| § | the outcome of the class action lawsuit;defend underlying patents from infringement by generic naloxone entrants;
|
our ability to identify and acquire companies, businesses, products or product candidates that satisfy our selection criteria;
| § | our ability to obtain and maintain regulatory approvals for our product candidates and the timing of any such approvals; |
our ability to successfully integrate and realize the benefits of our acquisitions of PaxVax Holding Company Ltd. (PaxVax) and Adapt Pharma Limited (Adapt), both of which were acquired in October 2018; | § | the procurement of products by U.S. government entities under regulatory exemptions prior to approval by the FDA and corresponding procurement by government entities outside of the United States under regulatory exemptions prior to approval by the corresponding regulatory authorities in the applicable country; |
our ability to successfully identify and respond to new development contracts with the USG, as well as successfully maintain, through achievement of development milestones, current development contracts with the USG; | § | the success of our commercialization, marketing and manufacturing capabilities and strategy; and |
our ability and the ability of our contractors and suppliers to maintain compliance with current good manufacturing practices and other regulatory obligations; | § | the results of regulatory inspections;EMERGENT BIOSOLUTIONS INC.
the operating and financial restrictions placed on us and our subsidiaries under our senior secured credit facilities; our ability to obtain and maintain regulatory approvals for our product candidates and the timing of any such approvals; the procurement of products by USG entities under regulatory exemptions prior to approval by the FDA and corresponding procurement by government entities outside of the United States under regulatory exemptions prior to approval by the corresponding regulatory authorities in the applicable country; the success of our commercialization, marketing and manufacturing capabilities and strategy; and the accuracy of our estimates regarding future revenues, expenses, capital requirements and needs for additional financing. |
The foregoing sets forth many, but not all, of the factors that could cause actual results to differ from our expectations in any forward-looking statement. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. You should consider this cautionary statement, the risk factors identified in the section entitled "Risk Factors" in this quarterly report on Form 10-Q and the risk factors identified in our other periodic reports filed with the Securities and Exchange Commission (SEC) when evaluating our forward-looking statements.
NOTE REGARDING COMPANY REFERENCES
References in this report to “Emergent,” the “Company,” “we,” “us,” and “our” refer to Emergent BioSolutions Inc. and its consolidated subsidiaries.
NOTE REGARDING TRADENAMES
PART I. FINANCIAL INFORMATION
BioThrax® (Anthrax Vaccine Adsorbed), RSDL® (Reactive Skin Decontamination Lotion Kit), BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), Anthrasil® (Anthrax Immune Globulin Intravenous (Human)), VIGIV (Vaccinia Immune Globulin Intravenous (Human)), Trobigard® (atropine sulfate, obidoxime chloride), ACAM2000® (Smallpox (Vaccinia) Vaccine, Live), Vivotif® (Typhoid Vaccine Live Oral Ty21a), Vaxchora® (Cholera Vaccine, Live, Oral), NARCAN® (naloxone HCI) Nasal Spray and any and all Emergent brands, products, services and feature names, logos and slogans are trademarks or registered trademarks of Emergent or its subsidiaries in the United States or other countries. All other brands, products, services and feature names or trademarks are the property of their respective owners.
ITEM 1.FINANCIAL STATEMENTS
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Balance Sheets | |
(in thousands, except share and per share data) | |
| | | |
| | June 30, 2018 | | | December 31, 2017 | |
ASSETS | | (unaudited) | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 190,237 | | | $ | 178,292 | |
Restricted cash | | | 1,043 | | | | 1,043 | |
Accounts receivable | | | 189,489 | | | | 143,653 | |
Inventories | | | 139,373 | | | | 142,812 | |
Income tax receivable, net | | | - | | | | 2,432 | |
Prepaid expenses and other current assets | | | 21,166 | | | | 17,157 | |
Total current assets | | | 541,308 | | | | 485,389 | |
| | | | | | | | |
Property, plant and equipment, net | | | 419,157 | | | | 407,210 | |
Intangible assets, net | | | 111,773 | | | | 119,597 | |
Goodwill | | | 49,130 | | | | 49,130 | |
Deferred tax assets, net | | | 12,654 | | | | 2,834 | |
Other assets | | | 4,869 | | | | 6,046 | |
Total assets | | $ | 1,138,891 | | | $ | 1,070,206 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 41,629 | | | $ | 41,751 | |
Accrued expenses and other current liabilities | | | 10,552 | | | | 4,831 | |
Accrued compensation | | | 29,259 | | | | 37,882 | |
Contingent consideration, current portion | | | 2,852 | | | | 2,372 | |
Income taxes payable, net | | | 2,771 | | | | - | |
Deferred revenue, current portion | | | 9,750 | | | | 13,232 | |
Total current liabilities | | | 96,813 | | | | 100,068 | |
| | | | | | | | |
Contingent consideration, net of current portion | | | 9,839 | | | | 9,902 | |
Long-term indebtedness | | | 13,482 | | | | 13,457 | |
Income taxes payable | | | 12,500 | | | | 12,500 | |
Deferred revenue, net of current portion | | | 63,255 | | | | 17,259 | |
Other liabilities | | | 4,656 | | | | 4,675 | |
Total liabilities | | | 200,545 | | | | 157,861 | |
| | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock, $0.001 par value; 15,000,000 shares authorized, 0 shares issued and outstanding at both June 30, 2018 and December 31, 2017 | | | - | | | | - | |
Common stock, $0.001 par value; 200,000,000 shares authorized, 51,231,814 shares issued and 50,014,528 shares outstanding at June 30, 2018; 50,619,808 shares issued and 49,405,365 shares outstanding at December 31, 2017 | | | 51 | | | | 50 | |
Treasury stock, at cost, 1,217,286 and 1,214,443 common shares at June 30, 2018 and December 31, 2017, respectively | | | (39,642 | ) | | | (39,497 | ) |
Additional paid-in capital | | | 632,569 | | | | 618,416 | |
Accumulated other comprehensive loss | | | (4,415 | ) | | | (3,698 | ) |
Retained earnings | | | 349,783 | | | | 337,074 | |
Total stockholders' equity | | | 938,346 | | | | 912,345 | |
Total liabilities and stockholders' equity | | $ | 1,138,891 | | | $ | 1,070,206 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Statements of Operations | |
(in thousands, except share and per share data) | |
| |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| | (Unaudited) | | | (Unaudited) | |
Revenues: | | | | | | | | | | | | |
Product sales | | $ | 180,075 | | | $ | 63,610 | | | $ | 255,846 | | | $ | 145,579 | |
Contract manufacturing | | | 23,613 | | | | 16,160 | | | | 49,791 | | | | 33,788 | |
Contracts and grants | | | 16,512 | | | | 21,002 | | | | 32,377 | | | | 38,263 | |
Total revenues | | | 220,200 | | | | 100,772 | | | | 338,014 | | | | 217,630 | |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of product sales and contract manufacturing | | | 89,173 | | | | 34,624 | | | | 147,217 | | | | 80,946 | |
Research and development | | | 24,745 | | | | 25,751 | | | | 53,796 | | | | 46,227 | |
Selling, general and administrative | | | 39,506 | | | | 31,868 | | | | 79,710 | | | | 67,018 | |
Income from operations | | | 66,776 | | | | 8,529 | | | | 57,291 | | | | 23,439 | |
| | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | 306 | | | | 583 | | | | 528 | | | | 956 | |
Interest expense | | | (1,008 | ) | | | (1,805 | ) | | | (1,242 | ) | | | (3,743 | ) |
Other expense, net | | | (253 | ) | | | (586 | ) | | | (179 | ) | | | (286 | ) |
Total other expense, net | | | (955 | ) | | | (1,808 | ) | | | (893 | ) | | | (3,073 | ) |
| | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | 65,821 | | | | 6,721 | | | | 56,398 | | | | 20,366 | |
Provision for income taxes | | | 15,677 | | | | 2,105 | | | | 11,162 | | | | 5,265 | |
Net income | | $ | 50,144 | | | $ | 4,616 | | | $ | 45,236 | | | $ | 15,101 | |
| | | | | | | | | | | | | | | | |
Net income per share - basic | | $ | 1.00 | | | $ | 0.11 | | | $ | 0.91 | | | $ | 0.37 | |
Net income per share - diluted (1) | | $ | 0.98 | | | $ | 0.11 | | | $ | 0.89 | | | $ | 0.35 | |
| | | | | | | | | | | | | | | | |
Weighted-average number of shares - basic | | | 49,896,124 | | | | 41,013,764 | | | | 49,738,980 | | | | 40,871,540 | |
Weighted-average number of shares - diluted | | | 51,162,909 | | | | 50,078,594 | | | | 51,039,195 | | | | 49,899,291 | |
(1) See "Earnings per share" footnote for details on calculation.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Statements of Comprehensive Income | |
(in thousands) | |
| |
| Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2018 | | | 2017 | | | 2018 | | | 2017 | |
| (Unaudited) | | (Unaudited) | |
| | | | | | | | | | | | |
Net income | | $ | 50,144 | | | $ | 4,616 | | | $ | 45,236 | | | $ | 15,101 | |
Foreign currency translations, net of tax | | $ | 1,165 | | | | 228 | | | | (717 | ) | | | 812 | |
Comprehensive income | | $ | 51,309 | | | $ | 4,844 | | | $ | 44,519 | | | $ | 15,913 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Statements of Cash Flows | |
(in thousands) | |
| | Six Months Ended June 30, | |
| | 2018 | | | 2017 | |
Cash flows from operating activities: | | (Unaudited) | |
Net income | | $ | 45,236 | | | $ | 15,101 | |
Adjustments to reconcile to net cash provided by (used in) operating activities: | | | | | | | | |
Stock-based compensation expense | | | 11,709 | | | | 8,018 | |
Depreciation and amortization | | | 24,713 | | | | 20,097 | |
Income taxes | | | 8,475 | | | | 4,951 | |
Change in fair value of contingent consideration | | | 1,674 | | | | 433 | |
Impairment of long-lived assets | | | 263 | | | | - | |
Other | | | 966 | | | | 464 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (46,251 | ) | | | 36,160 | |
Inventories | | | 3,439 | | | | 3,473 | |
Income taxes | | | (3,239 | ) | | | - | |
Prepaid expenses and other assets | | | (6,120 | ) | | | 276 | |
Accounts payable | | | (4,394 | ) | | | 4,245 | |
Accrued expenses and other liabilities | | | 5,607 | | | | (4,386 | ) |
Accrued compensation | | | (8,621 | ) | | | (10,194 | ) |
Deferred revenue | | | 134 | | | | 17,035 | |
Net cash provided by operating activities | | | 33,591 | | | | 95,673 | |
Cash flows from investing activities: | | | | | | | | |
Purchases of property, plant and equipment and other | | | (25,217 | ) | | | (29,605 | ) |
Proceeds from sale of assets | | | 2,624 | | | | - | |
Net cash used in investing activities | | | (22,593 | ) | | | (29,605 | ) |
Cash flows from financing activities: | | | | | | | | |
Issuance of common stock upon exercise of stock options | | | 8,465 | | | | 4,605 | |
Taxes paid on behalf of employees for equity activity | | | (6,020 | ) | | | (4,059 | ) |
Payments of notes payable to Aptevo | | | - | | | | (20,000 | ) |
Contingent consideration payments | | | (1,257 | ) | | | (2,405 | ) |
Purchase of treasury stock | | | (145 | ) | | | (83 | ) |
Net cash provided by (used in) financing activities | | | 1,043 | | | | (21,942 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | (96 | ) | | | (12 | ) |
| | | | | | | | |
Net increase in cash, cash equivalents and restricted cash | | | 11,945 | | | | 44,114 | |
Cash, cash equivalents and restricted cash at beginning of period (1) | | | 179,335 | | | | 271,513 | |
Cash, cash equivalents and restricted cash at end of period (1) | | $ | 191,280 | | | $ | 315,627 | |
(1) As of December 31, 2017 and June 30, 2018, the balance includes $1,043 of restricted cash.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited, in millions, except per share amounts)
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
ASSETS | | | |
Current assets: | |
| | |
Cash and cash equivalents | $ | 177.4 |
| | $ | 112.2 |
|
Restricted cash | 0.2 |
| | 0.2 |
|
Accounts receivable, net | 218.1 |
| | 262.5 |
|
Inventories | 232.0 |
| | 205.8 |
|
Prepaid expenses and other current assets | 65.0 |
| | 40.1 |
|
Total current assets | 692.7 |
| | 620.8 |
|
| | | |
Property, plant and equipment, net | 520.5 |
| | 510.2 |
|
Intangible assets, net | 742.4 |
| | 761.6 |
|
In-process research and development | 41.0 |
| | 50.0 |
|
Goodwill | 268.3 |
| | 259.7 |
|
Other assets | 56.4 |
| | 27.1 |
|
Total assets | $ | 2,321.3 |
| | $ | 2,229.4 |
|
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 124.5 |
| | $ | 80.7 |
|
Accrued expenses | 54.8 |
| | 30.7 |
|
Contingent consideration, current portion | 54.6 |
| | 5.6 |
|
Accrued compensation | 44.7 |
| | 58.2 |
|
Debt, current portion | 10.1 |
| | 10.1 |
|
Other current liabilities | 12.5 |
| | 15.1 |
|
Total current liabilities | 301.2 |
| | 200.4 |
|
Contingent consideration | 10.4 |
| | 54.4 |
|
Debt | 830.4 |
| | 784.5 |
|
Deferred tax liability | 65.6 |
| | 67.5 |
|
Deferred revenue | 77.0 |
| | 62.5 |
|
Other liabilities | 47.8 |
| | 49.2 |
|
Total liabilities | $ | 1,332.4 |
| | $ | 1,218.5 |
|
Commitments and contingencies (Notes 8 & 16) |
|
| |
|
|
Stockholders' equity: | | | |
Preferred stock, $0.001 par value; 15.0 shares authorized, no shares issued or outstanding at both 2019 and 2018 | — |
| | — |
|
Common stock, $0.001 par value; 200.0 shares authorized, 52.7 shares issued and 51.6 shares outstanding at 2019; 52.4 shares issued and 51.2 shares outstanding at 2018 | 0.1 |
| | 0.1 |
|
Treasury stock, at cost, 1.2 common shares at both 2019 and 2018 | (39.7 | ) | | (39.6 | ) |
Additional paid-in capital | 701.8 |
| | 688.6 |
|
Accumulated other comprehensive loss | (5.0 | ) | | (5.5 | ) |
Retained earnings | 331.7 |
| | 367.3 |
|
Total stockholders' equity | 988.9 |
| | 1,010.9 |
|
Total liabilities and stockholders' equity | $ | 2,321.3 |
| | $ | 2,229.4 |
|
See accompanying notes.
Emergent BioSolutions Inc.
Condensed Consolidated StatementStatements of Operations
(unaudited, in millions, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | | | | | | | |
Product sales, net | $ | 183.5 |
| | $ | 180.1 |
| | $ | 336.5 |
| | $ | 255.8 |
|
Contract manufacturing | 18.7 |
| | 23.6 |
| | 34.6 |
| | 49.8 |
|
Contracts and grants | 41.0 |
| | 16.5 |
| | 62.8 |
| | 32.4 |
|
Total revenues | 243.2 |
| | 220.2 |
| | 433.9 |
| | 338.0 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Cost of product sales and contract manufacturing | 100.8 |
| | 85.3 |
| | 192.7 |
| | 139.4 |
|
Research and development | 63.9 |
| | 24.7 |
| | 110.0 |
| | 53.8 |
|
Selling, general and administrative | 70.8 |
| | 39.5 |
| | 136.4 |
| | 79.7 |
|
Amortization of acquisition-related intangible assets | 14.7 |
| | 3.9 |
| | 29.2 |
| | 7.8 |
|
Total operating expenses | 250.2 |
| | 153.4 |
| | 468.3 |
| | 280.7 |
|
| | | | | | | |
(Loss) income from operations | (7.0 | ) | | 66.8 |
| | (34.4 | ) | | 57.3 |
|
| | | | | | | |
Other income (expense): | | | | | | | |
Interest expense | (9.5 | ) | | (1.0 | ) | | (19.0 | ) | | (1.2 | ) |
Other income, net | 1.4 |
| | — |
| | 0.4 |
| | 0.3 |
|
Total other expense, net | (8.1 | ) | | (1.0 | ) | | (18.6 | ) | | (0.9 | ) |
| | | | | | | |
(Loss) income before income taxes | (15.1 | ) | | 65.8 |
| | (53.0 | ) | | 56.4 |
|
Income tax (benefit) expense | (5.6 | ) | | 15.7 |
| | (17.4 | ) | | 11.2 |
|
Net (loss) income | $ | (9.5 | ) | | $ | 50.1 |
| | $ | (35.6 | ) | | $ | 45.2 |
|
| | | | | | | |
Net (loss) income per common share | | | | | | | |
Basic | $ | (0.18 | ) | | $ | 1.00 |
| | $ | (0.69 | ) | | $ | 0.91 |
|
Diluted | $ | (0.18 | ) | | $ | 0.98 |
| | $ | (0.69 | ) | | $ | 0.89 |
|
Shares used in computing (loss) income per share | | | | | | | |
Basic | 51.5 |
| | 49.9 |
| | 51.3 |
| | 49.7 |
|
Diluted | 51.5 |
| | 51.2 |
| | 51.3 |
| | 51.0 |
|
See accompanying notes.
Emergent BioSolutions Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(unaudited, in millions)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net (loss) income | $ | (9.5 | ) | | $ | 50.1 |
| | $ | (35.6 | ) | | $ | 45.2 |
|
Other comprehensive (loss) income, net of tax: |
|
| |
|
| | | | |
Foreign currency translations, net of tax | 0.7 |
| | (1.2 | ) | | 1.7 |
| | (0.7 | ) |
Derivatives | (1.2 | ) | | — |
| | (1.2 | ) | | — |
|
Total other comprehensive (loss) income, net of tax | (0.5 | ) | | (1.2 | ) | | 0.5 |
| | (0.7 | ) |
Comprehensive (loss) income | $ | (10.0 | ) | | $ | 48.9 |
| | $ | (35.1 | ) | | $ | 44.5 |
|
See accompanying notes.
Emergent BioSolutions Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in millions) |
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Cash flows provided by (used in) operating activities: | | | |
Net (loss) income | $ | (35.6 | ) | | $ | 45.2 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Share-based compensation expense | 14.9 |
| | 11.7 |
|
Depreciation and amortization | 55.1 |
| | 24.7 |
|
Amortization of deferred financing costs | 1.5 |
| | — |
|
Deferred income taxes | (1.3 | ) | | 8.5 |
|
Change in fair value of contingent consideration, net | 5.5 |
| | 1.7 |
|
Other | 2.9 |
| | 1.2 |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable | 44.6 |
| | (46.2 | ) |
Inventories | (26.1 | ) | | 3.4 |
|
Prepaid expenses and other assets | (44.9 | ) | | (9.3 | ) |
Accounts payable | 42.6 |
| | (4.4 | ) |
Accrued expenses | 6.9 |
| | 5.6 |
|
Accrued compensation | (13.5 | ) | | (8.6 | ) |
Deferred revenue | 16.4 |
| | 0.1 |
|
Net cash provided by operating activities: | 69.0 |
| | 33.6 |
|
Cash flows used in investing activities: | | | |
Purchases of property, plant and equipment and other | (35.5 | ) | | (25.2 | ) |
Milestone payment from prior asset acquisition | (10.0 | ) | | — |
|
Proceeds from sale of assets | — |
| | 2.6 |
|
Net cash used in investing activities: | (45.5 | ) | | (22.6 | ) |
Cash flows provided by (used in) financing activities: | | | |
Proceeds from revolving credit facility | 130.0 |
| | — |
|
Principal payments on revolving credit facility | (80.0 | ) | | — |
|
Principal payments on term loan facility | (5.6 | ) | | — |
|
Issuances of stock under share-based benefit plans | 4.6 |
| | 8.5 |
|
Taxes paid on behalf of employees for equity activity | (6.3 | ) | | (6.0 | ) |
Contingent consideration payments | (1.0 | ) | | (1.3 | ) |
Purchase of treasury stock | — |
| | (0.1 | ) |
Net cash provided by financing activities: | 41.7 |
| | 1.1 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (0.1 | ) |
Net increase in cash, cash equivalents and restricted cash | 65.2 |
| | 12.0 |
|
Cash, cash equivalents and restricted cash at beginning of period | 112.4 |
| | 179.3 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 177.6 |
| | $ | 191.3 |
|
See accompanying notes.
Emergent BioSolutions Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited, in thousands, except share and per share data)
| | $0.001 Par Value Common Stock | | | Additional Paid-In | | | Treasury Stock | | | Accumulated Other Comprehensive | | | Retained | | | Total Stockholders' | |
| | Shares | | | Amount | | | Capital | | | Shares | | | Amount | | | Loss | | | Earnings | | | Equity | |
Balance at December 31, 2017 | | | 50,619,808 | | | $ | 50 | | | $ | 618,416 | | | | (1,214,443 | ) | | $ | (39,497 | ) | | $ | (3,698 | ) | | $ | 337,074 | | | $ | 912,345 | |
Adoption of new accounting standard (ASC 606), net of tax | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (32,527 | ) | | | (32,527 | ) |
Balance at January 1, 2018 | | | 50,619,808 | | | | 50 | | | | 618,416 | | | | (1,214,443 | ) | | | (39,497 | ) | | | (3,698 | ) | | | 304,547 | | | | 879,818 | |
Employee equity plans activity | | | 612,006 | | | | 1 | | | | 14,153 | | | | - | | | | - | | | | - | | | | - | | | | 14,154 | |
Treasury stock | | | - | | | | - | | | | - | | | | (2,843 | ) | | | (145 | ) | | | - | | | | - | | | | (145 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 45,236 | | | | 45,236 | |
Foreign currency translation, net of tax | | | - | | | | - | | | | - | | | | - | | | | - | | | | (717 | ) | | | - | | | | (717 | ) |
Balance at June 30, 2018 | | | 51,231,814 | | | $ | 51 | | | $ | 632,569 | | | | (1,217,286 | ) | | $ | (39,642 | ) | | $ | (4,415 | ) | | $ | 349,783 | | | $ | 938,346 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $0.001 Par Value Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders' Equity |
| | Shares | | Amount | | | Shares | | Amount | | | |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | 52.4 |
| | $ | 0.1 |
| | $ | 688.6 |
| | (1.2 | ) | | $ | (39.6 | ) | | $ | (5.5 | ) | | $ | 367.3 |
| | $ | 1,010.9 |
|
Employee equity plans activity | | 0.3 |
| | — |
| | 13.2 |
| | — |
| | (0.1 | ) | | — |
| | — |
| | 13.1 |
|
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (35.6 | ) | | (35.6 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 0.5 |
| | — |
| | 0.5 |
|
Balance at June 30, 2019 | | 52.7 |
| | $ | 0.1 |
| | $ | 701.8 |
| | (1.2 | ) | | $ | (39.7 | ) | | $ | (5.0 | ) | | $ | 331.7 |
| | $ | 988.9 |
|
| | | | | | | | | | | | | | | | |
Balance at March 31, 2019 | | 52.6 |
|
| $ | 0.1 |
|
| $ | 690.1 |
|
| (1.2 | ) |
| $ | (39.6 | ) |
| $ | (4.5 | ) |
| $ | 341.2 |
|
| $ | 987.3 |
|
Employee equity plans activity | | 0.1 |
|
| — |
|
| 11.7 |
|
| — |
|
| (0.1 | ) |
| — |
|
|
|
|
| 11.6 |
|
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9.5 | ) | | (9.5 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
Balance at June 30, 2019 | | 52.7 |
|
| $ | 0.1 |
|
| $ | 701.8 |
|
| (1.2 | ) |
| $ | (39.7 | ) |
| $ | (5.0 | ) |
| $ | 331.7 |
|
| $ | 988.9 |
|
| | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | 50.6 |
|
| $ | 0.1 |
|
| $ | 618.4 |
|
| (1.2 | ) |
| $ | (39.5 | ) |
| $ | (3.8 | ) |
| $ | 337.1 |
|
| $ | 912.3 |
|
Adoption of new revenue accounting standard (ASC 606), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32.5 | ) | | (32.5 | ) |
Balance at January 1, 2018 | | 50.6 |
| | 0.1 |
| | 618.4 |
| | (1.2 | ) | | (39.5 | ) | | (3.8 | ) | | 304.6 |
| | 879.8 |
|
Employee equity plans activity | | 0.6 |
|
| — |
|
| 14.1 |
|
| — |
|
| (0.1 | ) |
| — |
|
| — |
|
| 14.0 |
|
Net income | | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 45.2 |
|
| 45.2 |
|
Other comprehensive loss | | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (0.7 | ) |
| — |
|
| (0.7 | ) |
Balance at June 30, 2018 | | 51.2 |
|
| $ | 0.1 |
|
| $ | 632.5 |
|
| (1.2 | ) |
| $ | (39.6 | ) |
| $ | (4.5 | ) |
| $ | 349.8 |
|
| $ | 938.3 |
|
| | | | | | | | | | | | | | | | |
Balance at March 31, 2018 | | 51.0 |
|
| $ | 0.1 |
|
| $ | 624.4 |
|
| (1.2 | ) |
| $ | (39.6 | ) |
| $ | (3.3 | ) |
| $ | 299.7 |
|
| $ | 881.3 |
|
Employee equity plans activity | | 0.2 |
|
| — |
|
| 8.1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 8.1 |
|
Net income | | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 50.1 |
|
| 50.1 |
|
Other comprehensive loss | | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1.2 | ) |
| — |
|
| (1.2 | ) |
Balance at June 30, 2018 | | 51.2 |
|
| $ | 0.1 |
|
| $ | 632.5 |
|
| (1.2 | ) |
| $ | (39.6 | ) |
| $ | (4.5 | ) |
| $ | 349.8 |
|
| $ | 938.3 |
|
See accompanying notes.
EMERGENT BIOSOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(unaudited, in millions, except share and per share amounts)
1.Summary Business
Emergent is a global life sciences company focused on providing specialty products for civilian and military populations that address accidental, deliberate and naturally occurring PHTs.
The Company is focused on innovative preparedness and response products and solutions addressing the following four distinct PHT categories: Chemical, Biological, Radiological, Nuclear and Explosives (CBRNE); emerging infectious diseases (EID); travelers’ diseases; and opioids. The USG is the Company's largest customer and provides the Company with substantial funding for the development of significant accounting policiesa number of the Company's product candidates.
The majority of the Company's revenue comes from a product portfolio that includes:
| |
• | Vaccines and Anti-Infectives - BioThrax® (Anthrax Vaccine Adsorbed), ACAM2000® (Smallpox (Vaccinia) Vaccine, Live), Vaxchora® (Cholera Vaccine, Live, Oral), and Vivotif® (Typhoid Vaccine, Live, Oral Ty21a). |
| |
• | Devices - NARCAN® (naloxone HCl) Nasal Spray for opioid overdose, RSDL® (Reactive Skin Decontamination Lotion Kit), and the Trobigard® (atropine sulfate, obidoxime chloride a nerve agent countermeasure) auto-injector. |
| |
• | Antibody Therapeutics - raxibacumab (Anthrax Monoclonal antibody therapeutic for anthrax),Anthrasil®( Anthrax Immune Globulin Intravenous (Human)), BAT®(Botulism Antitoxin Heptavalent), and VIGIV (Vaccinia Immune Globulin Intravenous (Human) therapeutic) for complications from smallpox vaccinations. |
The Company also generates revenue from contract development and manufacturing services including pharmaceutical product process development, manufacturing and filling services for injectable and other sterile products, inclusive of process design, technical transfer, manufacturing validations, laboratory analytical development support, aseptic filling, lyophilization, final packaging and accelerated and ongoing stability studies, as well as manufacturing of vial and pre-filled syringe formats, bulk drug products and finished units of clinical and commercial drugs.
We operate as one operating segment.
2. Basis of Presentation and Principles of Consolidation
Basis of presentation and consolidation
Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Emergent BioSolutions Inc. ("Emergent" or the "Company") and its wholly owned and majority ownedwholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC").SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principlesGAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the SEC.
In the opinion of the Company's management, anyAll adjustments contained in the accompanying unaudited condensed consolidated financial statements are of a normal recurring nature and are necessary to present fairly the financial position of the Company as of June 30, 2018.2019. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.
Significant accounting policies
Accounting Policies
During the six months ended June 30, 2018,2019, there have been no significant changes to the Company's summary of significant accounting policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the SEC, except for recently adopted accounting standards.
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. The Company has interest rate swaps and contingent consideration liabilities that are measured at fair value on a recurring basis (Note 8 and Note 9). The Company also records the new revenue recognition standardassets and liabilities of acquisitions at fair value (Note 3). As of June 30, 2019 and December 31, 2018, the Company adopted effective January 1, 2018. See Note 2. "Revenue recognition" for further details.had no other significant assets or liabilities that were measured at fair value on a non-recurring basis.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Recently issued accounting standardsAdopted Accounting Pronouncements
Leases
ASU No. 2018-07, Compensation-Stock Compensation (Topic 718):Improvements to Nonemployee Share-based Payment Accounting
In June 2018,February 2016, the Financial Accounting Standards Board ("FASB")(FASB) issued Accounting Standard Update ("ASU") No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting ("ASU No. 2018-07"). ASU No. 2018-07 expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods and services. ASU No. 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees (for example, service providers, external legal counsel, suppliers, etc.). The standard will be effective after December 15, 2018 for the Company, with early adoption permitted, but no earlier than the Company's adoption date of Topic 606. The Company early adopted the new standard effective April 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
ASU No. 2017-09, Compensation-Stock Compensation (Topic 718):Scope of Modification Accounting
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU No. 2017-09"). ASU No. 2017-09 clarifies(ASU) 2016-02, Leases, which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted the new standard effective January 1, 2018, which did not have a material impact on its condensed consolidated financial statements.
ASU 2016-18, Restricted Cash (Topic 230): Statement of Cash Flows
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (Topic 230): Statement of Cash Flows ("ASU No. 2016-18"). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances on the statement of cash flows upon adoption of this standard. The Company adopted the new standard effective January 1, 2018. Restricted cash primarily consists of collateralized cash for a standby letter of credit and guarantee arrangement with a bank.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU No. 2016-15"). ASU No. 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayments or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU No. 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The Company adopted the new standard effective January 1, 2018 and has determined the impact of ASU No. 2016-15 on its condensed consolidated financial statements will be related to the settlement of contingent liabilities arising from a business combination.
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU No. 2016-02"). ASU No. 2016-02 increases 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 will be effective January 1, 2019 forusing the Company, with early adoption permitted.modified retrospective approach. As of January 1, 2019 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 will be applied usingnot 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. The Company did not reassess existing contracts for lease classification or the classification of existing leases or associated costs. The Company will not reflect leases with an initial term of 12 months or less as a modified retrospective approachright of use asset or liability, but will recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. In addition, the Company will account for non-lease components of the arrangement separate from lease components (see Note 6).
SEC Simplification
In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which makes a number of changes meant to simplify interim disclosures. The new rule requires a presentation of changes in stockholders’ equity and noncontrolling interest in the form of a reconciliation, for the current and comparative year-to-date interim periods. The Company adopted the new disclosure requirements beginning in its March 31, 2019 Form 10-Q and included these disclosures in the condensed consolidated statements of changes in stockholders' equity. The additional elements of this release did not have a material impact on the Company's overall condensed consolidated financial statements.
Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides the option to reclassify certain income tax effects related to the beginningTax Cuts and Jobs Act passed in December of the earliest period presented in the financial statements. The Company's implementation efforts are primarily focused on the review of its existing lease contracts, identification of2017 between accumulated other contracts that may fall under the scope of the new guidancecomprehensive income and performing a gap analysis on the current state of lease-related activities compared with the future state of lease-related activities. retained earnings and also requires additional disclosures. The Company has identified the lease agreements that will be impacted byadopted the new standard effective January 1, 2019. There was no impact for the adoption of ASU 2018-02 on the Company's condensed consolidated financial statements.
New Accounting Pronouncements
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. 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 likely to result in the earlier recognition of allowances for losses. The guidance was further amended in January 2019 to clarify or address stakeholders’ specific issues about certain aspects of the amendments in the update and in May 2019 to provide an option to irrevocably elect the fair value option for certain financial assets previously measured on an amortized cost basis. The guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, but early adoption is permitted. The Company is currently evaluating the overalleffect that the pronouncement will have on its consolidated financial statements.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. ASU 2017-04 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 condensed consolidated financial statementsstatements.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and relatedper share amounts)
Fair Value Measurements
In August 2018 the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This new standard modifies certain disclosure requirements on fair value measurements. This new standard will be effective for the Company on January 1, 2020. The Company does not expect that the adoption of this new standard will have a material impact on the Company's disclosures.
Compensation - Retirement Benefits - Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General. ASU 2018-14 modifies the disclosure requirements for defined benefit pension plans and other postretirement 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.
There are no other recently issued accounting pronouncements that are expected to have a material impact on the Company's financial position, results of operations or cash flows.
2.Revenue recognition3. Acquisitions
Adapt
In May 2014,On October 15, 2018, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 (known as ASC 606) supersedesCompany acquired Adapt, a company focused on developing new treatment options and commercializing products addressing opioid overdose and addiction. Adapt's NARCAN® (naloxone HCl) Nasal Spray marketed product is the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance,first needle-free formulation of naloxone approved by the FDA and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchangeHealth Canada for the promised goodsemergency treatment of known or services, the provider should apply the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligationssuspected opioid overdose as manifested by respiratory and/or central nervous system depression. This acquisition includes approximately 50 employees, located in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract;U.S., Canada, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accountingIreland, including those responsible for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The Company adopted the requirements of the new standard as of January 1, 2018 using the modified retrospective method. The modified retrospective method requires companies to recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings.
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. For contracts with multiple performance obligations, the Company allocates the contract's transaction 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.
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 primarily includes consideration transferred under its development contracts with the U.S. government as consideration received can vary based on developmental progression of the product candidate(s). When a contract's transaction price includes variable consideration, the Company evaluates the estimate of 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 constraints or material changes to the Company's variable consideration estimates as of or during the six months ended June 30, 2018.
To indicate the transfer of control for the Company's product sales and contract 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.
The Company derives revenues primarily from the sale of its marketed medical countermeasures ("MCMs") products and contract revenues associated with development of its MCMs. The primary customer for the Company's MCM products and the development of the Company's MCM product candidate portfolio is the U.S. government. The Company's contracts for the sale of its MCM products generally have single performance obligation. Certain product sales contracts with the U.S. government include multiple performance obligations, which generally include the marketed product, stability testing associated with that product, expiry extensions and plasma collection. The Company's development contracts for its MCM product candidates generally are cost plus fixed fee arrangements, which the Company treats a single performance obligation with variable consideration. The U.S. government contracts for the salesupply chain management, research and development, of the Company's MCMgovernment affairs, and commercial operations. The products and product candidates within Adapt's portfolio are normally multi-year contracts.
In addition, the Company performs contract manufacturing services for third parties, which includes pharmaceutical product process development, manufacturing and filling services for injectable and other sterile products, inclusive of process design, technical transfer, manufacturing validations, laboratory analytical development support, aseptic filling, lyophilization, final packaging and accelerated and ongoing stability studies. These contracts generally include a single performance obligationconsistent with a duration that is less than one-year.
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 contracts with customers have unique contract terms, the Company reviewed all of its non-standard agreements in order to determine the effect of adoption.
The Company determined its Centers for Innovation in Advanced Developmentmission and Manufacturing ("CIADM") contract with the Biomedical Advanced Research and Development Authority ("BARDA") will have a material change in revenue recognition under the new guidance. Under ASC 606, the Company determined that there is one performance obligation to provide ongoing manufacturing capability to the U.S. government and will recognize the consideration received in the 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. 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. 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 analyzed 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.
The Company considers accounts receivables and deferred costs associated with revenue generating contracts, that are not included in inventory or property, plant and equipment, as contract assets. As of June 30, 2018 and December 31, 2017, the Company had $189.5 million and $143.7 million, respectively, in contract assets associated with accounts receivable which is included in accounts receivable on the company's condensed consolidated balance sheets. As of June 30, 2018 and December 31, 2017, the Company had contract assets associated with deferred costs of $3.4 million and $2.9 million, respectively, which is included in prepaid and other current assets onexpands the Company's
condensed consolidated balance sheets.
When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations are deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of the contract liabilities, which is included in the Company's current and long-term deferred revenue line items in the condensed consolidated balance sheets:
(in thousands) | | | |
Balance at December 31, 2017 | | $ | 30,491 | |
Adoption of new accounting standard (ASC 606) | | | 42,379 | |
Balance at January 1, 2018 | | | 72,870 | |
Deferral of revenue | | | 15,478 | |
Recognition of revenue included in beginning of year contract liability | | | (15,343 | ) |
Balance at June 30, 2018 | | $ | 73,005 | |
We operate in one business segment. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. For the three and six months ended June 30, 2018, there was a nominal difference between revenues recognized under ASC 606 and revenues recognized based on the prior revenue recognition guidance for the same period. For the three and six months ended June 30, 2018, the Company's revenues disaggregated by the major sources was as follows:
(in thousands) | | Three Months Ended June 30, 2018 | | | Six Months Ended June 30, 2018 | |
| | U.S | | | Non-U.S. | | | | | | U.S | | | Non-U.S. | | | | |
| | Government | | | Government | | | Total | | | Government | | | Government | | | Total | |
| | | | | | | | | | | | | | | | | | |
Product sales | | $ | 169,897 | | | $ | 10,178 | | | $ | 180,075 | | | $ | 235,922 | | | $ | 19,924 | | | $ | 255,846 | |
Contract manufacturing | | | - | | | | 23,613 | | | | 23,613 | | | | - | | | | 49,791 | | | | 49,791 | |
Contracts and grants | | | 15,250 | | | | 1,262 | | | | 16,512 | | | | 30,055 | | | | 2,322 | | | | 32,377 | |
Total revenues | | $ | 185,147 | | | $ | 35,053 | | | $ | 220,200 | | | $ | 265,977 | | | $ | 72,037 | | | $ | 338,014 | |
As of June 30, 2018, the Company had expected future revenues associated with performance obligations that have not been satisfied of approximately $630 million. The Company expects to recognize a majority of its revenues within the next 24 months with the remainder recognized thereafter. However, the amount and timing of recognition of revenue for unsatisfied performance obligations can materially change due to timing of funding appropriations from the U.S. government and the overall success of the Company's development activities associated with its MCM product candidates. 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 June 30, 2018).
3. Acquisitions
Acquisition of ACAM2000 business
On October 6, 2017, the Company completed the acquisition of the ACAM2000® (Smallpox (Vaccinia) Vaccine, Live)core business of Sanofi Pasteur Biologics, LLC ("Sanofi")addressing public health threats. This acquisition included 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 Centers for Disease Control and Prevention ("CDC"), which under the terms expired in March 2018. This contract had a stated value of 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 U.S. Strategic National Stockpile ("SNS") and the establishment of 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 included 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 2017. 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 preliminarilyAdapt have been recorded as of October 6, 2017,15, 2018, the acquisition date, at their respective fair values, and combined with those of the Company.
As the Company continues to finalize the fair value of assets acquired and liabilities assumed, purchase price adjustments have been recorded and additional purchase price adjustments may be recorded during the measurement period. The Company reflects measurement period adjustments in the period in which the adjustments occur. The adjustments for the six months ended June 30, 2019 resulted from the receipt of additional financial information associated with certain acquired contract assets and the value of associated contingent purchase consideration obligation. These adjustments did not impact the Company's statements of operations. As of June 30, 2019, certain fair value estimates relating to intangible assets acquired and income taxes could be subject to further adjustment.
The total purchase price, revised for current period adjustments is summarized below:
|
| | | | |
| | 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 |
|
Updated purchase consideration | | $ | 668.7 |
|
The Company issued 733,309 shares of common stock at $60.44 per share, the closing price of Emergent's common stock on October 15, 2018, with a total value of $44.3 million. The $44.3 million value of the common 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 contingent 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 had a regulatory milestone. At October 6, 2017,fair value of 48.0 million as of June 30, 2019 and for the payment of additional consideration based on the collectability of identified acquired contract assets. The fair value of the contingent purchase consideration obligation related to the regulatory milestone was recorded at a fair value of $2.2 million. The fair value of this obligation is based on a present value model of management'smanagement’s assessment of the probability of achievementpotential future realization of the regulatory milestone as of the acquisition date.contingent purchase consideration
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
payments. This assessment is based on inputs that have no observable market inputs (Level 3).
The total purchase priceobligation is summarized below:
(in thousands) | | | |
Amount of cash paid to Sanofi | | $ | 117,500 | |
Fair value of contingent purchase consideration | | | 2,200 | |
Total purchase price | | $ | 119,700 | |
measured using a discounted cash flow model.
The table below summarizes the preliminary allocation of the purchase price based upon estimated fair values of assets acquired and liabilities assumed at October 6, 2017. 15, 2018 updated for measurement period adjustments recorded through June 30, 2019.
|
| | | | | | | | | | | |
| October 15, 2018 | | Measurement Period Adjustments | | Updated October 15, 2018 |
Estimated 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 estimated 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 assets | 534.0 |
| | — |
| | 534.0 |
|
Goodwill | 149.0 |
| | (1.0 | ) | | 148.0 |
|
Total purchase price | $ | 667.2 |
| | $ | 1.5 |
| | $ | 668.7 |
|
The Company did not assume any liabilities indetermined the acquisition. Thisestimated fair value of the intangible asset using the income approach. The preliminary allocationestimated fair value of the intangible asset acquired for Adapt's marketed product NARCAN® Nasal Spray is 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 estimated the fair value of the NARCAN® Nasal Spray intangible asset using the income approach which is based upon the finalization of valuation reports and as management gathers additional information on the present value of future cash flows with a discount rate of 10.5%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Adapt. This is comparable to the estimated 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 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 acquired assets.company's products.
The intangible asset associated with the IPR&D acquired from Adapt is related to a product candidate. Management determined that the estimated acquisition-date fair value of intangible assets related to IPR&D was $41.0 million. The estimated fair value was determined using the income approach, which discounts expected future cash flows to present value. The Company estimated the fair value using a discount rate of 11.0%, which is based on the estimated weighted-average cost of capital for companies with 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 estimated 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, the stage of development of pipeline programs 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. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts (see Note 7).
(in thousands) | | | |
Fair value of tangible assets acquired: | | | |
Inventory | | $ | 74,876 | |
Property, plant and equipment | | | 19,995 | |
Total fair value of tangible assets acquired | | | 94,871 | |
| | | | |
Acquired intangible asset | | | 16,700 | |
Goodwill | | | 8,129 | |
Total purchase price | | $ | 119,700 | |
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
The Company determined the fair value of 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 has recorded $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. Substantially all of the goodwill generated from the Adapt acquisition is not expected to be deductible for tax purposes due to the legal structure of the transaction.
PaxVax
On October 4, 2018, the Company completed the acquisition of 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, and 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 salesforce 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 infrastructure and related capabilities.
The Company paid cash consideration of $273.1 million for PaxVax. As of the date of this filing, the accounting for the PaxVax acquisition is preliminary due to the Company's need to gather data to assess the fair value of property, plant and equipment, intangible assets and accounting for taxes. The table below summarizes the preliminary allocation of the purchase price based upon estimated fair values of assets acquired and liabilities assumed at October 4, 2018 updated for measurement period adjustments recorded through June 30, 2019.
|
| | | | | | | | | | | |
| October 4, 2018 | | Measurement Period Adjustments | | Updated October 4, 2018 |
Estimated 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 |
| | — |
| | 12.2 |
|
Property, plant and equipment | 57.8 |
| | — |
| | 57.8 |
|
Deferred tax assets | 3.8 |
| | — |
| | 3.8 |
|
Accounts payable | (3.5 | ) | | — |
| | (3.5 | ) |
Accrued expenses and other liabilities | (33.6 | ) | | (0.4 | ) | | (34.0 | ) |
Total estimated fair value of tangible assets acquired and liabilities assumed | 69.5 |
| | (0.4 | ) | | 69.1 |
|
| | | | | |
Acquired in-process research and development | 9.0 |
| | (9.0 | ) | | — |
|
Acquired intangible assets | 133.0 |
| | — |
| | 133.0 |
|
Goodwill | 61.6 |
| | 9.4 |
| | 71.0 |
|
Total purchase price | $ | 273.1 |
| | $ | — |
| | $ | 273.1 |
|
The preliminary estimated fair value of the intangible assetassets acquired for PaxVax's marketed products is a total of $133.0 million. The Company determined the estimated 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'sacquired products. The Company has determined that the weighted average useful lives of the intangible assets to be 19 years. The Company estimated the fair value of the ACAM2000Vivotif and Vaxchora intangible asset assets
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
using the income approach with a present value discount rate of 15.5%; this discount rate14.5% and 15.0%, respectively, which is derived frombased on the estimated weighted-average cost of capital for companies with profiles substantially similar companies and assets.to that of PaxVax. This is comparable to the estimated 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 ACAM2000these intangible assetassets 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 intangible asset associated with the IPR&D the measurement of the amounts recognized as of that date. The Company has determinedestimates the ACAM2000 intangible asset will be amortized over 10 years.
fair value based on the income approach.
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 and complete/dispose of the inventory with a profit on those costs.
The Company determined the fair value of the property, plant and equipment utilizing eitherboth the cost approach orand the sales comparison approach. The cost approach is deriveddetermined by determiningestablishing 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 is derived by the determination thatvalues an asset is equal tobased on the market price of an asset ofassets with 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$71.0 million in goodwill related to the ACAM2000PaxVax acquisition, representingcalculated as the purchase price paid in the acquisition that was in excess of the fair value of the tangible and intangible assets acquired. Thereacquired representing the future economic benefits the Company expects to receive as a result of the acquisition. The goodwill created from the PaxVax acquisition is noassociated with early stage pipeline products along with potential contract manufacturing services. The majority of the goodwill generated from the PaxVax acquisition is expected to be deductible for tax purposes.purposes based upon the structure used in the acquisition.
Impact of Business Acquisitions
The operations of each of the two business acquisitions discussed above were included in the consolidated financial statements as of each of their respective acquisition dates. The following table presents their revenue and earnings as reported within the consolidated financial statements.
|
| | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2019 |
Revenue | $ | 88.2 |
| | $ | 163.1 |
|
Operating income | 8.2 |
| | 4.4 |
|
4.Fair Inventories
The components of inventory are as follows:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Raw materials and supplies | | $ | 66.3 |
| | $ | 51.8 |
|
Work-in-process | | 119.1 |
| | 103.2 |
|
Finished goods | | 46.6 |
| | 50.8 |
|
Total inventories | | $ | 232.0 |
| | $ | 205.8 |
|
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Land and improvements | | $ | 46.7 |
| | $ | 44.6 |
|
Buildings, building improvements and leasehold improvements | | 228.0 |
| | 216.2 |
|
Furniture and equipment | | 318.8 |
| | 293.9 |
|
Software | | 56.3 |
| | 55.2 |
|
Construction-in-progress | | 59.9 |
| | 71.8 |
|
Property, plant and equipment, gross | | 709.7 |
| | 681.7 |
|
Accumulated depreciation and amortization | | (189.2 | ) | | (171.5 | ) |
Total property, plant and equipment, net | | $ | 520.5 |
| | $ | 510.2 |
|
6. Leases
The Company has operating leases for corporate offices, research and development facilities 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 measurementsof 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 exercise those options.
Contingent consideration consists of liabilities measured at fair valueLease expense for lease payments is recognized on a recurring basis. Forstraight-line basis over the threelease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's leases have remaining lease terms of 1 year to 15 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 1 year.
The components of lease expense were as follows:
|
| | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2019 |
Operating lease cost: | | | | |
Amortization of right-of-use assets | | $ | 0.7 |
| | $ | 1.3 |
|
Interest on lease liabilities | | 0.2 |
| | 0.3 |
|
Total operating lease cost | | $ | 0.9 |
| | $ | 1.6 |
|
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Supplemental balance sheet information related to leases was as follows:
|
| | | | | |
(In millions, except lease term and discount rate) | Balance Sheet Location | | June 30, 2019 |
Operating lease right-of-use assets | Other assets | | $ | 15.7 |
|
| | | |
Operating lease liabilities, current portion | Other current liabilities | | 1.9 |
|
Operating lease liabilities | Other liabilities | | 14.6 |
|
Total operating lease liabilities | | | $ | 16.5 |
|
| | | |
Operating leases: | | |
|
|
Weighted Average Remaining Lease Term (years) | | | 10.3 |
|
Weighted Average Discount Rate | | | 4.62 | % |
7. Intangible Assets
The Company's intangible assets consist of products acquired via business combinations or asset acquisitions. The following table summarizes the carrying amount of the Company's intangible assets and goodwill, net of accumulated amortization:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 |
| Estimated Life (years) | Cost | | Measurement Period Adjustment | | Additions | | Gross Total | | Accumulated Amortization | | Net |
Intangible assets, net | 5-22 | $ | 818.4 |
| | $ | — |
| | $ | 10.0 |
| | $ | 828.4 |
| | $ | (86.0 | ) | | $ | 742.4 |
|
IPR&D | indefinite | 50.0 |
| | (9.0 | ) | | — |
| | 41.0 |
| | — |
| | 41.0 |
|
Goodwill | indefinite | 259.7 |
| | 8.6 |
| | — |
| | 268.3 |
| | — |
| | 268.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Estimated Life (years) | Cost | | Measurement Period Adjustment | | Additions | | Gross Total | | Accumulated Amortization | | Net |
Intangible assets, net | 5-22 | $ | 151.4 |
| | $ | — |
| | $ | 667.0 |
| | $ | 818.4 |
| | $ | (56.8 | ) | | $ | 761.6 |
|
IPR&D | indefinite | 50.0 |
| | — |
| | — |
| | 50.0 |
| | — |
| | 50.0 |
|
Goodwill | indefinite | 49.1 |
| | — |
| | 210.6 |
| | 259.7 |
| | — |
| | 259.7 |
|
During the six months ended June 30, 2019 and 2018, the contingent purchase consideration obligations associated with RSDL increased by $0.7Company recorded amortization expense for intangible assets of $29.2 million and $1.6$7.8 million, respectively. During the three and six months ended June 30, 2017,2019 and 2018, the contingent purchaseCompany recorded amortization expense for intangible assets of $14.7 million and 3.9 million, respectively. As of June 30, 2019, the weighted average amortization period remaining for intangible assets was 14.0 years. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts.
8. Contingent Consideration
Contingent consideration obligationsliabilities associated with RSDL increased by $0.2 millionbusiness combinations are fair value measurement items. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders and $0.5 million, respectively.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 with the exception of the milestone achievement. The changes in the fair value of the RSDL contingent consideration obligations are primarily due to the expected amount and timing of future net sales, which are inputs that have no observable market (Level 3).
The Company also has contingent consideration associated with its asset acquisitions. These changesliabilities are classifiednot recorded as level 3 fair value measurements, but rather are accrued when the milestone has been achieved and is payable.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in the Company's statement of operations as cost of product salesmillions, except share and contract manufacturing.per share amounts)
The following table is a reconciliation of the beginning and ending balance of the liabilities, consisting only of contingent consideration, measured at fair value, usingconsiderations and is based on level 3 significant unobservable inputs, (Level 3) duringother than the six months ended June 30, 2018.raxibacumb milestone accrual, which is based on achievement of contractual milestones.
|
| | | |
| |
Balance at December 31, 2018 | $ | 60.0 |
|
Milestone achievement - asset acquisition | 10.0 |
|
Measurement period adjustment | 1.5 |
|
Change in fair value | 5.5 |
|
Settlements | (12.0 | ) |
Balance at June 30, 2019 | $ | 65.0 |
|
(in thousands) | | | |
Balance at December 31, 2017 | | $ | 12,274 | |
Expense included in earnings | | | 1,674 | |
Settlements | | | (1,257 | ) |
Balance at June 30, 2018 | | $ | 12,691 | |
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 June 30, 2018 and 2017 and for the quarters then ended, the Company had no significant assets or liabilities that were measured at fair value on a non-recurring basis.
5.Inventories
Inventories consisted of the following:
| | June 30, | | | December 31, | |
(in thousands) | | 2018 | | | 2017 | |
Raw materials and supplies | | $ | 34,426 | | | $ | 36,069 | |
Work-in-process | | | 79,546 | | | | 76,610 | |
Finished goods | | | 25,401 | | | | 30,133 | |
Total inventories | | $ | 139,373 | | | $ | 142,812 | |
6. Property, plant and equipment
Property, plant and equipment consisted of the following:
| | June 30, | | | December 31, | |
(in thousands) | | 2018 | | | 2017 | |
Land and improvements | | $ | 21,848 | | | $ | 21,843 | |
Buildings, building improvements and leasehold improvements | | | 159,264 | | | | 160,005 | |
Furniture and equipment | | | 213,445 | | | | 206,819 | |
Software | | | 52,343 | | | | 50,829 | |
Construction-in-progress | | | 124,832 | | | | 100,088 | |
Property, plant and equipment, gross | | | 571,732 | | | | 539,584 | |
Less: Accumulated depreciation and amortization | | | (152,575 | ) | | | (132,374 | ) |
Total property, plant and equipment, net | | $ | 419,157 | | | $ | 407,210 | |
In the table presented above, as of June 30, 2018 and December 31, 2017, construction-in-progress primarily includes costs related to construction of the Company's CIADM facility.
7.Intangible assets
During the three months ended June 30, 2018 and 2017, the Company recorded amortization expense for intangible assets of $3.9 million and $1.6 million, respectively. During the six months ended June 30, 2018 and 2017, the Company recorded amortization expense for intangible assets of $7.8 million and $3.1 million, respectively. Amortization expense has been recorded in operating expenses, specifically selling, general and administrative and cost of product sales and contract manufacturing. As of June 30, 2018, the weighted average amortization period remaining for intangible assets was 8.3 years.
8. Equity
During the six months ended June 30, 2019, a contingent milestone was achieved related to the Company's acquisition of raxibacumab in October 2017. The acquisition of raxibacumab was accounted for as an asset acquisition and therefore the achievement of the $10.0 million milestone resulted in an increase to the contingent consideration liability with a corresponding increase in intangible assets.
9. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk 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 senior secured credit agreement's payments of variable interest rate debt.
Accounting Policy for Derivative Instruments and Hedging Activities
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 and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income 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. If current fair values of designated interest rate swaps remained static over the next twelve months, the Company would reclassify $0.4 million of net deferred gains from accumulated other comprehensive loss into income over the next twelve months. All outstanding cash flow hedges mature in October 2023.
As of June 30, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
|
| | | | | |
| Number of Instruments | | Notional |
Interest Rate Swaps | 7 | | $ | 350.0 |
|
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
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.
|
| | | | | | | | | | | | | | | |
Asset Derivatives | Liability Derivatives |
| June 30, 2019 | December 31, 2018 | June 30, 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 | $ | 0.4 |
| Other Assets | — |
| Other Liabilities | $ | 1.6 |
| | Other Liabilities | — |
|
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 incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our 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 our derivative contracts for the effect of nonperformance risk, we have 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.
The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income.
|
| | | | | | | | | | | | | |
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 |
| June 30, 2019 | June 30, 2018 | | | June 30, 2019 | June 30, 2018 |
Interest Rate Swaps | $ | 1.2 |
| — |
| Interest expense | | $ | — |
| $ | — |
|
10. Debt
The components of debt are as follows:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Senior secured credit agreement - Term loan due 2023 | | $ | 441.6 |
| | $ | 447.2 |
|
Senior secured credit agreement - Revolver loan due 2023 | | 398.0 |
| | 348.0 |
|
2.875% Convertible Senior Notes due 2021 | | 10.6 |
| | 10.6 |
|
Other | | 3.0 |
| | 3.0 |
|
Total debt | | 853.2 |
| | 808.8 |
|
Current portion of long-term debt, net of debt issuance costs | | (10.1 | ) | | (10.1 | ) |
Unamortized debt issuance costs | | (12.7 | ) | | (14.2 | ) |
Non-current portion of debt | | $ | 830.4 |
| | $ | 784.5 |
|
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Senior Secured Credit Agreement
On September 29, 2017, the Company entered into a senior secured credit agreement (the “2017 Credit Agreement”) with four lending financial institutions. On October 15, 2018, the Company entered into an Amended and Restated Credit Agreement (the "Amended Credit Agreement") with multiple lending institutions, which modified the 2017 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"). The Company may request incremental term loan facilities or increases in the Revolving Credit Facility (each an "Incremental Loan") if requirements relating to net leverage ratio will be maintained on a pro forma basis.
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 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 ending September 30, 2019, 3.75 to 1.00 for the quarterly filing periods from October 1, 2019 through September 29, 2020 and 3.50 to 1.0 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 all affirmative and negative covenants.
2.875% Convertible Senior Notes due 2021
On January 29, 2014, the Company issued 2.875% convertible senior notes due 2021 (the "Notes"). The Notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears on January 15 and July 15 of each year. The Notes mature on January 15, 2021.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
11. Revenue recognition
The Company operates as one operating segment. Therefore, results of its operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. The Company's revenues disaggregated by the major sources were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| | U.S. Government | | Non-U.S. Government | | Total | | U.S. Government | | Non-U.S. Government | | Total |
Product sales | | $ | 94.6 |
| | $ | 88.9 |
| | $ | 183.5 |
| | $ | 169.9 |
| | $ | 10.2 |
| | $ | 180.1 |
|
Contract manufacturing | | — |
| | 18.7 |
| | 18.7 |
| | — |
| | 23.6 |
| | 23.6 |
|
Contracts and grants | | 38.3 |
| | 2.7 |
| | 41.0 |
| | 15.3 |
| | 1.2 |
| | 16.5 |
|
Total revenues | | $ | 132.9 |
| | $ | 110.3 |
| | $ | 243.2 |
| | $ | 185.2 |
| | $ | 35.0 |
| | $ | 220.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| | U.S. Government | | Non-U.S. Government | | Total | | U.S. Government | | Non-U.S. Government | | Total |
Product sales | | $ | 167.9 |
| | $ | 168.6 |
| | $ | 336.5 |
| | $ | 235.9 |
| | $ | 19.9 |
| | $ | 255.8 |
|
Contract manufacturing | | — |
| | 34.6 |
| | 34.6 |
| | — |
| | 49.8 |
| | 49.8 |
|
Contracts and grants | | 58.7 |
| | 4.1 |
| | 62.8 |
| | 30.1 |
| | 2.3 |
| | 32.4 |
|
Total revenues | | $ | 226.6 |
| | $ | 207.3 |
| | $ | 433.9 |
| | $ | 266.0 |
| | $ | 72.0 |
| | $ | 338.0 |
|
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 is reflected as deferred revenue on the consolidated balance sheets and is deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of deferred revenue contract liability balances:
|
| | | | |
| | |
December 31, 2018 | | $ | 73.1 |
|
Deferral of revenue | | 23.8 |
|
Revenue recognized | | (7.4 | ) |
June 30, 2019 | | $ | 89.5 |
|
Transaction price allocated to remaining performance obligations
As of June 30, 2019, the Company had expected future revenues associated with performance obligations that have not been satisfied of approximately $533.2 million. 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.
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 equipment, as contract assets. As of June 30, 2019 and December 31, 2018, the Company had contract assets associated with deferred costs of $26.5 million and $1.2 million, respectively, which is reflected as a component of prepaid expenses and other current assets on the Company's consolidated balance sheets.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Accounts receivable
Accounts receivable including unbilled accounts receivable contract assets consist of the following:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Billed, net | | $ | 179.5 |
|
| $ | 234.0 |
|
Unbilled | | 38.6 |
|
| 28.5 |
|
Total, net | | $ | 218.1 |
|
| $ | 262.5 |
|
As of June 30, 2019 and December 31, 2018, allowances for doubtful accounts were de minimis.
12. Income taxes
The estimated effective annual tax rate for the Company, which excludes discrete adjustments, was 27% and 25% for the six months ended June 30, 2019 and 2018, respectively. The increase in the estimated effective annual tax rate is primarily due to the impact of foreign and state taxes. For each of the six month periods ended June 30, 2019 and 2018, the Company recorded a discrete tax benefit of $3.2 million, primarily due to activity associated with equity awards. For the three months ended June 30, 2019and 2018, the Company recorded a discrete tax benefit of $1.4 million and $0.9 million, respectively, also primarily due to activity associated with equity awards.
13. (Loss) earnings per share
The following table presents the calculation of basic and diluted net (loss) income per share:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | |
| | | | | | |
Net (loss) earnings | | $ | (9.5 | ) | | $ | 50.1 |
| | $ | (35.6 | ) | | $ | 45.2 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted-average number of shares—basic | | 51.5 |
| | 49.9 |
| | 51.3 |
| | 49.7 |
|
Dilutive securities—equity awards | | — |
| | 1.3 |
| | — |
| | 1.3 |
|
Weighted-average number of shares—diluted | | 51.5 |
| | 51.2 |
| | 51.3 |
| | 51.0 |
|
| | | | | | | | |
Net (loss) earnings per share - basic | | $ | (0.18 | ) | | $ | 1.00 |
| | $ | (0.69 | ) | | $ | 0.91 |
|
Net (loss) earnings per share - diluted | | $ | (0.18 | ) | | $ | 0.98 |
| | $ | (0.69 | ) | | $ | 0.89 |
|
For the three and six months ended June 30, 2019 and 2018, basic earnings per share is computed by dividing net gain/(loss) by the weighted average number of shares of common stock outstanding during the period.
For the three and six months ended June 30, 2019 and 2018, diluted earnings per share is computed using the treasury method by dividing net loss 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 as the effect would have been anti-dilutive for the three and six months ended June 30, 2019 due to the Company's net loss. The share-based awards that were excluded from the calculation of diluted loss per share, because they were anti-dilutive, were 3.0 million for the three and six months ended June 30, 2019.
14. Share-based compensation
During the six months ended June 30, 2019, the Company granted 0.4stock options to purchase 0.3 million shares of common stock options and 0.40.5 million shares of restricted stock units under the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan (the "Plan").Plan. The grants vest over three equal annual installments beginning on the day prior to the anniversary of the grant date.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
15. Defined benefit plan
The Company sponsors a defined benefit pension plan covering eligible employees in Switzerland (the Swiss Plan). 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 Plan assets are comprised of an insurance contract that has a fair value consistent with its contract value based on the practicability exception using level 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 measurement date used for the Swiss Plan is December 31, annually. The expense components of the Swiss Plan consisted of the following:
|
| | | | | | | | |
| | Three Months Ended June 30, 2019 | | Six months ended June 30, 2019 |
Net service cost | | $ | 0.3 |
| | $ | 0.6 |
|
Expected return on plan assets, net of expenses | | (0.1 | ) | | (0.1 | ) |
Total pension expense | | $ | 0.2 |
| | $ | 0.5 |
|
16. Commitments and Contingencies
ANDA Litigation - Perrigo 4mg
On May 24,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 Company's stockholders approved an increaseFDA, 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, Plaintiffs), filed a complaint for patent infringement of the ‘253, ‘747, ‘177, ‘965, and the ‘838 Patents against Perrigo in the number of shares issuable under the Plan by 3.0 million shares, to a total of 21.9 million shares, and extended the plan term to May 23, 2028.
9. Income taxes
The estimated effective annual tax rateUnited States District Court for the Company, which excludes discrete adjustments, was 25% and 31%District of New Jersey arising from Perrigo’s ANDA filing with the FDA. Plaintiffs filed a second complaint against Perrigo on December 7, 2018, for the six months ended June 30,infringement of the ‘937 Patent. As a result of timely filing the first lawsuit in accordance with the Hatch-Waxman Act, a 30-month stay of approval will be imposed by the FDA on Perrigo’s ANDA, which is expected to remain in effect until March 2021 absent an earlier judgment, unfavorable to the Plaintiffs, by the Court.
ANDA Litigation - Teva 2mg
On or about February 27, 2018, Adapt Pharma Inc. and 2017, respectively. The decreaseAdapt 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), 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 Opiant filed a complaint for patent infringement against Teva in the estimated effective annual tax rate is primarily dueUnited States District Court for the District of New Jersey.
ANDA Litigation - Teva 4mg
On or about September 13, 2016, Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received notice from Teva that Teva had filed an ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 4 mg/spray before the expiration of the '253 Patent. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received additional notices from Teva relating to the impact'747, the '177, the '965, the '838, and the ‘937 Patents. Teva's notice letters assert that the commercial manufacture, use or sale of
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
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 Jersey with respect to the '253 Patent. Adapt Pharma Inc. 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 Tax Reform Act enacted on December 22, 2017 which reduced the U.S. federal corporate income tax rate from 35% to 21%date of this filing, Adapt Pharma Inc., offset by state taxes, non-deductible expenses, international provisions from the U.S. tax reformAdapt Pharma Operations Limited, and the impact ofOpiant, have not filed a change in the Company's jurisdictional mix of earnings. For the six months ended June 30, 2018 and 2017, the Company recorded a discrete tax benefit primarily associated with equity awards activity of $3.2 million and $1.1 million, respectively.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. For the six months ended June 30, 2018, the Company did not change the provisional estimates recognized in 2017. Additional work is necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. Any adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
10. Purchase commitments
During the first quarter of 2018, the Company entered into a three year contract with Norwood Laboratories Inc. ("Norwood") to purchase approximately $12.0 million of raw materialscomplaint related to the Company's RSDL product. As‘937 Patent.
In the complaints described in the paragraphs above, the Plaintiffs seek, among other relief, orders that the effective date of June 30, 2018,FDA approvals of the Company hadTeva ANDA products and the Perrigo ANDA product be a date not purchased any materials under this commitment.
11. Earnings per share
The following table presentsearlier than the calculationexpiration of basicthe patents listed for each product, equitable relief enjoining Teva and diluted net income per share:
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(in thousands, except share and per share data) | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Numerator: | | | | | | | | | | | | |
Net income | | $ | 50,144 | | | $ | 4,616 | | | $ | 45,236 | | | $ | 15,101 | |
Interest expense on convertible debt, net of tax | | | - | | | | 835 | | | | - | | | | 1,742 | |
Amortization of convertible debt issuance costs, net of tax | | | - | | | | 195 | | | | - | | | | 391 | |
Net income, adjusted | | $ | 50,144 | | | $ | 5,646 | | | $ | 45,236 | | | $ | 17,234 | |
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted-average number of shares—basic | | | 49,896,124 | | | | 41,013,764 | | | | 49,738,980 | | | | 40,871,540 | |
Dilutive securities—equity awards | | | 1,266,785 | | | | 968,354 | | | | 1,300,215 | | | | 931,263 | |
Dilutive securities—convertible debt | | | - | | | | 8,096,476 | | | | - | | | | 8,096,488 | |
Weighted-average number of shares—diluted | | | 51,162,909 | | | | 50,078,594 | | | | 51,039,195 | | | | 49,899,291 | |
| | | | | | | | | | | | | | | | |
Net income per share - basic | | $ | 1.00 | | | $ | 0.11 | | | $ | 0.91 | | | $ | 0.37 | |
Net income per share - diluted | | $ | 0.98 | | | $ | 0.11 | | | $ | 0.89 | | | $ | 0.35 | |
ForPerrigo from making, using, offering to sell, selling, or importing the threeproducts that are the subject of Teva and six months ended June 30, 2018Perrigo’s respective ANDAs, until after the expiration of the patents listed for each product, and 2017, basic earnings per share is computed by dividing net incomemonetary relief or other relief as deemed just and proper by the weighted average number of shares of common stock outstanding during the period.court.
Shareholder Class Action Lawsuit filed July 19, 2016
For the three and six months ended June 30, 2018, diluted earnings per share was computed using the "treasury method" by dividing the net income by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares is adjusted for the potential dilutive effect of the exercise of stock options, and the vesting of restricted stock units and performance stock units.
For the three and six months ended June 30, 2017, diluted earnings per share is computed using the "if-converted" method by dividing the net income adjusted for interest expense and amortization of debt issuance cost, both net of tax, associated with the 2.875% Convertible Senior Notes due 2021 (the "Notes") by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares is adjusted for the potential dilutive effect of the exercise of stock options; and the vesting of restricted stock units and performance stock units along with the assumption of the conversion of the Notes, at the beginning of the period.
For the three and six months ended June 30, 2018, there were no stock options excluded from the calculation of diluted earnings per share. For the three and six months ended June 30, 2017, approximately 0.4 million stock options were excluded from the calculation of diluted earnings per share due to the fact that the exercise prices were in excess of the average per share closing price during the period.
12. Litigation
On July 19, 2016, Plaintiff William Sponn ("Sponn")(Sponn), filed a putative class action complaint in the United States District Court for the District of Maryland on behalf of purchasers of the Company'sCompany’s common stock between January 11, 2016 and June 21, 2016, inclusive (the "Class Period")Class Period), seeking to pursue remedies under the Securities Exchange Act of 1934 against the Company and certain of its senior officers and directors collectively,(collectively, the Defendants.Defendants). The complaint alleges,alleged, among other things, that the CompanyDefendants made materially false and misleading statements about the government'sgovernment’s demand for BioThrax and expectations that the Company'sCompany’s five-year exclusive procurement contract with HHSthe U.S. Department of Health and Human Services (HHS) would be renewed, and omitted certain material facts. Sponn is seekingsought unspecified damages, including legal costs. On October 25, 2016, the Courtcourt added City of Cape Coral Municipal Firefighters'Firefighters’ Retirement Plan and City of Sunrise Police Officers'Officers’ Retirement Plan as plaintiffs and appointed them Lead Plaintiffs and RobinsRobbins Geller Rudman & Dowd LLP as Lead Counsel. On December 27, 2016, the Plaintiffsplaintiffs filed an amended complaint that citescited the same class period, namesnamed the same defendants and makesmade similar allegations to the original complaint. The CompanyDefendants filed a Motion to Dismiss on February 27, 2017. The Plaintiffsplaintiffs filed an opposition brief on April 28, 2017. The Company'sDefendants’ Motion to Dismiss was heard and denied on July 6, 2017. The CompanyDefendants filed itsan answer on July 28, 2017. The parties are currentlythen engaged in the process of exchanging discovery.discovery process. The Plaintiffsplaintiffs filed an amended motion for class certification and appointment of Lead Plaintiffs, Sponn, and Geoffrey L. Flagstad (Flagstad) as lead plaintiffsClass Representatives on December 20, 2017. A hearing on that motion was heard on May 2, 2018. On June 8, 2018 the Court granted class certification with a shortened class period, from May 5, 2016 to June 21, 2016. In that same order, the court appointed Flagstad as Class Representative and Robbins Geller Rudman & Dowd LLP as Class Counsel. The Defendants have denied, and continue to deny, any and all allegations of fault, liability, wrongdoing, or damages. However, recognizing the risk, time, and expense of litigating any case to trial, on August 27, 2018, the Defendants reached an agreement in principle with plaintiffs to settle all of the related claims of any individual plaintiff that purchased or acquired Company stock from January 11, 2016 to June 21, 2016, for $6.5 million, an amount that was paid by the Company’s insurance carrier. The settlement required no payment by any of the Defendants. The Defendants continue to deny any and all liability. The parties executed the settlement agreement on October 16, 2018 and filed the agreement with the court on October 17, 2018. The court granted preliminary approval of the settlement on October 18, 2018. At the time of the approval of the settlement on January 22, 2019, there were no objections to the settlement, but there were two shareholders who had submitted opt-outs so that they could be excluded from the settlement. On January 25, 2019, the court issued an order and final judgment approving the settlement. The time to file a notice of appeal has passed.Defendants continue to believe that the allegations in the complaint are without meritmerit.
17. Supplemental Information
The following table provides a reconciliation of cash, cash equivalents and intend to defend themselves vigorously against those claims.As of the date of this filing, the range of potential loss cannot be determined or estimated.restricted cash:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | | $ | 177.4 |
| | $ | 112.2 |
|
Restricted cash | | 0.2 |
| | 0.2 |
|
Total cash, cash equivalents and restricted cash | | $ | 177.6 |
| | $ | 112.4 |
|
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read theThe following discussion and analysis of our financial condition and results of operations togethershould be read in conjunction with our unaudited condensed consolidated financial statements and the relatedaccompanying notes and other financial information included elsewhere in this quarterly report on Form 10-Q.10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, includingincludes information with respect to our plans and strategy for our business and financing, includesas well as forward-looking statements that involve risks and uncertainties. You should carefully review the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this quarterly report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a global life sciences company focused on providing specialty products forto civilian and military populations a portfolio of innovative preparedness and response products and solutions that address accidental, intentionaldeliberate and naturally occurring public health threats, or PHTs. Within the category of our specialty products, wePHTs.
We are focused on developing, manufacturingthe following four distinct PHT categories: CBRNE; EID; travelers’ diseases; and commercializing medical countermeasures, or MCMs, that address PHTs. The PHTs that we address fall into two categories: Chemical, Biological, Radiological, Nuclear and Explosives, or CBRNE; and emerging infectious diseases, or EID.opioids. We have a product portfolio of eighteleven products through which we(vaccines, antibody therapeutics, and drug-device combination products) that generate our product sales revenue, which accounts for a majority of our total revenue,revenue. We also have a fully-integrated portfolio of contract manufacturing services, and a research and development pipeline of various investigational stage product candidates. The U.S. government is the primary purchaser of our products and provides us with substantial funding for the development of many of our product candidates. Our development pipeline consistsconsisting of a diversified mix of both pre-clinical-pre-clinical and clinical-stage candidates.clinical stage product candidates (vaccines, antibody therapeutics, and drug-device combination products). Finally, we have a fully-integrated portfolio of contract development and manufacturing services. We continue to pursue acquiring and developing products and solutions that provide an opportunity to serve both government and commercial (non-government) customers.
Our MCM products are:product portfolio includes:
Vaccines and Anti-Infectives
| § | BioThrax®BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the U.S. Food and Drug Administration, or FDA for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;
|
| § | ACAM2000® (Smallpox (Vaccinia) Vaccine, Live), the only smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection (acquired from Sanofi Pasteur Biologics, LLC in October 2017);
|
| § | RaxibacumabACAM2000® (Smallpox (Vaccinia) Vaccine, Live), the only smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection; Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral vaccine licensed by the FDA for the prevention of typhoid fever; and Vaxchora® (Cholera Vaccine, Live, Oral), the only FDA-licensed vaccine for the prevention of cholera. Devices NARCAN® (naloxone HCl) Nasal Spray, 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; RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device cleared by the FDA to remove or neutralize the following chemical warfare agents from the skin: tabun, sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and T-2 toxin; and Trobigard® (atropine sulfate, obidoxime chloride), an auto-injector device designed for intramuscular self-injection of atropine sulfate and obidoxime chloride, as a nerve agent countermeasure. This product is not currently approved or cleared by the FDA or any similar regulatory body, and is only distributed to authorized government buyers for use outside the United States. This product is not distributed in the United States. Antibody Therapeutics raxibacumab (Anthrax Monoclonal), the first fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax (acquired from GlaxoSmithKline LLC in October 2017); |
| § | Anthrasil® [Anthrax Immune Globulin Intravenous (Human)], the only polyclonal antibody therapeutic licensed by the FDA and Health Canada for the treatment of inhalational anthrax;
|
| § | BAT® [Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)], the only heptavalent antibody therapeutic licensed by the FDA and Health Canada for the treatment of botulism; |
| § | VIGIV [Vaccinia Immune Globulin Intravenous (Human)], the only antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination; |
| § | RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device cleared by the FDA to remove or neutralize the following chemical warfare agents from the skin: tabun, sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and T-2 toxin; and
|
| § | Trobigard™ (atropine sulfate, obidoxime chloride), an auto-injector device designed for intramuscular self-injection of atropine sulfate and obidoxime chloride, as a nerve agent countermeasure. This product is not currently approved or cleared by the FDA or any similar regulatory body, and is only distributed to authorized government buyers for use outside the United States. This product is not distributed in the United States.
|
Our lead investigational stage MCM product candidates, many of which are under an active development contract with significant funding from the U.S. government, are:
| § | NuThrax™ (anthrax vaccine adsorbed with CPG 7909 adjuvant), a next generation anthrax vaccine; |
| § | FLU-IGIV (NP025), a human polyclonal antibody therapeutic being developed for the treatment of serious influenza A infection in hospitalized patients; |
| § | ZIKV-IG (NP024), a human polyclonal antibody therapeutic being developed as a prophylaxis for Zika infections in at risk populations; |
| § | FILOV (NP026), an equine polyclonal antibody therapeutic being developed to treat hemorrhagic fever caused by Filoviruses (Ebola, Marburg and Sudan); |
| § | VLA1601, a highly purified inactivated vaccine against the Zika virus; |
| § | UNI-FLU, a universal influenza vaccine; |
| § | EBX-205, an oral therapeutic to treat acute bacterial skin and skin structure infection, including those caused by methicillin-resistant Staphylococcus aureus, or MRSA, as well as to treat other serious bacterial infections caused by biothreat pathogens;
|
| § | EBI-001, a pan respiratory antiviral from our iminosugar-based discovery program; |
| § | GC-072, an oral and intravenous treatment for Burkholderia pseudomallei infection (GC-072 is the lead compound in the EV-035 series of broad-spectrum antibiotics);
|
| § | D4, a multi-drug delivery device being developed for nerve agent antidote delivery (atropine and pralidoxime chloride in combination); and |
| § | SIAN (stabilized isoamyl nitrite), a stabilized form of isoamyl nitrite in an intra-nasal spray device being developed as a treatment for known or suspected acute cyanide poisoning. |
Highlightsand Business Accomplishments for 2018
In June 2018, we announced a planned $50 million expansion to our Camden fill/finish facility located in Baltimore, Maryland. The multi-year expansion is expected to be completed in 2021 and will increase our contract development and manufacturing capability and capacity.
In May 2018, the Coalition for Epidemic Preparedness Innovations, or CEPI, announced a collaboration with us and Profectus BioSciences, Inc., or Profectus, under which the parties will receive up to $25 million to advance the development and manufacture of a vaccine against the Nipah virus, or NiV, a bat-borne virus that can spread to both humans and livestock. We, through a separate agreement with Profectus, have an exclusive option to license and assume control of development activities for the NiV vaccine from Profectus. NiV and Hendra virus, or HeV, are closely related Paramyxoviruses that cause respiratory and encephalitis disease in a variety of animal hosts and in humans. There is currently no approved vaccine or therapeutic against either NiV or HeV.
In April 2018, we announced the successful completion of the Mutual Recognition Procedure, or MRP, for market authorization of BioThrax® in five Concerned Member States, or CMS, within the European Union, or EU, consisting of Italy, the Netherlands, Poland, the U.K., and France (where it will be marketed as BaciThrax™). We filed the mutual recognition application based on the existing Marketing Authorization of BioThrax in Germany granted by the Paul-Ehrlich-Institut. Following the positive MRP outcome, national licenses were issued by four out of the five CMS countries.
In February 2018, we announced a contract award by the Centers for Disease Control and Prevention, or CDC, valued at $26 million over 12 months, for the continued supply of VIGIV into the U.S. Strategic National Stockpile, or SNS. VIGIV is the only therapeutic licensed by the FDA for the treatment and prophylaxis of complications due to smallpox vaccination. Underinhalational anthrax;
Anthrasil® (Anthrax Immune Globulin Intravenous (Human)), the contract, we will conduct manufacturing runs, collect plasma for future manufacturing, and undertake additional activities in support of maintaining FDA licensure of VIGIV. VIGIV was developed on our hyperimmune platform, on which several marketedonly polyclonal antibody therapeutics have beentherapeutic licensed including Anthrasil®. This contract will continue the CDC's commitment to VIGIV, which was licensed in the U.S. by the FDA in 2005 and in Canada by Health Canada for the treatment of inhalational anthrax;
BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only heptavalent antibody therapeutic licensed by the FDA and Health Canada for the treatment of botulism; and
VIGIV (Vaccinia Immune Globulin Intravenous (Human)), the only polyclonal antibody therapeutic licensed by the FDA and Health
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in 2007.millions, except share and per share amounts)
In February 2018,Canada to address certain complications from smallpox vaccination.
Highlights and Business Accomplishments for 2019
On June 3, 2019, we together with Valneva SE, or Valneva, announced the initiation of a Phase 1 clinical trial in the U.S. to evaluate the safety and immunogenicity of VLA1601, Valneva's vaccine candidate against Zika virus. Initial data from the trial are expected to be available in late 2018 or early 2019. Upon availability of Phase 1 data, we will have the option to continue the development and commercialization of a Zika vaccine under our worldwide exclusive license agreement with Valneva for a milestone payment of €5 million. The agreement provides Valneva potential additional milestone payments of up to €44 million related to product development, approval, commercialization, and product sales, future royalties on annual net sales, and the right, prior to a Phase 3 clinical trial, to negotiate for exclusive commercialization rights in Europe.
Financial Operations Overview
Revenues
We have derived a majority of our historical product sales revenues from BioThrax sales to the U.S. government. We are a party to a contract withaward by the CDC, an operating divisionOffice of the Assistant Secretary for Preparedness and Response (ASPR) in the U.S. Department of Health and Human Services or HHS,(HHS) valued at approximately $535 million over 10 years for the continued supply of Vaccinia Immune Globulin Intravenous (VIGIV) into the U.S. Strategic National Stockpile (SNS) in support of smallpox preparedness.
On May 15, 2019, we announced that BARDA informed the company that it will begin procuring AV7909 (anthrax vaccine adsorbed with CPG 7909 adjuvant) for delivery into the Strategic National Stockpile (SNS). Subject to the fulfillment of certain contractual obligations, the company plans to initiate deliveries of AV7909 in the second half of 2019.
On April 16, 2019, we announced results from an interim analysis of our Phase 2 clinical study evaluating the safety and immunogenicity of the Company’s chikungunya virus virus-like particle vaccine candidate across a series of dosing regimens. The interim analysis has shown that with a single dose administered, up to $91198% of study participants produced a neutralizing antibody response against the chikungunya virus by day 7. Further, the immune response was shown to be persistent through the six-month visit, following the one-dose regimen.
On March 19, 2019, we announced the initiation of a Phase 3 trial to evaluate the lot consistency, immunogenicity, and safety of AV7909 (anthrax vaccine adsorbed with CPG 7909 adjuvant) following a two-dose schedule administered intramuscularly in healthy adults. AV7909 is being developed for post-exposure prophylaxis of disease resulting from suspected or confirmed Bacillus anthracis exposure.
On February 28, 2019, we announced that we have signed an indefinite-delivery, indefinite-quantity contract with the U.S. Department of State to establish a long-term, reliable, and stable supply chain for medical countermeasures that address the treatment prosed by chemical warfare agents. The contract is comprised of a five-year base period of performance along with five one-year option periods with a total contract value of a minimum of approximately $7 million to supply approximately 29.4a maximum of $100 million dosesover the contract’s period of BioThrax to the SNS through September 2021.
performance. We are focused on increasing the saleswill be supplying two of our current medical countermeasures addressing chemical threats; Trobigard® auto-injector and RSDL®kit.
Financial Operations Overview
Revenues
We generate revenues from the sale of our eleven marketed MCMs toproducts, the performance of contract development and manufacturing services, and our performance of research and development services under contracts and grants that we receive from the USG and others. The USG is the largest purchaser of our CBRNE products and primarily purchases our products for the U.S. government customers,Strategic National Stockpile (SNS), a national repository of medical countermeasures including critical antibiotics, vaccines, chemical antidotes, antitoxins, and other critical medical supplies. The USG primarily purchases our products under long-term firm fixed price procurement contracts. The majority of our historical product sales were derived from BioThrax purchases by the USG.
Our opioid overdose treatment, NARCAN® Nasal Spray, is 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 federal agencies. Our travelers’ disease products, comprising Vivotif and Vaxchora, are sold to wholesalers and distributors, as well as directly to healthcare practitioners. We sell Vivotif and Vaxchora to private travel clinics, retail pharmacies and integrated hospital networks.
We also generate revenue from the performance of contract development and manufacturing services for third-parties. Our services include fill/finish activities as well as the production of bulk drug substances on expanding the market forbehalf of our MCM product portfolio to other customers domestically and internationally.customers.
We have received contractcontracts and grantgrants funding from the Biomedical Advanced ResearchUSG and Development Authority, or BARDA, Department of Defense, or DoD, the CDC, the Defense Threat Reduction Agency, or DTRA,other non-governmental organizations to perform research and the National Institute of Allergydevelopment activities related to programs addressing certain CBRNE threats and Infectious Diseases, or NIAID, for the following development programs:emerging infectious disease.
Our revenue, operating results and profitability have varied, and we expect that they will continue to vary on a quarterly basis.
Development Programs | Funding Source | Award Date | Performance Period |
Anthrasil | BARDA | 09/2005 | 09/2005 — 04/2021 |
| BARDA | 09/2013 | 09/2013 — 09/2018 |
Auto-injector platform | DoD | 07/2017 | 07/2017 — 06/2022 |
BAT | BARDA | 05/2006 | 05/2006 — 12/2027 |
CIADM | BARDA | 06/2012 | 06/2012 — 06/2037 |
GC-072 | DTRA | 08/2014 | 08/2014 — 08/2019 |
NuThrax | NIAID | 08/2014 | 08/2014 — 01/2020 |
| BARDA | 03/2015 | 03/2015 — 10/2018 |
| BARDA | 09/2016 | 09/2016 — 09/2021 |
SIAN | BARDA | 09/2017 | 09/2017 — 09/2022 |
UV-4B | NIAID | 09/2011 | 09/2011 — 09/2018 |
VIGIV | CDC | 02/2018 | 02/2018 — 02/2019 |
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)
Critical Accounting Policies and Estimates
During the six months ended June 30, 2018,2019, there have been no significant changes to our Critical Accounting Policiescritical accounting policies and Estimatesestimates contained in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the Securities and Exchange Commission,SEC, except for the adoption of the new revenue recognition standard.lease standard (see Note 2 and Note 6 to the accompanying condensed consolidated financial statements).
In May 2014,EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | % Change | | 2019 | | 2018 | | Change | | % Change |
Product sales net: | | |
| | | | | | | | | | | | | | |
NARCAN Nasal Spray | | $ | 73.0 |
| | $ | — |
| | $ | 73.0 |
| | NM |
| | $ | 138.5 |
| | $ | — |
| | $ | 138.5 |
| | NM |
|
ACAM2000 | | 6.5 |
| | 56.5 |
| | (50.0 | ) | | (88 | %) | | 52.0 |
| | 78.3 |
| | (26.3 | ) | | (34 | %) |
BioThrax | | 28.0 |
| | 77.6 |
| | (49.6 | ) | | (64 | %) | | 39.6 |
| | 97.8 |
| | (58.2 | ) | | (60 | %) |
Other | | 76.0 |
| | 46.0 |
| | 30.0 |
| | 65 | % | | 106.4 |
| | 79.7 |
| | 26.7 |
| | 33 | % |
Total product sales, net | | 183.5 |
| | 180.1 |
| | 3.4 |
| | 2 | % | | 336.5 |
| | 255.8 |
| | 80.7 |
| | 32 | % |
Contract manufacturing | | 18.7 |
| | 23.6 |
| | (4.9 | ) | | (21 | )% | | 34.6 |
| | 49.8 |
| | (15.2 | ) | | (31 | %) |
Contracts and grants | | 41.0 |
| | 16.5 |
| | 24.5 |
| | NM |
| | 62.8 |
| | 32.4 |
| | 30.4 |
| | 94 | % |
Total revenues | | 243.2 |
| | 220.2 |
| | 23.0 |
| | 10 | % | | 433.9 |
| | 338.0 |
| | 95.9 |
| | 28 | % |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of product sales and contract manufacturing | | 100.8 |
| | 85.3 |
| | 15.5 |
| | 18 | % | | 192.7 |
| | 139.4 |
| | 53.3 |
| | 38 | % |
Research and development | | 63.9 |
| | 24.7 |
| | 39.2 |
| | NM |
| | 110.0 |
| | 53.8 |
| | 56.2 |
| | NM |
|
Selling, general and administrative | | 70.8 |
| | 39.5 |
| | 31.3 |
| | 79 | % | | 136.4 |
| | 79.7 |
| | 56.7 |
| | 71 | % |
Amortization of intangible assets | | 14.7 |
| | 3.9 |
| | 10.8 |
| | NM |
| | 29.2 |
| | 7.8 |
| | 21.4 |
| | NM |
|
Total operating expenses | | 250.2 |
| | 153.4 |
| | 96.8 |
| | 63 | % | | 468.3 |
| | 280.7 |
| | 187.6 |
| | 67 | % |
| | | | | | | | | | | | | | | | |
(Loss) income from operations | | (7.0 | ) | | 66.8 |
| | (73.8 | ) | | NM |
| | (34.4 | ) | | 57.3 |
| | (91.7 | ) | | NM |
|
| | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest expense | | (9.5 | ) | | (1.0 | ) | | (8.5 | ) | | NM |
| | (19.0 | ) | | (1.2 | ) | | (17.8 | ) | | NM |
|
Other income, net | | 1.4 |
| | — |
| | 1.4 |
| | NM |
| | 0.4 |
| | 0.3 |
| | 0.1 |
| | 33 | % |
Total other expense, net | | (8.1 | ) | | (1.0 | ) | | (7.1 | ) | | NM |
| | (18.6 | ) | | (0.9 | ) | | (17.7 | ) | | NM |
|
| | | | | | | | | | | | | | | | |
(Loss) income before income taxes | | (15.1 | ) | | 65.8 |
| | (80.9 | ) | | NM |
| | (53.0 | ) | | 56.4 |
| | (109.4 | ) | | NM |
|
Income tax (benefit) expense | | (5.6 | ) | | 15.7 |
| | (21.3 | ) | | NM |
| | (17.4 | ) | | 11.2 |
| | (28.6 | ) | | NM |
|
Net (loss) income | | $ | (9.5 | ) | | $ | 50.1 |
| | $ | (59.6 | ) | | NM |
| | $ | (35.6 | ) | | $ | 45.2 |
| | $ | (80.8 | ) | | NM |
|
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)
Product Sales, net
|
| | | |
| NARCAN Nasal Spray | | Other Product Sales |
| ACAM2000 | | Contract Manufacturing |
| BioThrax | | Contracts and Grants |
NARCAN Nasal Spray
NARCAN Nasal Spray was acquired in October 2018 in connection with the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU No. 2014-09. ASU No. 2014-09 supersedesCompany's acquisition of Adapt resulting in an increase in product sales in the revenue recognition requirementscurrent quarter and year-to-date periods.
ACAM2000
The decrease 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. In order for a provider of promised goods or services to recognize as revenue the consideration that we expect to receive in exchangeACAM2000 sales for the promised goods or services, the provider should apply 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;three and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. We adopted the requirements of the new standard as of January 1, 2018 using the modified retrospective method. The modified retrospective method requires companies to recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings.
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. For contracts with multiple performance obligations, we allocate the contract's transaction price to each performance obligation on a relative standalone selling price basis using our 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 we 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.
Once the performance obligations in the contract have been identified, we estimate 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. Our variable consideration primarily includes consideration transferred under our development contracts with the U.S. government as consideration received can vary based on developmental progression of the product candidate(s). When a contract's transaction price includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include 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 constraints or material changes to our variable consideration estimates during the six months ended June 30, 2018.
To indicate the transfer of control for our product sales and contract manufacturing services, we 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 we meet the criteria associated with transferring control of the good or service over time.
Results of Operations
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Revenues
| | Three Months Ended June 30, | | | | | | | |
(in millions) | | 2018 | | | 2017 | | | Change | | | % Change | |
| | | | | | | | | | | | |
Product sales: | | | | | | | | | | | | |
BioThrax | | $ | 77.6 | | | $ | 52.3 | | | $ | 25.3 | | | | 48 | % |
Other | | | 102.5 | | | | 11.3 | | | | 91.2 | | | | 807 | % |
Total Product sales | | | 180.1 | | | | 63.6 | | | | 116.5 | | | | 183 | % |
Contract manufacturing | | | 23.6 | | | | 16.2 | | | | 7.4 | | | | 46 | % |
Contracts and grants | | | 16.5 | | | | 21.0 | | | | (4.5 | ) | | | (21 | %) |
Total revenues | | $ | 220.2 | | | $ | 100.8 | | | $ | 119.4 | | | | 118 | % |
Product sales:
The increase in BioThrax sales2019 was primarily due to the timingvolume of BioThrax deliveriesACAM2000 delivered to the SNS.SNS during the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018. Substantially all of the BioThrax product sales revenues during the three months ended June 30, 2018 and 2017 consisted of sales to the U.S. government.
The increase in Other product sales relates primarily to:
| § | sales of ACAM2000 (which was acquired in October 2017) to the CDC; |
| § | sales of Raxibacumab (which was acquired in October 2017) to BARDA; |
| § | the timing of sales of BAT to the SNS; |
| § | sales of Trobigard to the U.S. Department of State; |
| § | sales of RSDL to the DoD; and |
| § | sales of Anthrasil to the Canadian National Defence ministry. |
These increases in Other product sales were partially offset by a decrease in VIGIV sales primarily due to the timing of deliveries to the SNS.
Contract manufacturing:
The increase in Contract manufacturing revenue was primarily due to manufacturing services at our Canton facility (which was acquired in October 2017).
Contracts and grants:
The decrease in Contracts and grants revenue was primarily due to a reduction in revenue associated with the successful completion of multiple U.S. Government contracts as well as reduced R&D activities related to certain ongoing funded development programs, including:
| § | decreased development funding of $2.9 million for our large-scale manufacturing of BioThrax, primarily due to the timing of contract close out activities associated with the development contract from BARDA; |
| § | decreased revenue of $3.4 million related to our CIADM program, primarily due to adoption of a new revenue accounting standard effective January 1, 2018. The $3.4 million decrease includes a decrease of $1.6 million in funding for CIADM task orders (related to Ebola and Zika); and |
| § | decreased revenue of $1.6 million for our NuThrax program related to the timing of clinical trial activities, partially offset by an increase in manufacturing development activities. |
These decreases in Contracts and grants revenue were partially offset by an increase in the following R&D development programs:
| § | development funding of $1.9 million for BAT primarily related to the timing of stability testing; and |
| § | development funding of $1.7 million for SIAN related to a non-clinical pharmacokinetics study and manufacturing development. |
Cost of Product Sales and Contract Manufacturing
Cost of product sales and contract manufacturing increased by $54.6 million, or 158%, to $89.2 million for the three months ended June 30, 2018 from $34.6 million for the three months ended June 30, 2017. The increase was primarily attributable to the increase in product sales and contract manufacturing activities at our Bayview and Canton facilities.
Research and Development Expenses
Research and development expenses decreased by $1.1 million, or 4%, to $24.7 million for the three months ended June 30, 2018 from $25.8 million for the three months ended June 30, 2017. Net of contracts and grants revenue, during the three months ended June 30, 2018 and 2017, we incurred net research and development expenses of $8.2 million and $4.8 million, respectively.
The decrease in research and development expense was primarily attributable to:
| § | timing of manufacturing development activities associated with non-clinical guinea pig studies for our NuThrax product candidate; and |
| § | timing of license fees for VLA1601 (a highly purified inactivated vaccine against the Zika virus). |
These decreases were partially offset by increased research and development activity primarily attributable to the timing of:
| § | technology transfer activities for Raxibacumab (acquired in October 2017), related to moving the manufacturing from GlaxoSmithKline's facility to our Bayview facility; and |
| § | manufacturing and pharmacokinetic activities for our SIAN product candidate. |
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $7.6 million, or 24%, to $39.5 million for the three months ended June 30, 2018 from $31.9 million for the three months ended June 30, 2017. The increase was primarily attributable to an increase in professional services to support our infrastructure improvement initiatives, along with an increase in compensation related costs.
Provision for Income Taxes
Provision for income taxes increased by $13.6 million, to $15.7 million for the three months ended June 30, 2018 from $2.1 million for the three months ended June 30, 2017. The increase was primarily due to an increase in pre-tax income of $59.1 million, partially offset by the impact of the Tax Reform Act enacted on December 22, 2017 which reduced the U.S. federal corporate income tax rate from 35% to 21%.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Revenues
| | Six Months Ended June 30, | | | | | | | |
(in millions) | | 2018 | | | 2017 | | | Change | | | % Change | |
| | | | | | | | | | | | |
Product sales: | | | | | | | | | | | | |
BioThrax | | $ | 97.8 | | | $ | 96.1 | | | $ | 1.7 | | | | 2 | % |
Other | | | 158.0 | | | | 49.4 | | | | 108.6 | | | | 220 | % |
Total Product sales | | | 255.8 | | | | 145.5 | | | | 110.3 | | | | 76 | % |
Contract manufacturing | | | 49.8 | | | | 33.8 | | | | 16.0 | | | | 47 | % |
Contracts and grants | | | 32.4 | | | | 38.3 | | | | (5.9 | ) | | | (15 | %) |
Total revenues | | $ | 338.0 | | | $ | 217.6 | | | $ | 120.4 | | | | 55 | % |
Product sales:
The increase in BioThrax sales was primarily due to the timing of BioThrax deliveries to the SNS. BioThrax product sales revenues during the six months ended June 30, 2019 and 2018 were made to the USG under a long-term procurement contract at a consistent value per dose. Delivery obligations under this long-term procurement contract were fully satisfied during the quarter ended March 31, 2019.
BioThrax
The decrease in BioThrax sales for the three and 2017six months ended June 30, 2019 was primarily consisteddue to the number of BioThrax deliveries to the U.S. governmentSNS during the period as compared to the three and six months ended June 30, 2018. The USG purchased fewer units of $96.3 millionBioThrax during the three and $93.4 million, respectively.six months ended June 30, 2019 partially in anticipation of the transition to the Company's next generation anthrax vaccine, AV7909, which we expect to begin delivering to the SNS in the second half of 2019. The decrease in units delivered was slightly offset by contractual per unit pricing increases. Substantially all of the BioThrax product sales revenues are made to the USG under a long-term procurement contract. The fluctuations in BioThrax revenue are largely related to changes in volume depending on when the USG requests delivery. The USG delivery schedule varies based on funding and management of the SNS inventory.
Other Product Sales
The increase in Otherthe Company's other product sales relatesduring the three and six months ended June 30, 2019 was primarily to:
| § | sales of ACAM2000 (whichdue to the contribution of products associated with the PaxVax acquisition as well as increased sales of raxibacumab, which was acquired in October 2017) to the CDC; |
| § | sales of Raxibacumab (which was acquired in October 2017) to BARDA; |
| § | sales of BAT to the SNS; |
| § | sales of Trobigard to the U.S. Department of State; |
| § | sales of RSDL to the DoD; and |
| § | sales of Anthrasil to the Canadian National Defence ministry. |
These increases in Other product sales were partially offset by a decrease in Trobigard sales compared to the sales of BATthree and six months ended June 30, 2018.
Contract Manufacturing
The decrease in contract manufacturing revenue for the three and six months ended June 30, 2019 compared to comparative periods in 2018 is due to the timing of BAT deliveriesCanton contract manufacturing activities in 2018 that did not recur in 2019. The six months ended June 30, 2019 was further impacted by a contract to the SNS.
Contract manufacturing:
The increase in Contract manufacturing revenue was primarily due to theperform design, construction and validation of manufacturing capability for a third party at our Lansing, Michigan site and manufacturingduring the first quarter of 2018 for which no similar services at our Canton, Massachusetts facility.
were provided during the six months ended June 30, 2019.
Contracts and grants:
Grants
The decreaseincrease in Contractscontracts and grants revenue wasfor the three and six months ended June 30, 2019 primarily due to a reduction in revenue associated with the successful completion of multiple U.S. Government contracts as well as reduced R&Dreflects research and development activities related to certain ongoing funded development programs, including:
| § | decreased development funding of $3.5 million for our large-scale manufacturing of BioThrax, primarily due to the timing of contract close out activities associated with the development contract from BARDA; |
| § | decreased revenue of $6.6 million related to our CIADM program primarily due to adoption of a new revenue accounting standard effective January 1, 2018. The $6.6 million decrease includes a decrease of $2.5 million in funding for CIADM task orders (related to Ebola and Zika); and |
| § | decreased revenue of $2.0 million for our NuThrax program related to the timing of clinical trial activities, partially offset by an increase in manufacturing development activities. |
funding for AV7909 for clinical trial activities and manufacturing. These decreases in Contracts and grants revenueincreases were partially offset by an increasea reduction in development funding for ACAM2000 for stability testing which were recorded during the following R&D development programs:three and six months ended June 30, 2018 for which no similar services were provided in current period.
EMERGENT BIOSOLUTIONS INC.
| § | development funding of $3.5 million for ACAM2000 (acquired October 2017) primarily related to development contract closeout activities with the CDC; and |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | § | development funding of $2.9 million for SIAN related to a non-clinical pharmacokinetics study and manufacturing development. |
(unaudited, amounts in millions, except share and per share amounts)
Cost of Product Sales and Contract Manufacturing
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| |
| Cost of Product Sales and Contract Manufacturing |
l | Gross profit margin for product sales and contract manufacturing |
Cost of product sales and contract manufacturing increased by $66.3 million, or 82%, to $147.2 million for the three and six months ended June 30, 2019 primarily due to the acquisitions of Adapt and PaxVax, both acquired in October 2018, from $80.9 million foras well as an increase in facilities related expenses during the three and six months ended June 30, 2017. The increase was primarily attributable to the increase in product sales and contract manufacturing activities at our Bayview and Canton facilities.2019.
These increases were partially offset by a decrease in BAT costs due to the timing of sales to the SNS and higher 2017 costs for BioThrax due to an increase in the cost per dose sold associated with decreased production yields in the period in which the doses were produced.
Research and Development Expenses (Gross and Net) |
| |
| Research and Development expense |
l | Research and Development expense, net of contracts and grants revenue |
Research and development expenses increased by $7.6 million, or 16%, to $53.8 million for the three and six months ended June 30, 20182019 primarily due to the acquisitions of Adapt and PaxVax, both acquired in October 2018. Increases also resulted from $46.2 millionthe timing of manufacturing development activities for the six months ended June 30, 2017. Net of contracts and grants revenue, during the six months ended June 30, 2018 and 2017, we incurred net research and development expenses of $21.4 million and $7.9 million, respectively.
The increase in research and development expense was primarily attributable to:
| § | technology transfer activities for Raxibacumab (acquired in October 2017), moving the manufacturing from GlaxoSmithKline's facility to our Bayview facility; |
| § | manufacturing and pharmacokinetic activities for our SIAN product candidate; and |
| § | proof of concept activities for our UNI-FLU program. |
our AV7909 product candidate. These increases were partially offset by decreased researchdecreases in technology transfer expenses for raxibacumab.
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and development activity primarily attributable to the timing of:per share amounts)
| § | clinical trial activity to evaluate safety and tolerability related to UV-4B; we anticipate a reduction in funding by the U.S. government and, as a result, we will cease further development work on UV-4B and expect the spending to be minimal in the future; and |
| § | license fees associated our Ebola/Marburg programs. |
Selling, General and Administrative Expenses
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| |
| Selling, General and Administrative |
l | SG&A as a percentage of total revenue |
Selling, general and administrative expenses increased by $12.7 million, or 19%, to $79.7 million for thethe three and six months ended June 30, 2018 from $67.02019 primarily due to $21.5 million forand $42.0 million in expenses related to the operations and integration of newly acquired entities during the three and six months ended June 30, 2017.2019, respectively. The newly acquired entities were both acquired in October 2018. The remaining increase was primarily attributableis due to an increase in professional services to support our infrastructure improvement initiatives, along with anstrategic growth initiatives.
Amortization of intangible Assets
The increase in compensation related costs.amortization of intangible assets for the three and six months ended June 30, 2019 compared
to 2018 was primarily due to the acquisitions of Adapt and PaxVax.
Total Other Expense,Income (Expense), Net
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| |
| Interest expense |
| Other income (expense) |
Total other expense, net decreasedincreased by $2.2$7.1 million or 71%, to $0.9and $17.7 million for thethree and six months ended June 30, 2019 due to an increase in borrowings on our senior secured credit facilities established in October 2018 to fund our acquisitions of Adapt and PaxVax.