | $ | 60.83 | | | | | $ | 3.0 | |
| Stock options granted | 0.7 | | | $ | 39.11 | | | | | |
| Stock options exercised | — | | | $ | 27.71 | | | | | |
| Stock options forfeited | (0.2) | | | $ | 64.66 | | | | | |
| Stock options outstanding at December 31, 2022 | 1.7 | | | $ | 51.74 | | | 4.1 | | $ | — | |
| Stock options exercisable at December 31, 2022 | 0.8 | | | $ | 54.14 | | | 2.3 | | $ | — | |
The weighted average remaining contractual term of options outstanding as ofCash received from option exercises for the years ended December 31, 20192022, 2021 and 20182020 was 3.3 years$0.5 million, $10.4 million and 4.0 years, respectively. The weighted average remaining contractual term of options exercisable as of December 31, 2019 and 2018 was 2.3 years and 3.0 years,$27.6 million, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2019, 2018,2022, 2021, and 20172020 was $21.13, $18.48$17.85, $35.16 and $10.53$21.69 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018,2022, 2021, and 20172020 was $5.3$0.3 million, $24.4$15.7 million and $13.9 million, respectively. The total fair value of awards vested during 2019, 2018 and 2017 was $16.9 million, $16.9 million and $17.9$38.2 million, respectively. As of the year ended December 31, 2019, the total2022, there was $12.0 million of unrecognized compensation cost and weighted average period over which total compensation is expected to be recognized related to unvested equity awards was $37.0 million and 1.5 years, respectively.stock options.
The following is a summary of performance stock unit and restricted stock unit award activity under the Emergent Plan. Plan:
| | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value | | Aggregate
Intrinsic Value |
| Stock awards outstanding at December 31, 2021 | 1.1 | | | $ | 70.82 | | | $ | 47.6 | |
Stock awards granted (1) | 1.9 | | | $ | 34.49 | | | |
| Stock awards released | (0.5) | | | $ | 67.48 | | | |
Stock awards forfeited (1) | (0.3) | | | $ | 55.46 | | | |
| Stock awards outstanding at December 31, 2022 | 2.2 | | | $ | 42.30 | | | $ | 25.8 | |
| | | | | |
(1) Performance stock units granted and forfeited during the year ended December 31, 2022 are included at the target payout percentage, or 100%, of shares granted. |
The total fair value of restricted stock unit awards released during the years ended December 31, 2022, 2021 and 2020 was $30.9 million, $26.9 million and $34.1 million, respectively. As of December 31, 2022, there was $54.5 million of unrecognized compensation cost related to unvested restricted stock units. That cost is expected to be recognized ratable over a weighted average period of 1.9 years.
Performance stock units represent common stock potentially issuable in the future, subject to achievement of approximately 0.1 millionperformance conditions. Our current outstanding performance stock units vest based on certain financial metrics over the applicable performance period. The vesting and payout range for our performance stock units is typically between 50% and up to 150% of the target number of shares were granted and remain outstandingat the yearend of a three-year performance period. The total fair value of performance unit awards released during the years ended December 31, 2019,2022, 2021 and are included in the table below.2020 was $2.5 million, $3.8 million and $1.2 million, respectively. As of December 31, 2022, there was $5.3 million of unrecognized compensation cost related to unvested performance stock units. That cost is expected to be recognized ratable over a weighted average period of 1.9 years.
|
| | | | | | | | | | |
| (in millions, except share and per share data) | Number of Shares | | Weighted-Average Grant Price | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2018 | 921,093 |
| | $ | 42.82 |
| | $ | 54.6 |
|
| Granted | 594,752 |
| | 57.94 |
| | |
| Vested | (434,629 | ) | | 38.81 |
| | |
| Forfeited | (128,364 | ) | | 53.17 |
| | |
| Outstanding at December 31, 2019 | 952,852 |
| | $ | 52.77 |
| | $ | 51.5 |
|
102
Stock-basedShare-based compensation expense was recorded in the following financial statement line items:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
| Cost of product sales | | $ | 3.1 |
| | $ | 1.7 |
| | $ | 1.1 |
|
| Research and development | | 4.0 |
| | 3.1 |
| | 2.5 |
|
| Selling, general and administrative | | 19.6 |
| | 18.4 |
| | 11.6 |
|
| Total stock-based compensation expense | | $ | 26.7 |
| | $ | 23.2 |
| | $ | 15.2 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cost of product sales | $ | 7.3 | | | $ | 6.4 | | | $ | 8.9 | |
| Cost of CDMO services | 1.8 | | | 1.1 | | | 3.5 | |
| Research and development | 5.4 | | | 5.0 | | | 8.4 | |
| Selling, general and administrative | 30.6 | | | 29.9 | | | 30.2 | |
| Total share-based compensation expense | $ | 45.1 | | | $ | 42.4 | | | $ | 51.0 | |
Accumulated Other Comprehensive Lossother comprehensive income (loss), net of tax
The following table includes changes in accumulated other comprehensive loss by component,income (loss), net of tax:tax by component:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Defined Benefit Pension Plan | | Derivative Instruments | | Foreign Currency Translation Adjustments | | Total |
| |
| Balance at December 31, 2020 | | $ | (7.7) | | | $ | (11.0) | | | $ | (6.6) | | | $ | (25.3) | |
| Other comprehensive income (loss) before reclassifications | | 4.3 | | | 0.7 | | | (1.0) | | | 4.0 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | (0.6) | | | 5.8 | | | — | | | 5.2 | |
| Net current period other comprehensive income (loss) | | 3.7 | | | 6.5 | | | (1.0) | | | 9.2 | |
| Balance at December 31, 2021 | | $ | (4.0) | | | $ | (4.5) | | | $ | (7.6) | | | $ | (16.1) | |
| Other comprehensive income before reclassifications | | 8.7 | | | 10.8 | | | 1.0 | | | 20.5 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | (1.2) | | | (0.1) | | | — | | | (1.3) | |
| Net current period other comprehensive income | | 7.5 | | | 10.7 | | | 1.0 | | | 19.2 | |
| Balance at December 31, 2022 | | $ | 3.5 | | | $ | 6.2 | | | $ | (6.6) | | | $ | 3.1 | |
The tables below present the tax effects related to each component of other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Pretax | | Tax Benefit (Expense) | | Net of tax | | Pretax | | Tax Benefit (Expense) | | Net of tax | | Pretax | | Tax Benefit (Expense) | | Net of tax |
| Defined benefit pension plan | $ | 8.7 | | | $ | (1.2) | | | $ | 7.5 | | | $ | 4.3 | | | $ | (0.6) | | | $ | 3.7 | | | $ | (5.0) | | | $ | 0.7 | | | $ | (4.3) | |
| Derivative instruments | 14.6 | | | (3.9) | | | 10.7 | | | 8.9 | | | (2.4) | | | 6.5 | | | (13.0) | | | 3.6 | | | (9.4) | |
| Foreign currency translation adjustments | 0.6 | | | 0.4 | | | 1.0 | | | (1.2) | | | 0.2 | | | (1.0) | | | (1.8) | | | 0.1 | | | (1.7) | |
| Total adjustments | $ | 23.9 | | | $ | (4.7) | | | $ | 19.2 | | | $ | 12.0 | | | $ | (2.8) | | | $ | 9.2 | | | $ | (19.8) | | | $ | 4.4 | | | $ | (15.4) | |
|
| | | | | | | | | | | | | | | | |
| | | Defined Benefit Pension Plan | | Derivative Instruments | | Foreign Currency Translation Losses | | Total |
| (in millions) | |
| Balance, January 1, 2018 | | $ | — |
| | $ | — |
| | $ | (3.7 | ) | | $ | (3.7 | ) |
| Other comprehensive loss | | (0.2 | ) | | — |
| | (1.6 | ) | | (1.8 | ) |
| Balance, December 31, 2018 | | $ | (0.2 | ) | | $ | — |
| | $ | (5.3 | ) | | (5.5 | ) |
| Other comprehensive (loss) income before reclassifications | | $ | (3.2 | ) | | $ | (2.2 | ) | | $ | 0.4 |
| | $ | (5.0 | ) |
| Amounts reclassified from accumulated other comprehensive income | | — |
| | 0.6 |
| | — |
| | 0.6 |
|
| Net current period other comprehensive loss | | $ | (3.2 | ) | | $ | (1.6 | ) | | $ | 0.4 |
| | $ | (4.4 | ) |
| Balance, December 31, 2019 | | $ | (3.4 | ) | | $ | (1.6 | ) | | $ | (4.9 | ) | | $ | (9.9 | ) |
103
10. Net income (loss) per common share The following table presents the calculation of basic and diluted net income (loss) per common share:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Numerator: | | | | | |
| Net income (loss) | $ | (223.8) | | | $ | 230.9 | | | $ | 305.1 | |
| | | | | |
| Denominator: | | | | | |
| Weighted-average number of shares-basic | 50.1 | | | 53.5 | | | 52.7 | |
| Dilutive effect of employee incentive plans | — | | | 0.6 | | | 1.1 | |
| Weighted-average number of shares-diluted | 50.1 | | | 54.1 | | | 53.8 | |
| | | | | |
| Net income (loss) per common share - basic | $ | (4.47) | | | $ | 4.32 | | | $ | 5.79 | |
| Net income (loss) per common share - diluted | $ | (4.47) | | | $ | 4.27 | | | $ | 5.67 | |
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed using the treasury method by dividing net income by the weighted average number of shares of common stock outstanding during the period, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised and are not anti-dilutive. No adjustment for the potential dilutive effect of dilutive securities is reported for the year ended December 31, 2022 as the effect would have been anti-dilutive due to the Company's net loss.
The following table presents the share-based awards that are not considered in the diluted net income (loss) per common share calculation generally because the exercise price of the awards was greater than the average per share closing price during the year ending December 31, 2022, 2021 and 2020. In certain instances, awards may be anti-dilutive even if the average market price exceeds the exercise price when the sum of the assumed proceeds exceeds the difference between the market price and the exercise price.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Anti-dilutive stock awards | 2.8 | | | 1.0 | | | — | |
11. Revenue recognition
The Company operates in two business segments (see Note 16, "Segment information"). The Company's revenues disaggregated by the major sources were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| USG | | Non-USG | | Total | | USG | | Non-USG | | Total | | USG | | Non-USG | | Total |
| Product sales | $ | 445.4 | | | $ | 520.8 | | | $ | 966.2 | | | $ | 530.0 | | | $ | 493.9 | | | $ | 1,023.9 | | | $ | 626.0 | | | $ | 363.8 | | | $ | 989.8 | |
| CDMO: | | | | | | | | | | | | | | | | | |
| Services | — | | | 108.4 | | | 108.4 | | | — | | | 334.9 | | | 334.9 | | | — | | | 166.7 | | | 166.7 | |
| Leases | — | | | 4.9 | | | 4.9 | | | 237.6 | | | 62.1 | | | 299.7 | | | 253.3 | | | 30.5 | | | 283.8 | |
| Total CDMO | — | | | 113.3 | | | 113.3 | | | 237.6 | | | 397.0 | | | 634.6 | | | 253.3 | | | 197.2 | | | 450.5 | |
| Contracts and grants | 37.2 | | | 4.2 | | | 41.4 | | | 130.2 | | | 4.0 | | | 134.2 | | | 109.2 | | | 5.9 | | | 115.1 | |
| Total revenues | $ | 482.6 | | | $ | 638.3 | | | $ | 1,120.9 | | | $ | 897.8 | | | $ | 894.9 | | | $ | 1,792.7 | | | $ | 988.5 | | | $ | 566.9 | | | $ | 1,555.4 | |
For the years ended December 31, 2022, 2021 and 2020, the Company's product sales from Anthrax Vaccines, Nasal Naloxone products, TEMBEXA, ACAM2000 and Other products as a percentage of total product sales were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| % of product sales: | | | | | |
| Anthrax vaccines | 28 | % | | 25 | % | | 38 | % |
| Nasal naloxone products | 39 | % | | 43 | % | | 31 | % |
| TEMBEXA | 12 | % | | — | % | | — | % |
| ACAM2000 | 7 | % | | 20 | % | | 20 | % |
| Other products | 14 | % | | 12 | % | | 11 | % |
For the year ended December 31, 2022 there were two customers in excess of 10% of total revenues. The USG accounted for 43% of total revenues and the second customer accounted for 10% of total revenues. Both customer's revenue is attributable to the Products segment. For the years ended 2021 and 2020, aside from sales to the USG, there were no sales to an individual customer in excess of 10% of total revenues. For the years ended December 31, 2022, 2021, and 2020, the Company’s revenues from customers within the United States comprised 79%, 92% and 93%, respectively, of total revenues.
Termination of manufacturing services agreement with Janssen Pharmaceuticals, Inc.
On July 2, 2020, the Company, through its wholly-owned subsidiary, Emergent Manufacturing Operations Baltimore, LLC, entered into the Agreement with Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson, for large-scale drug substance manufacturing of Johnson & Johnson’s investigational SARS-CoV-2 vaccine, Ad26.COV2-S, recombinant based on the AdVac technology (the “Product”).
On June 6, 2022, the Company provided to Janssen a notice (the “Notice”) of material breach of the Agreement for, among other things, failure by Janssen (i) to provide the Company the requisite forecasts of the required quantity of Product to be purchased by Janssen under the Agreement and (ii) to confirm Janssen’s intent to not purchase the requisite minimum quantity of the Product pursuant to the Agreement and instead, wind-down the Agreement ahead of fulfilling these minimum requirements. Later on June 6, 2022, the Company received from Janssen a purported written notice of termination (the “Janssen Notice”) of the Agreement for asserted material breaches of the Agreement by the Company, including alleged failure by the Company to perform its obligations in compliance with current good manufacturing practices ("cGMP") or other applicable laws and regulations and alleged failure by the Company to supply Janssen with the Product. Janssen alleged that the Company’s breaches were not curable and that, therefore, termination of the Agreement would be effective as of July 6, 2022. The Company disputes Janssen's assertions and allegations, including Janssen's ability to effect termination pursuant to the Janssen Notice. The Company and Janssen disagree on the monetary amounts that are due to the Company as a result of termination by any means. The Company believes the amounts due to the Company
include, but are not limited to, compensation for services provided, reimbursement for raw materials purchased and non-cancelable orders, and fees for early termination. Janssen has alleged that no additional amount is due to the Company and that the Company should pay Janssen an unspecified amount as a result of the Company's alleged failure to perform under the Agreement. The Company has not recorded any contingent liabilities related to Janssen's allegations as the Company believes they are without merit and intends to vigorously defend the Company's position during the dispute resolution process through arbitration.
During the year ended December 31, 2022, there were no impacts on previously recognized revenue or depreciation related to the conclusion of the Agreement. As of December 31, 2022, the Company has no billed or unbilled net accounts receivable related to the Agreement.
Because the arbitration process may extend longer than one year, the Company reclassified $127.7 million from "Inventories, net" and $25.0 million from "Prepaid expenses and other current assets" to "Other assets" in the fourth quarter resulting in $152.7 million in long-term assets related to the Janssen Agreement on the consolidated balance sheet as of December 31, 2022. These assets include termination penalties, certain inventory related items and raw materials inventory representing materials purchased for the Agreement which Janssen has not reimbursed. The Company evaluated the net realizable value of the inventory as of December 31, 2022, concluding that because the Agreement specifies the Company is entitled to, among other things, reimbursement of raw materials and non-cancelable orders in the event of a contract termination for any reason, the Company is entitled to payment from Janssen for these raw materials. Additionally, the Company has $6.2 million of non-cancelable orders as of December 31, 2022 which have not been received and Janssen has not reimbursed.
BARDA Centers of Innovation and Advanced Development and Manufacturing Agreement
In 2020, the Company announced the issuance of a task order under its existing CIADM agreement with BARDA for COVID-19 vaccine development and manufacturing (the "BARDA COVID-19 Development Public Private Partnership"). The BARDA COVID-19 Development Public Private Partnership is considered a lease and is accounted for under ASC 842. The initial task order had a contract value of up to $628.2 million and included the reservation of manufacturing capacity and accelerated expansion of fill/finish capacity valued at $542.7 million and $85.5 million, respectively. Subsequently, the task order was expanded to include incremental capital activities which increased the value to $650.8 million. On November 1, 2021, the Company and BARDA mutually agreed to the completion of the Company's CIADM contract and associated task orders, including the BARDA COVID-19 Development Public Private Partnership. The Company did not recognize lease revenues under this arrangement during the year ended December 31, 2022. Total revenues associated with the base arrangement were $71.3 million and $15.8 million during the years ended December 31, 2021 and December 31, 2020, respectively, and are reflected as a component of contracts and grants revenue on the consolidated statements of operations. Revenues associated with the BARDA COVID-19 Development Public-Private Partnership were $237.6 million and $233.3 million during the years ended December 31, 2021 and December 31, 2020, respectively, and are recorded as CDMO leases on the consolidated statements of operations.
CDMO Operating Leases
Certain multi-year CDMO service arrangements with non-USG customers include operating leases whereby the customer has the right to direct the use of and obtain substantially all of the economic benefits of specific manufacturing suites operated by the Company. The associated revenue is recognized on a straight-line basis over the term of the lease. The remaining term on the Company's operating lease components approximates 2.6 years. The Company utilizes a cost-plus model to determine the stand-alone selling price of the lease component to allocate contract consideration between the lease and non-lease components. During the year ended December 31, 2022, the Company's non-USG lease revenues were $4.9 million, which is included within CDMO leases in the consolidated statement of operations. Excluding future amounts related to the Agreement as discussed above, the Company estimates future operating lease revenues to be $5.1 million in 2023, $0.9 million in 2024, $0.9 million in 2025, and $2.7 million in years beyond 2025.
Transaction price allocated to remaining performance obligations
As of December 31, 2022, the Company expects future revenues of approximately $378.2 million associated with all arrangements entered into by the Company. The Company expects to recognize a majority of the $378.2 million of unsatisfied performance obligations within the next 24 months. The amount and timing of revenue recognition for unsatisfied performance obligations can change. The future revenues associated with unsatisfied performance obligations exclude the value of unexercised option periods in the Company’s revenue arrangements. Often the timing of manufacturing activities changes based on customer needs and resource availability. Government funding appropriations can impact the timing of product deliveries. The success of the Company's development activities that receive
development funding support from the USG under development contracts can also impact the timing of revenue recognition.
Contract assets
The Company considers accounts receivable and deferred costs associated with revenue generating contracts, which are not included in inventory or property, plant and equipment and the Company does not currently have a contractual right to bill, to be contract assets. As of December 31, 2022 and December 31, 2021, the Company had $34.8 million and $21.5 million, respectively, of contract assets recorded within accounts receivable, net on the consolidated balance sheets.
Contract liabilities
When performance obligations are not transferred to a customer at the end of a reporting period, cash received associated with the amount allocated to those performance obligations is reflected as contract liabilities on the consolidated balance sheets and is deferred until control of these performance obligations is transferred to the customer.
The following table presents the roll forward of the contract liabilities:
| | | | | |
| Contract Liabilities |
| Balance at December 31, 2020 | $ | 100.1 | |
| Deferral of revenue | 279.7 | |
| Revenue recognized | (363.4) | |
| Balance at December 31, 2021 | $ | 16.4 | |
| Deferral of revenue | 38.9 | |
| Revenue recognized | (23.6) | |
| Balance at December 31, 2022 | $ | 31.7 | |
As of December 31, 2022 and 2021, the current portion of contract liabilities was $26.4 million and $11.7 million, respectively, and was included in other current liabilities on the balance sheet.
Accounts Receivable and Allowance for Expected Credit Losses
Accounts receivable including unbilled accounts receivable contract assets consist of the following:
| | | | | | | | | | | |
| | December 31, |
| 2022 | | 2021 |
| Accounts receivable: | | | |
| Billed | $ | 102.7 | | | $ | 228.1 | |
| Unbilled | 56.4 | | | 49.8 | |
| Allowance for expected credit losses | (0.7) | | | (3.2) | |
| Accounts receivable, net | $ | 158.4 | | | $ | 274.7 | |
12. Leases
The Company is the lessee for operating corporate leases for offices, R&D facilities and manufacturing facilities. The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use ("ROU") assets and liabilities. For a discussion of lessor activities, see Note 11, "Revenue recognition".
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating lease cost: | | | | | |
| Amortization of right-of-use assets | $ | 5.6 | | | $ | 5.6 | | | $ | 4.5 | |
| Interest on lease liabilities | 1.1 | | | 1.3 | | | 1.1 | |
| Total operating lease cost | $ | 6.7 | | | $ | 6.9 | | | $ | 5.6 | |
Operating lease costs are reflected as components of cost of product sales, cost of contract development and manufacturing, research and development expense and selling, general and administrative expense.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| Leases | Classification | 2022 | | 2021 |
| Operating lease right-of-use assets | Other assets | $ | 19.4 | | | $ | 28.3 | |
| | | | |
| Operating lease liabilities, current portion | Other current liabilities | $ | 5.8 | | | $ | 5.8 | |
| Operating lease liabilities | Other liabilities | 14.8 | | | 24.2 | |
| Total operating lease liabilities | | $ | 20.6 | | | $ | 30.0 | |
| | | | |
| Operating leases: | | | | |
| Weighted average remaining lease term (years) | | 5.9 | | 7.0 |
| Weighted average discount rate | | 4.1 | % | | 4.1 | % |
During the year ended December 31, 2022, the Company exercised the option to purchase its Rockville manufacturing facility. As a result, the Company removed the related operating lease right-of-use asset and operating lease liability of $3.5 million and $3.4 million, respectively. The purchased assets have been properly included in "Property, plant and equipment, net" on the Company's consolidated balance sheet as of December 31, 2022.
The Company's leases have remaining lease terms of less than one year to approximately 11 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year.
Lease maturities as of December 31, 2022, are as follows:
| | | | | |
| Year | As of
December 31, 2022 |
| 2023 | $ | 6.5 | |
| 2024 | 4.3 | |
| 2025 | 2.7 | |
| 2026 | 2.3 | |
| 2027 | 1.8 | |
| Thereafter | 5.9 | |
| Total undiscounted lease liabilities | 23.5 | |
| Less: Imputed interest | 2.9 | |
| Total Lease liabilities | $ | 20.6 | |
13. Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized. As a result
The Company establishes valuation allowances for deferred income tax assets in accordance with U.S. GAAP, which provides that such valuation allowances shall be established unless realization of the reductionincome tax benefits is more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As of December 31, 2022, the Company reassessed the valuation allowance and considered negative evidence, including its significant losses in the U.S. corporate income tax ratecurrent year and the substantial doubt about the Company’s ability to continue as a going concern through one year from 35% to 21% under the Tax Reform Act, the Company revalued its ending netdate that these financial statements are issued, positive evidence, scheduled reversal of deferred tax liabilities, available taxes in carryback periods, tax planning strategies and projected future taxable income. After assessing both the United States at December 31, 2017negative and recognizedpositive evidence, the Company concluded that it should record a provisional $13.4valuation allowance of $43.8 million tax benefit in the Company’s consolidated statement of income for the year ended December 31, 2017. During 2018, we adjusted the provisional estimate by approximately $4.5 million, bringing the total tax benefit recorded to date to $17.9 million related to the revaluation of ouron its global net operating losses, credits and other deferred tax assets and liabilities.assets.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $95.4 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional transition tax of $13.6 million of income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. During 2018 we reduced the provisional transition tax by $0.3 million, bringing the total transition tax to $13.3 million.
While the Tax Reform Act provides for a territorial tax system and it includes two new U.S. tax base erosion provisions, the global intangible low-taxedlow-tax income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company is subject to incremental U.S. tax on GILTI income. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2019.2022 and 2021. BEAT provisions do not have material impact on the consolidated financial statements.
For the year ended December 31, 2022, the Company has evaluated its historical indefinite reinvestment assertion in connection with the Company’s going concern uncertainty. The Company recognized a deferred withholding tax liability for the undistributed earnings of the Company’s international subsidiaries available cash and net working capital in the amount of $4.7 million. All other international subsidiaries’ outside basis differences are indefinitely reinvested.
Significant components of the provisions for income taxes attributable to operations consist of the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current | | | | | |
| Federal | $ | (9.6) | | | $ | (3.7) | | | $ | 62.8 | |
| State | 2.0 | | | 14.9 | | | 27.7 | |
| International | 33.6 | | | 28.4 | | | 14.0 | |
| Total current | 26.0 | | | 39.6 | | | 104.5 | |
| Deferred | | | | | |
| Federal | (39.0) | | | 38.0 | | | 1.1 | |
| State | 8.2 | | | 4.3 | | | — | |
| International | 6.9 | | | 1.6 | | | (3.5) | |
| Total deferred | (23.9) | | | 43.9 | | | (2.4) | |
| Income tax provision | $ | 2.1 | | | $ | 83.5 | | | $ | 102.1 | |
|
| | | | | | | | | | | |
| | December 31, |
| (in millions) | 2019 | | 2018 | | 2017 |
| Current | |
| | | | |
| Federal | $ | 1.4 |
| | $ | 1.8 |
| | $ | 29.4 |
|
| State | 11.6 |
| | 2.4 |
| | 3.0 |
|
| International | 11.0 |
| | 6.0 |
| | 0.3 |
|
| Total current | 24.0 |
| | 10.2 |
| | 32.7 |
|
| Deferred | | | | | |
| Federal | 1.9 |
| | 7.5 |
| | (6.0 | ) |
| State | 1.1 |
| | 3.0 |
| | (0.6 | ) |
| International | (4.1 | ) | | (1.9 | ) | | 9.9 |
|
| Total deferred | (1.1 | ) | | 8.6 |
| | 3.3 |
|
| Total provision for income taxes | $ | 22.9 |
| | $ | 18.8 |
| | $ | 36.0 |
|
109
The Company's net deferred tax asset (liability)liability consists of the following:
|
| | | | | | | |
| | December 31, |
| (in millions) | 2019 | | 2018 |
| Federal losses carryforward | $ | 8.5 |
| | $ | 10.7 |
|
| State losses carryforward | 17.4 |
| | 18.1 |
|
| Research and development carryforward | 9.0 |
| | 10.1 |
|
| State research and development carryforward | 5.0 |
| | 5.0 |
|
| Scientific research and experimental development credit carryforward | 11.0 |
| | 13.1 |
|
| Stock compensation | 7.6 |
| | 7.5 |
|
| Foreign NOLs | 36.9 |
| | 35.4 |
|
| Deferred revenue | 18.1 |
| | 11.6 |
|
| Inventory reserves | 1.8 |
| | 3.4 |
|
| Lease liability | 6.0 |
| | — |
|
| Other | 7.5 |
| | 4.9 |
|
| Deferred tax asset | 128.8 |
| | 119.8 |
|
| Fixed assets | (51.2 | ) | | (46.4 | ) |
| Intangible assets | (54.5 | ) | | (60.4 | ) |
| Right-of-use asset | (5.9 | ) | | — |
|
| Other | (3.2 | ) | | (0.7 | ) |
| Deferred tax liability | (114.8 | ) | | (107.5 | ) |
| Valuation allowance | (64.5 | ) | | (66.4 | ) |
| Net deferred tax asset (liability) | $ | (50.5 | ) | | $ | (54.1 | ) |
| | | | | | | | | | | |
| | December 31, |
| 2022 | | 2021 |
| Deferred tax assets | | | |
| Federal losses carryforward | $ | 15.3 | | | $ | 7.6 | |
| State losses carryforward | 5.4 | | | 3.3 | |
| R&D carryforward | 18.4 | | | 16.6 | |
| | | |
| | | |
| Stock compensation | 10.1 | | | 8.9 | |
| Foreign losses carryforward | 9.1 | | | 10.2 | |
| Deferred revenue | 2.0 | | | 0.4 | |
| Inventory reserves | 10.5 | | | 2.9 | |
| Lease liability | 4.6 | | | 6.5 | |
| IRC 263A capitalized costs | 5.0 | | | 3.9 | |
| Capitalized R&D | 25.9 | | | — | |
| IRC 163(j) Interest Limitation | 7.6 | | | — | |
| Other | 0.7 | | | 5.6 | |
| Gross deferred tax assets | 114.6 | | | 65.9 | |
| Valuation allowance | (68.0) | | | (25.0) | |
| Total deferred tax assets | 46.6 | | | 40.9 | |
| Deferred tax liabilities | | | |
| Fixed assets | (62.4) | | | (75.1) | |
| Intangible assets | (46.1) | | | (47.6) | |
| Right-of-use asset | (4.3) | | | (6.1) | |
| Foreign Withholding Tax | (4.7) | | | — | |
| Other | (0.9) | | | (2.8) | |
| Total deferred tax liabilities | (118.4) | | | (131.6) | |
| Net deferred tax liabilities | $ | (71.8) | | | $ | (90.7) | |
As of December 31, 2019,2022, the Company has a net U.S. deferred tax liability in the amount of $7.7approximately $73.0 million and a foreign net deferred tax liability in the amount of $42.8 million. The Company had a net U.S. deferred tax liability in the amount of $4.8 million and a foreign net deferred tax asset in the amount of $49.3 million as of December 31, 2018.
As of December 31, 2019, the Company currently has approximately $40.5 million ($8.5 million tax effected) in U.S. federal net operating loss ("NOL") carryforwards, along with $14.0$36.0 million of NOL’s which will expire in researchvarying amounts in 2031 through 2035 and development$37.0 million which will carryforward indefinitely, although, limited to eighty percent of taxable income annually. The Company has U.S. federal tax credit carryforwards for U.S. federalof $13.4 million which will expire in 2027 through 2042.
As of December 31, 2022, the Company had pre-apportionment state NOLs totaling approximately $1.9 billion primarily in Maryland which will begin to expire in 2025 and state tax purposespost-apportionment NOLs totaling approximately $146.8 million that will begin to expire in 2028. The Company has state R&D tax credit carryforwards of $5.0 million which will expire in 2027 through 2038.
The deductibility of such US federal and 2024, respectively. The U.S. federalstate net operating losses and credits may be limited. Under Section 382/383 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an "ownership change," which generally occurs if the percentage of the corporation's stock owned by 5% stockholders increases by more than 50% over a three-year period, the corporation's ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Certain of the net operating loss carryforwards are recorded with a $4.7 million valuation allowance. The research and development taxthe credit carryforwards haveare subject to an annual limitation pursuant to Internal Revenue Code Section 382 and 383 as a valuation allowanceresult of historical acquisitions. We may experience ownership changes in the amountfuture as a result of $9.1 million. The Companysubsequent shifts in our stock ownership, some of which may be outside of our control, which may further limit our carryforwards. If we determine that an ownership change has $280.7 million ($17.4 millionoccurred and our ability to use our historical NOL and credit carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax effected) in state net operating loss carryforwards, primarily in Maryland and California, that will begin to expire in 2025. The U.S. state tax loss carryforwards are recorded with a valuation allowance of $245.0 million ($16.4 million tax effected). obligations.
The Company has approximately $199.0$51.5 million ($37.0 million tax effected) in net operating losses from foreign jurisdictions someas of December 31, 2022, $14.5 million of losses which have an indefinite life (unless the foreign entities have a change in the nature or conduct of the business in the three years following a change in ownership), and some of which begin towill expire in 2022. Avarying amounts in 2022 through 2028 and $37.0 million will carryforward indefinitely.
The Company’s valuation allowance in respectincreased by $43.0 million due to these foreignthe Company’s determination that it is not more likely than not to realize its global net deferred income tax assets and the current year losses incurred within the U.S. The valuation allowance has been recorded inprimarily against the tax effected
amount of $34.3 million. The Company currently has approximately $11.0 million in Manitoba scientific research and experimental development credit carryforwards that will begin to expire in 2027. The use of any of theseCompany's net operating lossesloss and research and development tax credit carryforwards may be restricted due to future changes in the Company's ownership.carryforwards.
The provision for incomeIncome taxes differsdiffer from the amount of taxes determined by applying the U.S. federal statutory rate to income before the provision for income taxes as a result of the following:
|
| | | | | | | | | | | |
| | December 31, |
| (in millions) | 2019 | | 2018 | | 2017 |
| US | $ | 63.9 |
| | $ | 71.0 |
| | $ | 80.7 |
|
| International | 13.5 |
| | 10.5 |
| | 37.9 |
|
| Earnings before taxes on income | 77.4 |
| | 81.5 |
| | 118.6 |
|
| Federal tax at statutory rates | $ | 16.3 |
| | $ | 17.1 |
| | $ | 41.5 |
|
| State taxes, net of federal benefit | 10.3 |
| | 4.3 |
| | 1.3 |
|
| Impact of foreign operations | (6.9 | ) | | 2.8 |
| | (2.2 | ) |
| Change in valuation allowance | (1.0 | ) | | (0.1 | ) | | 0.3 |
|
| Tax credits | (3.6 | ) | | (1.8 | ) | | (1.9 | ) |
| Transition tax | — |
| | (0.2 | ) | | 13.6 |
|
| Change in U.S. tax rate | — |
| | (4.5 | ) | | (13.4 | ) |
| Stock compensation | (2.4 | ) | | (5.8 | ) | | (4.0 | ) |
| Other differences | — |
| | (1.3 | ) | | (0.7 | ) |
| Return to provision true-ups | (2.3 | ) | | 1.1 |
| | — |
|
| Transaction costs | — |
| | 5.4 |
| | — |
|
| Contingent consideration | 4.7 |
|
| — |
|
| — |
|
| Compensation limitation | 1.3 |
| | 1.1 |
| | 1.3 |
|
| FIN 48 | 1.1 |
| | 0.3 |
| | 0.5 |
|
| GILTI, net | 3.6 |
| | 0.4 |
| | — |
|
| Permanent differences | 1.8 |
| | — |
| | (0.3 | ) |
| Provision for income taxes | $ | 22.9 |
| | $ | 18.8 |
| | $ | 36.0 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| U.S. | $ | (445.1) | | | $ | 112.0 | | | $ | 362.0 | |
| International | 223.4 | | | 202.4 | | | 45.2 | |
| Earnings (Losses) before taxes on income | (221.7) | | | 314.4 | | | 407.2 | |
| Federal tax at statutory rates | $ | (46.6) | | | $ | 65.8 | | | $ | 85.5 | |
| State taxes, net of federal benefit | (10.2) | | | 16.1 | | | 23.2 | |
| Impact of foreign operations | (7.0) | | | (16.8) | | | (7.8) | |
| Change in valuation allowance | 43.8 | | | 4.3 | | | 1.5 | |
| Tax credits | (3.5) | | | (4.7) | | | (7.6) | |
| Stock compensation | 4.7 | | | (4.9) | | | (7.9) | |
| Goodwill Impairments | 1.8 | | | 8.3 | | | — | |
| Adjustment of prior year taxes | (0.5) | | | 0.8 | | | (0.7) | |
| Transaction costs | — | | | 0.3 | | | 6.0 | |
| Compensation limitation | 0.7 | | | 2.9 | | | 2.2 | |
| Unrecognized tax benefit | (9.7) | | | 0.3 | | | (0.3) | |
| GILTI, net | 20.7 | | | 11.4 | | | 5.4 | |
| Foreign withholding tax | 4.7 | | | — | | | — | |
| Permanent differences | 3.2 | | | (0.3) | | | 2.6 | |
| Income tax provision (benefit) | $ | 2.1 | | | $ | 83.5 | | | $ | 102.1 | |
The effective annual tax rate for the years ended December 31, 2019, 2018,2022, 2021, and 20172020 was 30%(1)%, 23%27% and 30%25%, respectively.
The effective annual tax rate of 30%(1)% in 20192022 is lower than the statutory rate primarily due to the impact of a valuation allowance charge in the US, state and Foreign Jurisdictions, a charge due the Company’s indefinite reinvestment assertion, goodwill impairment, GILTI, and other permanent items. This is partially offset by tax credits, favorable rates in foreign jurisdictions, and the release of an indemnified unrecognized tax benefit.
The effective annual tax rate of 27% in 2021 is higher than the statutory rate primarily due to the impact of goodwill impairment, state taxes, GILTI contingent consideration and other non-deductible items. This is partially offset by stock option deduction benefits, tax credits, and favorable rates in foreign jurisdictions. The jurisdictional mix of profit has changed from the prior year largely due to lower U.S. CDMO margins, the termination of the CIADM arrangement in the U.S. and an increase in sales of NARCAN in which a portion of the profit is attributable to a foreign subsidiary.
The effective annual tax rate of 23%25% in 20182020 is higher than the statutory rate primarily due to the impact of state taxes, GILTI, acquisition transaction costs andcontingent consideration, other non-deductible items and the jurisdictional mix of earnings. This is partially offset by the impact of the SAB 118 benefit and the stock option deduction benefit.
The effective annualbenefits, tax rate of 30%credits, and favorable rates in 2017 differs from statutory rate primarily due to the jurisdictional mix of earnings. Due to the impact of the Tax Reform Act enacted on December 22, 2017, the Company recognized a $13.4 million tax benefit as a result of revaluing the U.S. ending net deferred tax liabilities from 35% to the newly enacted U.S. corporate income tax rate of 21%. The tax benefit was fully offset by tax expense of $13.6 million for the transition tax on the deemed mandatory repatriation of undistributed earnings.foreign jurisdictions.
The Company recognizes interest in interest expense and recognizes potential penalties related to unrecognized tax benefits in selling, general and administrative expense. Ofexpense, and the total interest and penalties recognized are insignificant. The total unrecognized tax benefits recorded at December 31, 20192022 and 2018, $0.02021 of $1.2 million and $0.4$9.8 million, respectively, is classified as a current liability and $10.4 million and $8.4 million, respectively, is classifiedprimarily as a non-current liability on the consolidated balance sheet.sheets.
The table below presents the gross unrecognized tax benefits activity for 2019, 2018the years ended December 31, 2022, 2021 and 2017:2020:
|
| | | |
| (in millions) | |
| Gross unrecognized tax benefits at December 31, 2016 | $ | 1.8 |
|
| Increases for tax positions for prior years | — |
|
| Decreases for tax positions for prior years | — |
|
| Increases for tax positions for current year | 0.5 |
|
| Settlements | (0.3 | ) |
| Lapse of statute of limitations | — |
|
| Gross unrecognized tax benefits at December 31, 2017 | $ | 2.0 |
|
| Unrecognized tax benefits acquired in business combinations | 6.5 |
|
| Increases for tax positions for prior years | — |
|
| Decreases for tax positions for prior years | — |
|
| Increases for tax positions for current year | 0.3 |
|
| Settlements | — |
|
| Lapse of statute of limitations | — |
|
| Gross unrecognized tax benefits at December 31, 2018 | $ | 8.8 |
|
| Increases for tax positions for prior years | 0.5 |
|
| Unrecognized tax benefits acquired in business combinations | — |
|
| Decreases for tax positions for prior years | — |
|
| Increases for tax positions for current year | 1.5 |
|
| Settlements | (0.4 | ) |
| Lapse of statute of limitations | — |
|
| Gross unrecognized tax benefits at December 31, 2019 | $ | 10.4 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Gross unrecognized tax benefits, beginning of period | $ | 9.8 | | | $ | 9.2 | | | $ | 10.4 | |
| Increases (decreases) for tax positions for prior years | (1.5) | | | 0.4 | | | — | |
| Increases for tax positions for current year | 0.9 | | | 0.2 | | | 0.6 | |
| Settlements | — | | | — | | | (1.8) | |
| Lapse of statute of limitations | (8.0) | | | — | | | — | |
| Gross unrecognized tax benefits, end of period | $ | 1.2 | | | $ | 9.8 | | | $ | 9.2 | |
The total gross unrecognized tax benefit of $10.4$1.2 million, includes the release of $8.0 million of which $7.0 million relatesliability that related to the 2018 acquisition of PaxVax is entirelyHoldings Company, Ltd. The liability was offset by aan indemnification receivable, pursuantboth of which were released due to a Tax Indemnity Agreement that became effective as at the closelapse of the acquisition.statute of limitation during the year.
WhenThe Company does not anticipate a significant change within the next twelve months for unrecognized tax benefits and when resolved, substantially all of these reservesliabilities would impact the effective tax rate. However, the Company maintains a full valuation allowance as of December 31, 2022 and the recognition of any unrecognized tax benefits would be offset with a change in the valuation allowance and therefore there would be no income statement impact.
The Company's federal and state income tax returns for the tax years 2016 to 20182019 and onwards remain open to examination. The Company's tax returns in the United Kingdom remain open to examination for the tax years 2012 to 2018, and tax returns in Germany remain open indefinitely. The Company's tax returns for Canada remain open to examination for the tax years 2012 to 2018. The Company's Swiss tax returns remain open to federal examination for 2018.2014 through 2021. The Company's Irish tax returns remain open to examination for the tax years 2013 to 2018.2016 through 2021.
As of December 31, 2019,2022, the Company’s 2018 Canadian 2017Scientific Research and Experimental Development Claim is under appeal and the Company’s 2020 Canadian Scientific Research and Experimental Development Claim is under audit. As of December 31, 2019, theThe Company's 2016 and 2017 Canadian and US federal income tax returns for the Adapt entities prior to acquisitionare under audit. The Company’s Irish group is under Level 1 Compliance Intervention review for 2021. In addition, the Company’s 2019 and 2020 New York state income tax returns are under audit.
14. Defined benefit and 401(k) savings plan
The Company sponsors a defined benefit pension plan covering eligible employees in Switzerland (the "Swiss Plan"), which we have agreed to sell as part of our Travel Health business to Bavarian Nordic, described further in Note 18, "Subsequent events". Under the Swiss Plan, the Company and certain of its employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. Employer contributions must be in an amount at least equal to the employee’s contribution. The Swiss PlanPlan's assets are comprised of an insurance contract that has a fair value consistent with its contract value based on the practicability exception using levelLevel 3 inputs. The entire liability is listed as non-current because plan assets are greater than the expected benefit payments over the next year. The Company recognizes pension expense as a component of selling, general and administrative expense. The Company recognized pension expense related to the Swiss Plan of $1.0$0.8 million, $2.0 million and $2.4 million reflected as a component of selling, general and administrative expenses for the yearyears ended December 31, 2019.
The funded status of the Swiss Plan is as follows:
|
| | | | | | | |
| (in millions) | December 31, 2019 | | December 31, 2018 |
| Fair value of plan assets, beginning of year | $ | 18.2 |
| | $ | — |
|
| Acquisitions | — |
| | 18.2 |
|
| Employer contributions | 1.0 |
| | 0.2 |
|
| Employee contributions | 0.7 |
| | 0.1 |
|
| Net benefits received (paid) | 1.7 |
| | 0.3 |
|
| Actual return on plan assets | 1.7 |
| | — |
|
| Settlements | (3.0 | ) | | (0.6 | ) |
| Currency impact | 0.3 |
| | — |
|
| Fair value of plan assets, end of year | $ | 20.6 |
| | $ | 18.2 |
|
| Projected benefit obligation, beginning of year | $ | 28.6 |
| | $ | — |
|
| Acquisitions | — |
| | 28.3 |
|
| Service cost | 1.3 |
| | 0.3 |
|
| Interest Cost | 0.2 |
| | 0.1 |
|
| Employee contributions | 0.7 |
| | 0.1 |
|
| Actuarial loss | 7.0 |
| | 0.3 |
|
| Net benefits received (paid) | 1.7 |
| | (0.1 | ) |
| Plan amendment | (1.7 | ) | | 0.1 |
|
| Settlements | (3.0 | ) | | (0.6 | ) |
| Currency impact | 0.4 |
| | 0.1 |
|
| Projected benefit obligation, end of year | $ | 35.3 |
| | $ | 28.6 |
|
| Funded status, end of year | $ | (14.7 | ) | | $ | (10.4 | ) |
| Accumulated benefit obligation, end of year | $ | 31.0 |
| | $ | 25.6 |
|
Since assets exceed the present value of expected benefit payments for the next twelve months, all of the liability is classified as non-current. | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Change in Plan Assets: | | | |
| Fair value of plan assets, beginning of period | $ | 29.3 | | | $ | 27.6 | |
| Employer contributions | 1.5 | | | 1.4 | |
| Employee contributions | 0.9 | | | 0.9 | |
| Net benefits received | 3.4 | | | 0.5 | |
| Actual return on plan assets | (0.4) | | | (0.1) | |
| Settlements | (5.0) | | | — | |
| Currency impact | (0.4) | | | (1.0) | |
| Fair value of plan assets, end of period | $ | 29.3 | | | $ | 29.3 | |
| Change in Benefit Obligation: | | | |
| Projected benefit obligation, beginning of period | $ | 46.8 | | | $ | 49.2 | |
| Service cost | 1.9 | | | 2.4 | |
| Interest Cost | 0.1 | | | — | |
| Employee contributions | 0.9 | | | 0.9 | |
| Actuarial gain | (10.0) | | | (4.6) | |
| Net benefits received | 3.4 | | | 0.5 | |
| Settlements | (5.0) | | | — | |
| Currency impact | (0.9) | | | (1.6) | |
| Projected benefit obligation, end of period | $ | 37.2 | | | $ | 46.8 | |
| Funded status, end of period | $ | (7.9) | | | $ | (17.5) | |
| | | |
| Accumulated benefit obligation, end of period | $ | 34.0 | | | $ | 41.8 | |
Components of net periodic pension cost incurred during the yearyears ended December 31, 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Service cost | $ | 1.9 | | | $ | 2.4 | | | $ | 1.9 | |
| Interest cost | 0.1 | | | — | | | 0.1 | |
| Expected return on plan assets | (0.8) | | | (0.8) | | | (0.6) | |
| Amortization of loss | 0.1 | | | 0.6 | | | 0.2 | |
| Amortization of prior service credit | (0.1) | | | (0.2) | | | (0.2) | |
| Settlements | (0.4) | | | — | | | 1.0 | |
| Net periodic benefit cost | $ | 0.8 | | | $ | 2.0 | | | $ | 2.4 | |
|
| | | | | | | |
| (in millions) | December 31, 2019 | | December 31, 2018 |
| Service cost | $ | 1.3 |
| | $ | 0.3 |
|
| Interest cost | 0.2 |
| | 0.1 |
|
| Expected return on plan assets | (0.5 | ) | | (0.1 | ) |
| Net periodic benefit cost | $ | 1.0 |
| | $ | 0.3 |
|
The weighted average assumptions used to calculate the projected benefit obligations are as follows:
|
| | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Discount rate | 0.2 | % | | 0.9 | % |
| Expected rate of return | 3.0 | % | | 3.0 | % |
| Rate of future compensation increases | 1.5 | % | | 1.5 | % |
| | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Discount rate | 2.1 | % | | 0.3 | % |
| Expected rate of return | 3.5 | % | | 3.0 | % |
| Rate of future compensation increases | 1.8 | % | | 1.4 | % |
The overall expected long-term rate of return on assets assumption considers historical returns, as well as expected future returns based on the fact that investment returns are insured, and the legal minimum interest crediting rate as applicable. Total contributions expected to be made into the plan for the year-ended December 31, 20202023 is $1.1$1.6 million.
The following table presents lossesgains (losses) recognized in accumulated other comprehensive lossincome (loss) before income tax related to the Company’s defined benefit pension plans:
|
| | | | | | | |
| (in millions) | Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| Net actuarial loss | $ | 5.4 |
| | $ | 0.1 |
|
| Prior service cost | (1.7 | ) | | 0.1 |
|
| Total recognized in accumulated other comprehensive loss | $ | 3.7 |
| | $ | 0.2 |
|
Actuarial losses in accumulated other comprehensive loss related to the Company’s defined benefit pension plans expected to be recognized as components of net periodic benefit cost over the year ending December 31, 2020 are de minimis. | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Net actuarial gain | $ | 9.0 | | | $ | 5.9 | |
| Prior service cost | (0.3) | | | (1.3) | |
| Total recognized in other comprehensive income (loss) | $ | 8.7 | | | $ | 4.6 | |
Future benefits expected to be paid as of December 31, 20192022 are as follows:
|
| | | |
| (In millions) | December 31, 2019 |
| 2020 | $ | 1.0 |
|
| 2021 | 1.0 |
|
| 2022 | 1.5 |
|
| 2023 | 1.0 |
|
| 2024 | 1.0 |
|
| Thereafter | 6.6 |
|
| Total | $ | 12.1 |
|
| | | | | |
| Year | As of
December 31, 2022 |
| 2023 | $ | 1.8 | |
| 2024 | 1.8 | |
| 2025 | 2.0 | |
| 2026 | 1.9 | |
| 2027 | 2.1 | |
| Thereafter | 27.6 | |
| Total | $ | 37.2 | |
401(k) savings plan
The Company has established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code.Code (the "401(k) Plan"). The 401(k) Plan covers substantially all U.S. employees. Under the 401(k) Plan, employees may make elective salary deferrals. During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, the Company made matching contributions of approximately $5.1$8.8 million, $3.1$8.9 million and $2.7$6.6 million, respectively.
14. Leases15. Purchase commitments
The Company has operating leases for corporate offices, researchPurchase commitments are agreements to purchase raw materials and development facilitiesservices that are enforceable, legally binding, and manufacturing facilities. We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use ("ROU") assets and liabilities.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities
represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses an implicit rate when readily determinable. At the beginning of a lease, the operating lease ROU asset also includes any concentrated lease payments expectedspecify terms that (1) include fixed or minimum quantities to be paidpurchased, (2) include fixed, minimum or variable price provisions and excludes lease incentives. The Company's lease ROU asset may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which(3) are accounted for separately. The Company's leases have remaining lease terms of 1 year to 14 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1longer than one year.
The components of lease expense were as follows:
|
| | | |
| | December 31, 2019 |
| Operating lease cost: | |
| Amortization of right-of-use assets | $ | 2.7 |
|
| Interest on lease liabilities | 0.6 |
|
| Total operating lease cost | $ | 3.3 |
|
For the years ended December 31, 2018 and 2017 total lease expense was $3.3 million and $1.6 million, respectively.
Supplemental balance sheet information related to leases was as follows as of December 31, 2019:
|
| | | | |
| (In millions, except lease term and discount rate) | Balance Sheet Location | December 31, 2019 |
| Operating lease right-of-use assets | Other assets | $ | 24.7 |
|
| | | |
| Operating lease liabilities, current portion | Other current liabilities | 3.6 |
|
| Operating lease liabilities | Other liabilities | 22.1 |
|
| Total operating lease liabilities | | 25.7 |
|
| | | |
| Operating leases: | | |
| Weighted average remaining lease term (years) | | 8.0 |
|
| Weighted average discount rate | | 4.2 | % |
15. Earnings per share
The following table presents the calculation of basic and diluted net income per share:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions, except per share data) | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net earnings | $ | 54.5 |
| | $ | 62.7 |
| | $ | 82.6 |
|
| Interest expense, net of tax | — |
| | — |
| | 2.6 |
|
| Amortization of debt issuance costs, net of tax | — |
| | — |
| | 0.7 |
|
| Net income, adjusted | $ | 54.5 |
| | $ | 62.7 |
| | $ | 85.9 |
|
| Denominator: | | | | | |
| Weighted-average number of shares-basic | 51.5 |
| | 50.1 |
| | 41.8 |
|
| Dilutive securities-equity awards | 0.9 |
| | 1.3 |
| | 1.1 |
|
| Dilutive securities-convertible debt | — |
| | — |
| | 7.4 |
|
| Weighted-average number of shares-diluted | 52.4 |
| | 51.4 |
| | 50.3 |
|
| Net income per share-basic | $ | 1.06 |
| | $ | 1.25 |
| | $ | 1.98 |
|
| Net income per share-diluted | $ | 1.04 |
| | $ | 1.22 |
| | $ | 1.71 |
|
For the year ending December 31, 2019 approximately 0.9 million shares of common stock are not considered in the diluted earnings per share calculation because the exercise price of these options is greater than the average per share closing price during the year and their effect would be anti-dilutive. For the years ending December 31, 2018, and 2017, substantially all of the outstanding stock options to purchase shares of common stock were included in the calculation of diluted earnings per share.
16. Purchase commitments
As of December 31, 20192022 the Company has approximately $59.7$132.8 million of purchase commitments associated with raw materials and contract development and manufacturingCDMO services that will be purchased in the next three years.
five years, of which the Company estimates that approximately $125.7 million will be purchased within the next year. For the years ended December 31, 2019, 2018,2022, 2021, and 2017,2020, the Company purchased $51.3$199.6 million, $12.1$110.7 million and $3.0$108.0 million, respectively, of materials and services under this commitment.these commitments.
16. Segment information
For financialThe Company reports segment information based on the internal reporting purposes,used by management for making decisions and assessing performance. During the first quarter of 2022, the Company reports financial information for 1revised the reporting that the CODM reviews in order to assess Company performance. The CODM manages the business with a focus on two reportable segment. Thissegments: (1) Products segment consisting of the Government - MCM and Commercial product categories and (2) Services segment focused on CDMO services. The Company evaluates the performance of these reportable segment engages in business activitiessegments based on revenue and Adjusted Gross Margin, which is a non-GAAP financial information that is providedmeasure. Segment revenue includes external customer sales, but it does not include inter-segment services. The Company defines Adjusted Gross Margin as segment revenue less segment cost of sales reduced for significant events, inventory step-up provisions and changes in fair value of contingent consideration. The Company does not allocate research and development, selling, general and administrative costs, amortization of intangibles assets, interest and other income (expense) or taxes to and resources which are allocatedoperating segments in the management reporting reviewed by the Chief Operating Decision Maker.CODM. The accounting policies of the reportablefor segment isreporting are the same as those described infor the summaryCompany as a whole. The Company has recast the related historical information for consistency.
The Company manages its assets on a total company basis, not by operating segment, as the Company's operating assets are shared or commingled. Therefore, the Company's CODM does not regularly review any asset information by operating segment and, accordingly, the Company does not report asset information by operating segment.
The following table includes segment revenues and a reconciliation of significant accounting policies.
For the years ended December 31, 2019, 2018, and 2017, the Company’s revenues within the United States comprised 90%, 91% and 89%, respectively, of total revenues. For the years ended December 31, 2019, 2018, and 2017, product sales from ACAM 2000 and Anthrax VaccinesCompany's segment adjusted gross margin to the USG comprised approximately 43%, 65% and 68%, respectively,consolidated statement of total product sales.operations for each of the Company's reporting segments:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Revenues: | | | | | |
| Products | $ | 966.2 | | | $ | 1,023.9 | | | $ | 989.8 | |
Services (1) | 113.3 | | | 634.6 | | | 450.5 | |
| Total segment revenues | 1,079.5 | | | 1,658.5 | | | 1,440.3 | |
| Contracts and grants revenue | 41.4 | | | 134.2 | | | 115.1 | |
| Total revenues | $ | 1,120.9 | | | $ | 1,792.7 | | | $ | 1,555.4 | |
| | | | | |
| Less: Cost of sales: | | | | | |
| Cost of Products | $ | 424.1 | | | $ | 382.0 | | | $ | 392.0 | |
| Cost of Services | 269.6 | | | 375.5 | | | 132.0 | |
| Total cost of sales | $ | 693.7 | | | $ | 757.5 | | | $ | 524.0 | |
| | | | | |
| Products gross margin | $ | 542.1 | | | $ | 641.9 | | | $ | 597.8 | |
Services gross margin (1) | $ | (156.3) | | | $ | 259.1 | | | $ | 318.5 | |
Consolidated gross margin (2) | $ | 385.8 | | | $ | 901.0 | | | $ | 916.3 | |
| | | | | |
| Adjustments to gross margin: | | | | | |
| Products: | | | | | |
| Changes in fair value of contingent consideration | $ | 2.6 | | | $ | 2.9 | | | $ | 31.7 | |
| Inventory step-up provision | 51.4 | | | — | | | — | |
| | | | | |
| Products adjusted gross margin | $ | 596.1 | | | $ | 644.8 | | | $ | 629.5 | |
Services adjusted gross margin (1) | $ | (156.3) | | | $ | 259.1 | | | $ | 318.5 | |
Consolidated adjusted gross margin(3) | $ | 439.8 | | | $ | 903.9 | | | $ | 948.0 | |
| | | | | |
| Other reconciling items: | | | | | |
| Contracts and grants revenue | $ | 41.4 | | | $ | 134.2 | | | $ | 115.1 | |
| Adjustments to gross margin | (54.0) | | | (2.9) | | | (31.7) | |
| Research and development | (193.0) | | | (234.0) | | | (234.5) | |
| Selling, general and administrative | (340.3) | | | (348.4) | | | (303.3) | |
| Goodwill impairment | (6.7) | | | (41.7) | | | — | |
| Amortization of intangible assets | (59.9) | | | (58.5) | | | (59.8) | |
| Interest expense | (37.3) | | | (34.5) | | | (31.3) | |
| Other, net | (11.7) | | | (3.7) | | | 4.7 | |
| Income (loss) before income taxes | $ | (221.7) | | | $ | 314.4 | | | $ | 407.2 | |
| | | | | |
(1) Services revenue, Services gross margin and Services Adjusted gross margin for the years ended December 31, 2021 and 2020 includes the impact of $237.6 million and $233.3 million, respectively of CDMO leases revenues related to the BARDA COVID-19 Development Public Private Partnership which ended in November 2021. |
(2) Total segment revenues less total cost of sales. |
(3) Consolidated gross margin plus adjustments to gross margin. |
The Company's product sales from Anthrax Vaccines, ACAM2000, NARCAN Nasal Spray and Other comprised approximately:following table includes depreciation expense for each segment:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Depreciation: | | | | | |
| Products | $ | 32.9 | | | $ | 27.8 | | | $ | 27.2 | |
| Services | 43.2 | | | 28.3 | | | 17.3 | |
| Other | 7.3 | | | 6.1 | | | 5.6 | |
| Total | $ | 83.4 | | | $ | 62.2 | | | $ | 50.1 | |
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| % of product sales: | |
| | | | |
| Anthrax Vaccines | 19 | % | | 46 | % | | 68 | % |
| ACAM2000 | 27 | % | | 19 | % | | — | % |
| NARCAN Nasal Spray | 31 | % | | 7 | % | | — | % |
| Other | 23 | % | | 28 | % | | 32 | % |
116
AsThe following table includes revenues by country. Revenues have been attributed based on the location of December 31, 2019, 2018the customer:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Revenue: | | | | | |
| United States | $ | 889.5 | | | $ | 1,642.5 | | | $ | 1,446.0 | |
| Canada | 148.6 | | | 66.7 | | | 46.0 | |
| Other | 82.8 | | | 83.5 | | | 63.4�� | |
| Total revenues | $ | 1,120.9 | | | $ | 1,792.7 | | | $ | 1,555.4 | |
The following table included long-lived assets, net by country. Long-lived assets, net includes right-of-use assets, net and 2017, aside from Anthrax Vaccinesproperty, plant & equipment, net, excluding software, net:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Long-lived assets, net: | | | |
| United States | $ | 696.1 | | | $ | 705.5 | |
| Switzerland | 88.1 | | | 73.1 | |
| Canada | 37.5 | | | 35.0 | |
| Other | 5.0 | | | 6.0 | |
| Total long-lived assets, net | $ | 826.7 | | | $ | 819.6 | |
17. Litigation
Securities and ACAM2000, thereshareholder litigation
With respect to the specific legal proceedings and claims described below, unless otherwise noted, the amount or range of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company's results of operations or cash flows for that period or on the Company's financial condition.
On April 20, 2021, May 14, 2021, and June 2, 2021, putative class action lawsuits were no other product sales to an individual customer or for an individual product in excess of 10% of total revenues.
For years ended December 31, 2019 and 2018,filed against the Company had long-lived assets outsideand certain of the United States of approximately $90.6 millionits current and $82.9 million, respectively, which are primarily located within Canada and Switzerland.
18. Quarterly financial data (unaudited)
Quarterly financial information for the years ended December 31, 2019 and 2018 is presented in the following tables:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| (in millions, except per share data) | March 31, | | June 30, | | September 30, | | December 31, |
| 2019: | |
| | |
| | |
| | |
|
| Revenue | $ | 190.6 |
| | $ | 243.2 |
| | $ | 311.8 |
| | $ | 360.4 |
|
| Income (loss) from operations | (27.4 | ) | | (7.0 | ) | | 70.7 |
| | 77.8 |
|
| Net income (loss) | (26.1 | ) | | (9.5 | ) | | 43.2 |
| | 46.9 |
|
| | | | | | | | |
| Net income (loss) per share-basic | $ | (0.51 | ) | | $ | (0.18 | ) | | $ | 0.84 |
| | $ | 0.91 |
|
| Net income (loss) per share-diluted | $ | (0.51 | ) | | $ | (0.18 | ) | | $ | 0.83 |
| | $ | 0.90 |
|
| | | | | | | | |
| 2018: | | | | | | | |
| Revenue | $ | 117.8 |
| | $ | 220.2 |
| | $ | 173.7 |
| | $ | 270.7 |
|
| Income (loss) from operations | (9.5 | ) | | 66.8 |
| | 21.3 |
| | 11.2 |
|
| Net income (loss) | (4.9 | ) | | 50.1 |
| | 20.9 |
| | (3.4 | ) |
| | | | | | | | |
| Net income (loss) per share-basic | $ | (0.10 | ) | | $ | 1.00 |
| | $ | 0.42 |
| | $ | (0.07 | ) |
| Net income (loss) per share-diluted | $ | (0.10 | ) | | $ | 0.98 |
| | $ | 0.41 |
| | $ | (0.07 | ) |
19. Litigation
ANDA Litigation
On September 14, 2018, Adapt Pharma Inc., Adapt Pharma Operations Limited and Adapt Pharma Ltd. (collectively, "Adapt Pharma"), and Opiant Pharmaceuticals, Inc. ("Opiant"), received notice from Perrigo UK FINCO Limited Partnership ("Perrigo"), that Perrigo had filed an Abbreviated New Drug Application ("ANDA"), with the United States Food and Drug Administration seeking regulatory approval to market a generic version of NARCAN®(naloxone hydrochloride) Nasal Spray 4mg/spray before the expiration of U.S. Patent Nos. 9,211,253, (the "‘253 Patent"), 9,468,747 (the "‘747 Patent"), 9,561,177, (the "‘177 Patent"), 9,629,965, (the "‘965 Patent") and 9,775,838 (the "‘838 Patent"). On or about October 25, 2018, Perrigo sent a subsequent notice letter relating to U.S. Patent No. 10,085,937 (the "937 Patent"). Perrigo’s notice letters assert that its generic product will not infringe any valid and enforceable claim of these patents.
On October 25, 2018, Emergent BioSolutions’ Adapt Pharma subsidiaries and Opiant, (collectively, the "Plaintiffs"), filed a complaint for patent infringement of the ‘253, ‘747, ‘177, ‘965, and the ‘838 Patents against Perrigoformer senior officers in the United States District Court for the District of New Jersey arising from Perrigo’s ANDA filingMaryland on behalf of purchasers of the Company’s common stock, seeking to pursue remedies under the Securities Exchange Act of 1934. These complaints were filed by Palm Tran, Inc. – Amalgamated Transit Union Local 1577 Pension Plan; Alan I. Roth; and Stephen M. Weiss, respectively. The complaints allege, among other things, that the defendants made false and misleading statements about the Company's manufacturing capabilities with respect to COVID-19 vaccine bulk drug substance (referred to herein as "CDMO Manufacturing Capabilities"). These cases were consolidated on December 23, 2021, under the FDA.caption In re Emergent BioSolutions Inc. Securities Litigation, No. 8:21-cv-00955-PWG (the "Federal Securities Class Action"). The Lead Plaintiffs in the consolidated matter are Nova Scotia Health Employees’ Pension Plan and The City of Fort Lauderdale Police & Firefighters’ Retirement System. The defendants filed a second complaint against Perrigomotion to dismiss on December 7, 2018, forMay 19, 2022 and the infringementLead Plaintiff filed an opposition to that motion on July 19, 2022. The defendants believe that the allegations in the complaints are without merit and intend to defend the matters vigorously. Given the uncertainty of litigation, the preliminary stage of the ‘937 Patent. On February 12, 2020, Adapt Pharma and Perrigo entered into a settlement agreement to resolve the ongoing litigation. Under the terms of the settlement, Perrigo has received a non-exclusive license under Adapt’s patents to make, have made and market its generic naloxone hydrochloride nasal spray under its own ANDA. Perrigo’s license will be effective as of January 5, 2033 or earlier under certain circumstances including circumstances related to the outcome of the current litigation against Teva (as defined below) or litigation against future ANDA filers. The Perrigo settlement agreement is subject to review by the U.S. Department of Justicecases, and the Federal Trade Commission,legal standards that must be met for, among other things, class certification and entrysuccess on the merits, the Company cannot reasonably estimate the possible loss or range of an order dismissingloss, if any, that may result from the litigation by the U.S. District Court for the District of New Jersey.consolidated action.
On or about February 27, 2018, Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received notice from Teva Pharmaceuticals Industries Ltd. and Teva Pharmaceuticals USA, Inc. (collectively "Teva"), that Teva had filed an ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 2 mg/spray before the expiration of U.S. Patent No. 9,480,644, (the "‘644 Patent"June 29, 2021, Lincolnshire Police Pension Fund (“Lincolnshire”), and U.S. Patent No. 9,707,226, (the "'226 Patent"). Teva's notice letter asserts that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the '644 Patent or the '226 Patent, or that the '644 Patent and '226 Patent are invalid or unenforceable. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opianton August 16, 2021, Pooja Sayal, filed a complaint for patent infringement against Tevaputative shareholder derivative lawsuits in the United States District Court for the District of New Jersey.Maryland on behalf of the Company against certain of the Company's current and former officers and directors for breach of fiduciary duties, waste of corporate assets, and unjust enrichment, each allegation related to the CDMO Manufacturing Capabilities. In addition to monetary damages, the complaints seek the implementation of multiple corporate governance and internal policy changes. On November 16, 2021, the cases were consolidated under the caption In re Emergent BioSolutions Inc. Stockholder Derivative Litigation, Master Case No. 8:21-cv-01595-PWG. On January 3, 2022, the Lincolnshire complaint was designated as the operative complaint in the consolidated action. On April 13, 2022 the Court approved the parties joint
stipulation to and stay of the proceedings and discovery until the close of fact discovery in the Federal Securities Class Action. The defendants believe that the allegations in the complaints are without merit and intend to defend the matter vigorously.
On or about September 13, 2016, Adapt Pharma15, 2021, September 16, 2021 and November 12, 2021, putative shareholder derivative lawsuits were filed by Chang Kyum Kim, Mark Nevins and Employees Retirement System of the State of Rhode Island, North Collier Fire Control and Rescue District Firefighters Pension Plan, and Pembroke Pines Firefighters & Police Officers Pension Fund, respectively, in The Court of Chancery of the State of Delaware on behalf of the Company against certain of its current and former officers and directors for breach of fiduciary duties, unjust enrichment and insider trading, each allegation related to the CDMO Manufacturing Capabilities. In addition to monetary damages, the complaints seek the implementation of multiple corporate governance and internal policy changes. On February 2, 2022, the cases were consolidated under the caption In re Emergent BioSolutions, Inc. and Adapt Pharma Operations Limited and Opiant received notice from Teva that Teva had filed an ANDADerivative Litigation, C.A. No. 2021-0974-MTZ with the FDA seeking regulatoryinstitutional investors as co-lead plaintiffs. On March 4, 2022, the defendants’ filed a motion to dismiss the complaint. Ruling on this motion is stayed pursuant to a March 29, 2022 order staying all proceedings pending a final, non-appealable judgment in the Federal Securities Class Action.
On December 3, 2021, December 22, 2021 and January 18, 2022, putative shareholder derivative lawsuits were filed by Zachary Elton, Eric White and Jeffrey Reynolds in the Circuit Court for Montgomery County, Maryland on behalf of the Company against certain of its current and former officers and directors for breach of fiduciary duty, unjust enrichment, waste of corporate assets, failing to maintain internal controls, making or causing to be made false and/or misleading statements and material omissions, insider trading and otherwise violating the federal securities laws, each allegation related to the CDMO Manufacturing Capabilities. The complaints seek monetary and punitive damages. On February 22, 2022, the Court entered an order consolidating these actions under case number C-15-21-CV-000496. On March 9, 2022, the parties filed a Joint Stipulation of Stay of Proceedings and Discovery, pursuant to which the parties agreed to stay all proceedings until 30 calendar days after a ruling on the defendants’ motion to dismiss the Federal Securities Class Action. The Court approved the Joint Stipulation on March 14, 2022.
In addition to the above actions, the Company has received inquiries and subpoenas to produce documents related to these matters from the Department of Justice, the SEC, the Maryland Attorney General’s Office, and the New York Attorney General’s Office. The Company produced or is producing documents as required in response and will continue to cooperate with these government inquiries. The Company also received inquiries and subpoenas from Representative Carolyn Maloney and Representative Jim Clyburn, members of the House Committee on Oversight and Reform and the Select Subcommittee on the Coronavirus Crisis and Senator Murray of the Committee on Health, Education, Labor and Pensions. The Company produced documents and provided testimony and briefings as requested in response to these inquiries.
18. Subsequent events
2023 Organizational Restructuring Plan
On January 9, 2023, the Company announced an organizational restructuring plan (the “Plan”) intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. The Plan includes a reduction of the Company’s current workforce by approximately five percent. Decisions regarding the elimination of positions are subject to local law and consultation requirements in certain countries, as well as the Company’s business needs.
The Company estimates that it will incur approximately $9.0 million to $11.0 million in charges in connection with the Plan, which it expects to incur in the first quarter of fiscal 2023. These charges consist primarily of charges related to employee transition, severance payments, employee benefits, and share-based compensation.
Agreement to Sell Travel Business
On February 15, 2023, we entered into the Sale Agreement with Bavarian Nordic, under which we agreed to sell our travel health business, including rights to Vaxchora and Vivotif, as well as our development-stage chikungunya vaccine candidate CHIKV VLP, our manufacturing site in Bern, Switzerland and certain of our development facilities in San Diego, California for a cash purchase price of $270.0 million, subject to certain customary adjustments. In addition, we may receive milestone payments of up to $80.0 million related to the development of CHIKV VLP and receipt of marketing approval and authorization in the U.S. and Europe, and sales-based milestones payments of up to market a generic version$30.0 million based on aggregate net sales of NARCAN® (naloxone hydrochloride) Nasal Spray 4 mg/spray beforeVaxchora and Vivotif in calendar year 2026. Approximately 280 employees are expected to join Bavarian Nordic as part of the transaction.
The transaction is expected to close in the second quarter of 2023, subject to certain customary closing conditions, including (1) the expiration or earlier termination of U.S. Patent No. 9,211,253 (the "'253 Patent"). Adapt Pharma Inc.the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (2) receipt of required clearances and Adapt Pharma Operations Limited and Opiant received additional notices from Teva relating to the '747, the '177, the '965, the '838, and the ‘937 Patents. Teva's notice letters assert that the commercial manufacture, use or saleapprovals under Spain’s competition laws, (3) receipt of its generic drug product described in its ANDA will not infringe the '253, the '747, the '177, the '965, the '838, or the ‘937 Patent, or that the '253, the '747, the '177, the '965, the '838, and the ‘937 Patents are invalid or unenforceable. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant filed a complaint for patent infringement against Teva in the United States District Court for the District of New Jerseycertain Swiss real property approvals, (4) no material adverse effect having occurred with respect to the '253 Patent. Adapt Pharma Inc.Business, and Adapt Pharma Operations Limited and Opiant also filed complaints for patent infringement against Teva in the United States District Court for the District of New Jersey with respect to the '747, the '177, the '965, and the '838 Patents. All five proceedings have been consolidated. As of the date of this filing, Adapt Pharma Inc., Adapt Pharma Operations Limited, and Opiant, have not filed a complaint related to the ‘937 Patent. Closing arguments are scheduled for February 26, 2020.
In the complaints described in the paragraphs above, the Plaintiffs seek, among(5) certain other relief, orders that the effective date of FDA approvals of the Teva ANDA products and the Perrigo ANDA product be a date not earlier than the expiration of the patents listed for each product, equitable relief enjoining Teva and Perrigo from making, using, offering to sell, selling, or importing the products that are the subject of Teva and Perrigo’s respective ANDAs, until after the expiration of the patents listed for each product, and monetary relief or other relief as deemed just and proper by the court.
Nalox-1 Pharmaceuticals, a non-practicing entity, filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (the "PTAB") requesting inter parties review ("IPR") of five of the six patents listed in the Orange Book related to NARCAN® Nasal Spray 4mg/spray. In a series of decisions, the PTAB agreed to institute a review
of the '253 Patent, the '747 Patent and the '965 Patent but denied review of the '177 Patent and the '838 Patent. Nalox-1 did not request review of the '937 Patent.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9 A.9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019.2022. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2019,2022, our chief executive officer and chief financial officer concluded that, as of such date, ourthat the disclosure controls and procedures were not effective at the reasonable assurance level.due to a material weakness in internal control over financial reporting, described below.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2022. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework).Based on As a result of this assessment, our management concluded that, as of December 31, 2019,2022, our internal control over financial reporting was not effective baseddue to an identified material weakness related to the improper capitalization of inventory. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. While this did not result in a material misstatement to our consolidated financial statements for any prior periods through and including December 31, 2022, there was a reasonable possibility that a material misstatement of our interim or annual financial statements would not be prevented or detected on a timely basis.
More specifically, the material weakness is due to insufficient controls to related to our assessment of pre-launch materials meeting the criteria for capitalization, which requires those criteria.materials to have economic value and a high probability of regulatory approval.
Remediation
We have initiated and begun to implement measures designed to improve our internal control over financial reporting related to the capitalization of inventory, including documenting a formal policy on the accounting for pre-paunch materials purchased for use in R&D activities, providing additional training related to the new policy, implementing a monthly control to review pre-launch inventory with corporate finance to ensure proper accounting treatment. As a result of these efforts and given that the deficiencies relate to specific adjustments that were made during the period ended December 31, 2022, we believe that the Inventory Capitalization Issue may be remediated during the first quarter of 2023.
Ernst & Young LLP, the independent registered public accounting firm that has audited our consolidated financial statements included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2019,2022, a copy of which is included in this annual reportAnnual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
ThereExcept for the material weakness described above, there has been no change in the Company's internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) that occurred during the quarter ended December 31, 2022 that have been changes inmaterially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule 13a-15(f)) identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this report that have materially affected our internal control over financial reporting. These changes pertained to the integration of the acquired companies in 2018, Adapt and PaxVax, onto the Company's information technology platforms during the fourth quarter of 2019.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Emergent BioSolutions Inc. and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Emergent BioSolutions Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Emergent BioSolutions Inc. and subsidiaries (the Company) has not maintained in all material respects, effective internal control over financial reporting as of December 31, 20192022, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls related to the Company's inventory process.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders'stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018,2022, and the related notes and financial statement schedule listed in the Index at Item 1515. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated February 24, 2020March 1, 2023, which expressed an unqualified opinion thereon.that included an explanatory paragraph regarding the Company's ability to continue as a going concern.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Baltimore, MarylandTysons, Virginia
February 24, 2020
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Ethics
We have adopted a code of business conduct and ethics that applies to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), as well as our other employees. A copy ofour code of business conduct and ethics is available on our website at www.emergentbiosolutions.com.www.emergentbiosolutions.com. We intend to post on our website all disclosures that are required by applicable law, the rules of the Securities and Exchange CommissionSEC or the New York Stock Exchange concerning any amendment to, or waiver of, our code of business conduct and ethics. The reference to our website is intended to be an inactive textual reference only. Neither the information on or that can be accessed through our website are incorporated by reference in this Annual Report on Form 10-K.
The remaining information required by Item 10 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20202023 Annual Meeting of Stockholders, to be filed with the SECU.S. Securities and Exchange Commission ("SEC") within 120 days following the end of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20202023 annual meeting of stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20202023 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20202023 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference from our Definitive Proxy
Statement relating to our 20202023 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
The following financial statements and supplementary data are filed as a part of this annual reportAnnual Report on Form 10-K in Part I,II, Item 8.
•Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
•Consolidated Balance Sheets at December 31, 20192022 and 20182021
•Consolidated Statements of Operations for the years ended December 31, 2019, 20182022, 2021 and 20172020
•Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 20182022, 2021 and 20172020
•Consolidated Statements of Cash Flows for the years ended December 31, 2019, 20182022, 2021 and 20172020
•Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2019, 20182022, 2021 and 20172020
•Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2019, 20182022, 2021 and 20172020 has been filed as part of this annual report on Form 10-K. All other financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits hereto and such listing is incorporated herein by reference.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Beginning Balance | | Charged to Costs and Expenses | | Deductions | | Ending Balance |
| Year Ended December 31, 2022 | | | | | | | | |
| Inventory allowance | | $ | 42.7 | | | 79.1 | | | (40.5) | | | $ | 81.3 | |
| Prepaid expenses and other current assets allowance | | $ | 3.7 | | | 3.9 | | | (0.5) | | | $ | 7.1 | |
| | | | | | | | |
| Year Ended December 31, 2021 | | | | | | | | |
| Inventory allowance | | $ | 37.6 | | | 37.9 | | | (32.8) | | | $ | 42.7 | |
| Prepaid expenses and other current assets allowance | | $ | 3.9 | | | 0.2 | | | (0.4) | | | $ | 3.7 | |
| | | | | | | | |
| Year Ended December 31, 2020 | | | | | | | | |
| Inventory allowance | | $ | 17.9 | | | 48.0 | | | (28.3) | | | $ | 37.6 | |
| Prepaid expenses and other current assets allowance | | $ | 4.0 | | | 0.5 | | | (0.6) | | | $ | 3.9 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Beginning Balance | | Additions from Acquisition | | Charged to costs and expenses | | Deductions | | Ending Balance |
| Year Ended December 31, 2019 | | | | | | | | | | |
| Inventory allowance | | $ | 14.0 |
| | $ | — |
| | $ | 23.0 |
| | $ | (19.1 | ) | | $ | 17.9 |
|
| Prepaid expenses and other current assets allowance | | 4.3 |
| | — |
| | — |
| | (0.3 | ) | | 4.0 |
|
| | | | | | | | | | | |
| Year Ended December 31, 2018 | | |
| | | | |
| | |
| | |
|
| Inventory allowance | | $ | 3.8 |
| | $ | 4.4 |
| | $ | 14.6 |
| | $ | (8.8 | ) | | $ | 14.0 |
|
| Prepaid expenses and other current assets allowance | | 5.3 |
| | — |
| | — |
| | (1.0 | ) | | 4.3 |
|
| | | | | | | | | | | |
| Year Ended December 31, 2017 | | |
| | | | |
| | |
| | |
|
| Inventory allowance | | $ | 3.5 |
| | $ | — |
| | $ | 8.8 |
| | $ | (8.5 | ) | | $ | 3.8 |
|
| Prepaid expenses and other current assets allowance | | 4.9 |
| | — |
| | 0.4 |
| | — |
| | 5.3 |
|
Exhibit Index
All documents referenced below were filed pursuant to the Securities Exchange Act of 1934 by the Company, (File No. 001-33137), unless otherwise indicated.
|
| | | | | | | |
Exhibit Number | | Exhibit Description |
2.13.1 | † | | |
2.2 | † | |
3.1 | | |
| 3.2 | | | |
| 4.1 | | | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 filed on October 20, 2006) (Registration No. 333-136622). |
| 4.2 | | | |
| 4.3 | | | |
| 4.4 | | | |
4.44.5 | | | |
| 4.6 | | | |
| 4.7 | | | |
9.1 | | |
| 10.1 | | | |
| 10.2 | * | | |
| 10.3 | | * | |
| 10.4 | | # | |
| 10.5 | | * | |
|
| 10.6 | | |
10.3 | * | |
10.410.7 | | * | (incorporated by reference to Appendix A to the Company's definitive proxy statement on Schedule 14A filed on April 6, 2012). |
10.510.8 | | * | |
10.6 | | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 10.9 | | * | |
10.710.10 | *# | |
| 10.11 | | * | |
10.810.12 | | * | |
10.910.13 | * | |
10.1010.14 | #* | * | |
10.1110.15 | #* | * | |
10.12 | * | |
10.13 | * | |
10.1410.16 | | * | |
10.1510.17 | #* | * | |
10.1610.18 | | * | |
| 10.19 | | †* | |
| 10.20 | | * | |
10.1710.21 | | * | |
10.18 | * | |
10.1910.22 | | * | |
10.2010.23 | | * | |
10.2110.24 | | † | |
10.2210.25 | | † | |
10.2310.26 | | † | |
10.2410.27 | | | |
10.2510.28 | | † | |
10.2610.29 | | † | |
10.29 | | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 10.32 | | | |
10.3010.33 | | † | |
10.3110.34 | | † | |
10.3210.35 | | † | |
10.3310.36 | | † | |
10.3410.37 | | † | |
10.3510.38 | | † | |
10.3610.39 | | † | |
10.3710.40 | | † | |
10.3810.41 | | ††† | |
10.3910.42 | #† | †† | |
10.4010.43 | #† | †† | |
10.4110.44 | #† | †† | |
10.4210.45 | | †† | |
| 10.46 | | †† | |
| 10.47 | | †† | |
| 10.48 | | †† | (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on November 5, 2021). |
| 10.49 | | †† | |
| 10.50 | | †† | |
| 10.51 | | † |
|
| | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 10.52 | | † | |
| 10.53 | | † | |
| 10.54 | | † | |
10.4310.55 | | † | |
10.4410.56 | | † | |
10.4510.57 | | ††† | |
10.4610.58 | #† | †† | |
| 10.59 | | †† | |
| 10.60 | | †† | |
| 10.61 | | †† | |
| 10.62 | | †† | |
| 10.63 | | †† | |
| 10.64 | | †† | |
| 10.65 | | †† | |
| 10.66 | | †† | |
| 10.67 | | † | |
10.4710.68 | #† | † | |
| 10.69 | | | |
|
| | | | | | | |
10.48Exhibit Number | #† | Exhibit Description |
| 10.70 | | †† | |
2110.71 | # | †† | |
| 10.72 | | †† | |
| 10.73 | | †† | |
| 10.74 | | †† | |
| 10.75 | | †† | |
| 10.76 | | †† | |
| 10.77 | | † | |
| 10.78 | | †† | |
| 10.79 | | †† | |
| 10.80 | | †† | |
| 10.81 | | †† | |
| 10.82 | | †† | |
| 10.83 | | †† | |
| 10.84 | | †† | |
| 10.85 | | †† | |
| 10.86 | | †† | |
| 10.87 | | †† | |
| 10.88 | | †† | |
| | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 10.89 | | †† | |
| 10.90 | | †† | |
| 10.91 | | †† | |
| 10.92 | | †† | |
| 10.93 | | †† | |
| 10.94 | | †† | |
| 10.95 | | †† | |
| 10.96 | | †† | |
| 10.97 | | †† | |
| 10.98 | | †† | |
| 10.99 | | †† | |
| 10.100 | | †† | |
| 10.101 | | †† | |
| 10.102 | | †† | |
| 10.103 | | †† | |
| 10.104 | | †† | |
| 10.105 | | †† | |
| 10.106 | | †† | |
| 10.107 | | †† | |
| | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 10.108 | | †† | |
| 10.109 | | †† | |
| 10.110 | | †† | |
| 10.111 | | †† | |
| 10.112 | | †† | |
| 10.113 | | †† | |
| 10.114 | | †† | |
| 10.115 | | †† | |
| 10.116 | | †† | |
| 10.117 | | †† | |
| 10.118 | | †† | |
| 10.119 | | †† | |
| 10.200 | | †† | |
| 10.201 | | †† | |
| 10.202 | | †† | |
| 10.203 | | † | |
| 10.204 | | #†† | |
| 21 | | # | |
| 23 | | # | |
| 31.1 | | # | |
| 31.2 | | # | |
| 32.1 | | # | |
| 32.2 | | # | |
| | | | | | | | |
101Exhibit Number | | Exhibit Description |
| 101 | # | The following financial information related to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statement of Changes in Stockholders' Equity; and (vi) the related Notes to Consolidated Financial Statements.Statements; and (vii) the Cover Page.
|
| 104 | # | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
| # | Filed herewith |
| † | Confidential treatment granted by the Securities and Exchange CommissionSEC as to certain portions. Confidential materials omitted and filed separately with the Securities and Exchange Commission.SEC. |
| †† | Confidential treatment requested by the Securities and Exchange Commission as to certain portions. Confidential materials omitted and filed separately with the Securities and Exchange Commission. |
| ††† | Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed. |
| * | Management contract or compensatory plan or arrangement filed herewith in response to Item 15(a) of Form 10-K. |
Attached as Exhibit 101 to this Annual Report on Form
ITEM 16. FORM 10-K are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2019 and 2018, (ii) Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017, (iii) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017 (iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017, (v) Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 2019, 2018 and 2017, and (vi) Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
| EMERGENT BIOSOLUTIONS INC. |
| |
| By: /s/RICHARD S. LINDAHL |
| Richard S. Lindahl |
| Executive Vice President, Chief Financial Officer and Treasurer |
| Date: February 24, 2020March 1, 2023 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| | | | |
/s/Robert G. Kramer Sr. Robert G. Kramer Sr. | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 24, 2020March 1, 2023 |
| | | | |
/s/Richard S. Lindahl Richard S. Lindahl | | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | | February 24, 2020March 1, 2023 |
| | | | |
/s/Fuad El-Hibri
Fuad El-Hibri
| | Executive Chairman of the Board of Directors | | February 24, 2020 |
| | | | |
/s/Zsolt Harsanyi, Ph.D. Zsolt Harsanyi, Ph.D. | | Director | | February 24, 2020March 1, 2023 |
| | | | |
/s/Kathryn Zoon, Ph.D. Kathryn Zoon, Ph.D. | | Director | | February 24, 2020March 1, 2023 |
| | | | |
/s/Ronald B. Richard Ronald B. Richard | | Director | | February 24, 2020March 1, 2023 |
| | | | |
/s/Louis W. Sullivan, M.D. Louis W. Sullivan, M.D. | | Director | | February 24, 2020March 1, 2023 |
| | | | |
/s/Dr. Sue Bailey
Dr. Sue Bailey
| | Director | | February 24, 2020 |
| | | | |
/s/George Joulwan George Joulwan | | Director | | February 24, 2020March 1, 2023 |
| | | | |
/s/Jerome Hauer, Ph.D. Jerome Hauer, Ph.D. | | Director | | February 24, 2020March 1, 2023 |
| | | | |
/s/Seamus MulliganMarvin White Seamus MulliganMarvin White
| | Director | | February 24, 2020March 1, 2023 |
| | | | |
/s/Sujata Dayal Sujata Dayal | | Director | | March 1, 2023 |
| | | | |
/s/Keith Katkin Keith Katkin | | Director | | March 1, 2023 |
