| (Mark One) | |||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
| For the quarterly period ended | June 30, | ||
| OR | |||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
| For the transition period from to | |||
Commission file number: 001-33137
EMERGENT BIOSOLUTIONS INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 14-1902018 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| 400 Professional Drive | ||
| Gaithersburg | Maryland | 20879 |
| (Address of Principal Executive Offices) | (Zip Code) | |
(Registrant's Telephone Number, Including Area Code)
| Securities registered pursuant to Section 12(b) of the Act | ||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, Par Value $0.001 per share | EBS | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.☒Yes☐No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒Yes☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
As of July 27, 2018,26, 2019, the registrant had 50,019,935approximately 51.6 million shares of common stock outstanding.
Emergent BioSolutions Inc.
Index to Form 10-Q
| Page No. | ||
EMERGENT BIOSOLUTIONS INC.
PART I. FINANCIAL INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q and the documents we incorporate by reference include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding the future earnings and performance of Emergent BioSolutions Inc. or any of our businesses, our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. We generally identify forward-looking statements by using words like "will","will," "believes," "expects," "anticipates," "intends," "plans," "forecasts," "estimates" and similar expressions in conjunction with, among other things, discussions of financial performance or financial condition, growth strategy, product sales, manufacturing capabilities, product development, regulatory approvals or expenditures. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. You should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. You are, therefore, cautioned not to place undue reliance on any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we do not undertake to update any forward-looking statement to reflect new information, events or circumstances.
There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements, including, among others:
appropriations for the procurement of BioThrax® (Anthrax Vaccine Adsorbed) and our other products addressing public health threats (PHTs);
| • |
| • | our ability to perform under our contracts with the U.S. government (USG) related to BioThrax, our |
our ability to commence deliveries based on BARDA’s procurement of AV7909 (anthrax vaccine adsorbed with CPG 7909 adjuvant) for the Strategic National Stockpile (SNS), and to receive eventual licensure of AV7909 from the FDA;
| • | the |
our ability to secure follow-on procurement contracts for our PHTs that are under procurement contracts that have expired or will be expiring;
| • |
| our ability and the ability of our |
our ability to identify and acquire companies, businesses, products or product candidates that satisfy our selection criteria;
| 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.
References in this report to “Emergent,” the “Company,” “we,” “us,” and “our” refer to Emergent BioSolutions Inc. and its consolidated subsidiaries.
NOTE REGARDING TRADENAMES
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.
| Emergent BioSolutions Inc. and Subsidiaries | ||||||||
| (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 | ||||
| (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 | ||||||||||||
| Emergent BioSolutions Inc. and Subsidiaries | ||||||||||||||||
| (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 | ||||||||
| (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 | ||||
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 | |||||||||||||||
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
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.
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
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.
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.
Adapt
(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 | ||
(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 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.
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 | ||
| 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 | ||||
| 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 | ||||
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.
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.
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.
| 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 | ||||||||
Shareholder Class Action Lawsuit filed July 19, 2016
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
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
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; 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 |
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)
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.
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.
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).
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)
Results of Operations
| 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 | ||||||||||||
NM - Not meaningful
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.
| 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 | % | ||||||||
| 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 | % | ||||||||
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:
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.
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:
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.
Cost of Product Sales and Contract Manufacturing
| 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.
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.
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)
Selling, General and Administrative Expenses
| 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
| 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.
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)
Income Tax (Benefit) Expense
| Income tax (benefit) expense | |
| l | Effective tax rate |
The income tax benefit is the result of losses incurred during the three and six months ended June 30, 2019, whereas the three and six months ended June 30, 2018 from $3.1 million forhad taxable income. These losses were impacted by corresponding increases in the six months ended June 30, 2017. The decrease was primarily attributable to a decrease in interest expense primarily due to the conversion of substantially all of the outstanding debt under our 2.875% Convertible Senior Notes due 2021 into shares of common stock during the fourth quarter of 2017.
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and 2017, we recorded a discrete tax benefit primarily associated with equity awards activity of $3.2 million and $1.1 million, respectively.per share amounts)
Liquidity and Capital Resources
Sources of Liquidity
Cash Flows
The following table provides information regarding our cash flows for the six months ended June 30, 20182019 and 2017:2018:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (in millions) | 2018 | 2017 | ||||||
| Net cash provided by (used in): | ||||||||
| Operating activities(i) | $ | 33.5 | $ | 95.7 | ||||
| Investing activities | (22.6 | ) | (29.6 | ) | ||||
| Financing activities | 1.0 | (21.9 | ) | |||||
| Net increase in cash and cash equivalents | $ | 11.9 | $ | 44.2 | ||||
| Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 69.0 | $ | 33.6 | ||||
| Investing activities | (45.5 | ) | (22.6 | ) | ||||
| 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 | ||||
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and cash equivalents.per share amounts)
Operating Activities:Activities
Net cash provided by operating activities of $33.5$69.0 million for the six months ended June 30, 2019 was primarily due to changes in working capital for accounts receivable and accounts payable. Net operating losses were offset by non cash charges.
Net cash provided by operating activities of $33.6 million for the six months ended June 30, 2018 was primarily due to our net income excluding non-cash items of $93.0 million and offset by changesincreases in working capital which resulted in a net cash outflow of $59.4 million. Cash outflows includes the timing of collection of accounts receivables related to amounts billed (primarily related to BioThrax and ACAM2000), a decrease from prepaid expenses and other assets (primarily due to deferred contract manufacturing costs and prepayments for manufacturing equipment) and a decrease in accrued compensation (primarily related to the payment of 2017 annual bonuses offset by the accrual of the 2018 bonuses).receivable.
Investing Activities
Net cash provided by operatingused in investing activities of $95.7$45.5 million for the six months ended June 30, 2017 was primarily due to our net income excluding non-cash items of $49.1 million2019 reflects software, infrastructure and changes in working capital which resulted in a net cash inflow of $46.6 million. Cash inflow includes the timing of collection of accounts receivables related to amounts billed, an increase in deferred revenue, and a decrease in inventories primarily due to the timing of deliveries of BAT to BARDA, partially offset by a decrease in accrued compensation primarily related to the payment of 2016 annual bonuses.
equipment investments.
Net cash used in investing activities of $22.6 million for the six months ended June 30, 2018 reflects infrastructure and equipment investments, including construction at our Baltimore CIADM manufacturing facility, partially offset by net proceeds from the sale of our manufacturing and development facility in Winnipeg, Manitoba.investments.
Financing Activities
Net cash used in investingprovided by financing activities of $29.6$41.7 million for the six months ended June 30, 2017 reflects infrastructure and equipment investments, including construction at2019 was primarily due to the net $44.4 million of credit on our Baltimore CIADM manufacturing facility.
debt facility, offset by contingent consideration payments.
Net cash provided by financing activities of $1.0$1.1 million for the six months ended June 30, 2018 was primarily due to the $8.5 million in proceeds from the issuance of common stock pursuant to our employee stock option exercises, partially offset by $6.0 million associated with the taxes paid on behalf of employees for equity activity and $1.3 million in contingent obligation payments.
activity.
Funding Requirements
We expect to continue to fund our anticipated operating expenses, capital expenditures, debt service requirements and any future repurchase of our common stock from the following sources:
| existing cash and cash equivalents; |
| net proceeds from the sale of our products and contract manufacturing services; |
| development contracts and grants funding; and |
There are numerous risks and uncertainties associated with product sales and with the development and commercialization of our product candidates. We may seek additional external financing to provide additional financial flexibility. Our future capital requirements will depend on many factors, including (but not limited to):
the level, timing and cost of product sales and contract manufacturing services;
the extent to which we acquire or invest in and integrate companies, businesses, products or technologies; |
| the acquisition of new facilities and capital improvements to new or existing facilities; |
| the payment obligations under our indebtedness; |
| the scope, progress, results and costs of our development activities; |
| our ability to obtain funding from collaborative partners, government entities and non-governmental organizations for our development programs; |
| the extent to which we repurchase additional common stock under our authorized share repurchase program; and |
| the costs of commercialization activities, including product marketing, sales and distribution. |
If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings, bank loans or collaboration and licensing arrangements.
If we raise funds by issuing equity securities, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants, like those contained in our senior secured revolving credit facility,facilities, which could limit or restrict our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities, buying back shares or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, itmay be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us.
We are not restricted under the terms of the indenture governing our remaining senior convertible notes2.875% Convertible Senior Notes due 2021 from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing our notes that could have the effect of diminishing our ability to make payments on our indebtedness. However, our senior secured credit facility restrictsfacilities restrict our ability to incur additional indebtedness, including secured indebtedness.
Economic conditions may make it difficult to obtain financing on attractive terms, or at all. If financing is
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)
unavailable or lost, our business, operating results, financial condition and cash flows would be adversely affected, and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.
Share Repurchase Program
In March 2018, our board of directors authorized our management to repurchase from time to time up to an aggregate of up to $50 million of our common stock under a board-approved share repurchase program. The term of the board authorization of the repurchase program is untilthrough December 31, 2019. Any repurchased shares will be available for use in connection with our stock plans and for other corporate purposes. As of June 30, 2018,2019, we have not made any repurchases under this program.
For a discussion of additional risks arising from our operations, see “Item 1A-Risk Factors” in this quarterly report.
We have interest rate and foreign currency market risk. We manage our interest rate risk in part by entering into interest rate swaps to market riskswap a portion of our indebtedness that is currently confinedbased on variable interest rates to our cash and cash equivalents.a fixed rate. We currently do not hedge interest rate exposure orour foreign currency exchange exposure, and the movement of foreign currency exchange rates could have an adverse or positive impact on our results of operations. We have not used derivative financial instruments for speculation or tradingspeculative purposes. Because of the short-term maturities of our cash and cash equivalents, we believe that an increase in market rates would likely not have a significant impact on the realizedvalue of our investments, but any increase in market rates would likely increase the interest expense associated with our debt.
Interest Rate Risk
We have debt with a mix of variable and fixed rates of interest. Floating rate debt carries interest based on the eurocurrency, as defined in our Amended Credit Agreement, plus an applicable margin. Increases in interest rates could therefore increase the associated interest payments that we are required to make on this debt.
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our operating results assuming various changes in market interest rates. A hypothetical increase of one percentage point in the eurocurrency rate with consideration to outstanding
debt and interest rate swap commitments as of June 30, 2019, would increase our interest expense by $4.9 million annually.
Foreign Currency Exchange Rate Risk
We have exposure to foreign currency exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Swiss franc and British pound. We manage our foreign currency exchange rate risk primarily by incurring, to the extent practicable, operating and financing expenses in the local currency in the countries in which we operate.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018.2019. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, 1934 or(the Exchange Act,Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018,2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
EMERGENT BIOSOLUTIONS INC.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the quarter ended June 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s assessment of and conclusion on the effectiveness of disclosure controls and procedures and internal controls over financial reporting did not include the internal controls related to the operations acquired in the acquisition of PaxVax Holding Company Ltd. and Adapt Pharma Limited, which are included in our unaudited condensed consolidated financial statements for the six months ended June 30, 2019, and which constituted $1.1 billion and $881.5 million of total assets and net assets, respectively as of June 30, 2019 and $163.1 million and $4.4 million of revenues and operating income, respectively, for the six months ended June 30, 2019.
PART II.OTHER INFORMATION
ANDA Litigation - Perrigo 4mg
On September 14, 2018, Adapt Pharma Inc., Adapt Pharma Operations Limited and Adapt Pharma Ltd. and Opiant Pharmaceuticals, Inc., received notice from Perrigo UK FINCO Limited Partnership that Perrigo had filed an ANDA with the FDA, seeking regulatory approval to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 4mg/spray before the expiration of the ‘253 Patent, the ‘747 Patent, the ‘177 Patent, the ‘965 Patent, and the ‘838 Patent. On or about October 25, 2018, Perrigo sent a subsequent notice letter relating to 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 United States District Court for the 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 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
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 '747, the '177, the '965, the '838, and the ‘937 Patents. Teva's notice letters assert that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the '253, the '747, the '177, the '965, the '838, or the ‘937 Patent, or that the '253, the '747, the '177, the '965, the '838, and the ‘937 Patents are invalid or unenforceable. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant filed a complaint for patent infringement against Teva in the United States District Court for the District of New 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 date of this filing, Adapt Pharma Inc., Adapt Pharma Operations Limited, and Opiant, have not filed a material adverse effect on our business, financial conditioncomplaint related to the ‘937 Patent.
In the complaints described in the paragraphs above, the Plaintiffs seek, among other relief, orders that the effective date of FDA approvals of the Teva ANDA products and the Perrigo ANDA product be a date not earlier than the expiration of the patents listed for each product, equitable relief enjoining Teva and Perrigo from making, using, offering to sell, selling, or resultsimporting the products that are the subject of operations.Teva and Perrigo’s respective ANDAs, until after the expiration of the
EMERGENT BIOSOLUTIONS INC.
patents listed for each product, and monetary relief or other relief as deemed just and proper by the court.
Shareholder Class Action Lawsuit filed July 19, 2016
On July 19, 2016, Plaintiff William Sponn or 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, or the Class Period, seeking to pursue remedies under the Exchange Act 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 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 Lead Plaintiffs 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 Plaintiffs 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. The Plaintiffs filed an amended motion for class certification and appointment of Lead Plaintiffs, Sponn, and Geoffrey L. 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, 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, issued an amended preliminary approval of the settlement on October 25, 2018, and scheduled a hearing regarding final approval for January 22, 2019. At the time of the final approval hearing 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 merit and intend to defend themselves vigorously against those claims.merit.
You should carefully consider the following risk factors in addition to the other information in this Quarterly Report on Form 10-Q when evaluating our business because these risk factors may have a significant impact on our business, financial condition, operating results or cash flows.If any of the risks described below or in subsequent reports we file with the SEC actually occur, they may materially harm our business, financial condition, operating results or cash flows. Additional risks and uncertainties that we have not yet identified or that we presently consider to be immaterial may also materially harm our business, financial condition, operating results or cash flows. Discussion of these factors is incorporated by reference into and considered an integral part of Part I, Item 2, "Management's“Management’s Discussion and Analysis of Financial Conditions and Results of Operations."
”
GOVERNMENT CONTRACTING RISKS
We currently derive a substantial portion of our revenue from sales of BioThrax to our principallargest customer, the U.S. government.USG. If the U.S. government'sUSG’s demand for and/or funding for procurement of BioThrax is substantially reduced, our business, financial condition, operating results and cash flowflows would be materially harmed.
We derive a substantial portion of our current and expected future revenues from sales of BioThrax, our anthrax vaccine licensed by the FDA to the U.S. government.USG. In December 2016, we signed a follow-on procurement contract with the CDCCenters for Disease Control and Prevention (CDC) for the delivery of approximately 29.4 million doses of BioThrax for placement into the SNS over a five-year period ending in September 2021. The potential value of this contract is approximately $911 million if all procurement options are exercised.
The procurement of doses of BioThrax by the CDC is subject to the availability of funding. We have no certainty that funding will be made available for the procurement of doses under the CDC contract. If the SNS priorities change, funding to procure doses of BioThrax may be limited or not available, and our business, financial condition and operating results and cash flows would be materially harmed. The
EMERGENT BIOSOLUTIONS INC.
success of our business and our future operating results are significantly dependent on funding for the procurement of BioThrax and the terms of our BioThrax sales to the U.S. government,USG, including the price per dose, the number of doses and the timing of deliveries.
Our pre-EUA submission of NuThrax forpackage related to AV7909 may not be accepted and we may not receive EUA pre-approval and eventual FDA licensure may not be approved by the FDA in a timely manner or at all. Delays in our ability to achieve such pre-approval and licensurea favorable outcome from the FDA could prevent us from realizing the full potential value of our BARDA contract for the advanced development and procurement of NuThrax.
AV7909.
In September 2016, we entered into a contract with the U.S. Department of Health and Human Services, or HHS, through BARDA for the advanced development and procurement of NuThrax,AV7909, our next generation anthrax vaccine candidate. The contract, as modified in March 2017, is valued at up to approximately $1.5 billion.
In addition, if priorities for the SNS change, funding to procure any future doses of NuThraxAV7909 may be limited or not available, BARDA may never initiate the transition to stockpiling AV7909, and our future business, financial condition, operating results and cash flows could be materially harmed.
Our U.S. governmentUSG procurement and development contracts require ongoing funding decisions by the U.S. government.USG. Reduced or discontinued funding of these contracts could cause ourbusiness, financial condition, operating results and cash flows to suffer materially.
The U.S. governmentUSG is the principal customer for our PHT-focused MCMs and is the primary source of funds for the development of our product candidates in our development pipeline, most notably our NuThraxAV7909 product candidate. We anticipate that the U.S. governmentUSG will also be a principal customer for those MCMs that we successfully develop within our existing product development pipeline, as well as those we acquire in the future. Additionally, a significant portion of our revenue comes from U.S. governmentUSG development contracts and grants. Over its lifetime, a U.S. governmentUSG procurement or
development program may be implemented through the award of many different individual contracts and subcontracts. The funding for such government programs is subject to Congressional appropriations, generally made on a fiscal year basis, even for programs designed to continue for several years. For example, sales of BioThrax to be supplied under our procurement contract with the CDC are subject to the availability of funding, mostly from annual appropriations. These appropriations can be subject to political considerations and stringent budgetary constraints.
Additionally, our government-funded development contracts typically give the U.S. governmentUSG the right, exercisable in its sole discretion, to extend these contracts for successive option periods following a base period of performance. The value of the services to be performed during these option periods may constitute the majority of the total value of the underlying contract. For example, the September 2016 contract award from BARDA for the development and delivery to the SNS of NuThraxAV7909 for post-exposure prophylaxis of anthrax disease consists of a five-year base period of performance valued at approximately $200 million. The contract award also includes options for the delivery of additional doses of NuThraxAV7909 to the SNS and options for an additional clinical study and post-marketing commitments which if both were to be exercised in full, would increase the total contract value to up to $1.5 billion. If levels of government expenditures and authorizations for public health countermeasure preparedness decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. governmentUSG otherwise declines to exercise its options under our existing contracts, our revenues would suffer, as well as our business, financial condition, operating results and cash flows.
There can be no assurance that we will be able to secure follow-on procurement contracts with the U.S. governmentUSG upon the expiration of any of our current product procurement contracts.
EMERGENT BIOSOLUTIONS INC.
raxibacumab that we acquired in our acquisition of Raxibacumabraxibacumab from Human Genome Sciences, Inc. and GlaxoSmithKline LLC, collectively referred to as GSK, expires will expire in November 2019. Our CDC procurement contract for BioThrax expires in 2021. We intend to negotiate follow-on procurement contracts for each of our PHT products upon the expiration of a related procurement contract, including our procurement contract for ACAM2000, but there can be no assurance that we will be successful obtaining any follow-on contracts. Even if we are successful in negotiating a follow-on procurement contract, it may be for a lower product volume, over a shorter period of performance or be on less favorable pricing or other terms. An inability to secure follow-on procurement contracts for our products could materially and adversely affect our revenues, and our business, financial condition, operating results and cash flows could be harmed.
The government contracting process is typically a competitive bidding process and involves unique risks and requirements.
Our business involves government contracts and grants, which may be awarded through competitive bidding. Competitive bidding for government contracts presents many risks and requirements, including:
the possibility that we may be ineligible to respond to a request for proposal issued by the government;
| in the event our competitors protest or challenge contract or grant awards made to us pursuant to competitive bidding, the potential that we may incur expenses or delays, and that any such protest or challenge could result in the resubmission of bids based on modified specifications, or in the termination, reduction or modification of the awarded contract. |
The U.S. governmentUSG may choose not to award us future contracts for either the development of our new product candidates or for the procurement of our existing products addressing PHTs and may instead
award such contracts to our competitors. If we are unable to secure particular contracts, we may not be able to operate in the market for products that are provided under those contracts. Additionally, if we are unable to consistently win new contract awards over an extended period, or if we fail to anticipate all of the costs or resources that we will be required to secure and, if applicable, perform under such contract awards, our growth strategy and our business, financial condition and operating results and cash flows could be materially and adversely affected.
Laws and regulations affecting government contracts make it costlier and more costly and difficult for us to successfully conduct our business. Failure to comply with these laws could result in significant civil and criminal penalties and materially damage our reputation and relationship with the U.S. government,USG, which could have a material adverse effect on our business, financial condition, operating results and cash flows.
As a manufacturer and supplier of MCMs to the U.S. governmentUSG addressing PHTs, we we must comply with numerous laws and regulations relating to the procurement, formation, administration and performance of government contracts. These laws and regulations govern how we transact business with our government clients and, in some instances, impose additional costs and related obligations on our business operations. Among the most significant government contracting regulations that affect our business are:
the Federal Acquisition Regulation (FAR), and agency-specific regulations supplemental to FAR, which comprehensively regulate the award, formation, administration and performance of government contracts;
EMERGENT BIOSOLUTIONS INC.
export and import control laws and regulations, including but not limited to International Traffic in Arms Regulations; and |
laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
The amount we are paid under our fixed price government procurement contracts is based on estimates we have made of thetime, resources and expenses required for us to perform under those contracts. If our actual costs exceed our estimates, we may not be able to earn an adequate return or may incur a lossunder these contracts, which could harm our operating results and materially reduce our net income.
Our current procurement contracts with HHS and the DoD are fixed price contracts. We expect that future procurement contracts we successfully secure with the U.S. governmentUSG would also be fixed price contracts. Under a fixed price contract, we are required to deliver our products at a fixed price regardless of the actual costs we incur. Estimating costs that are related to performance in accordance with contract specifications is difficult, particularly where the period of performance is over several years. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed price contract could reduce the profitability of such a contract or cause a loss, which could harm our operating results and materially reduce our net income.
Unfavorable provisions in government contracts, some of which may be customary, maysubject our business to material limitations, restrictions and
uncertainties and may have a material adverse impact on our business, financial condition, operating results and cash flows.
Government contracts customarily contain provisions that give the U.S. governmentUSG substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the U.S.USG to:
terminate existing contracts, in whole or in part, for any reason or no reason;
unilaterally reduce or modify contracts or subcontracts, including by imposing equitable price adjustments;
cancel multi-year contracts and related orders, if funds for contract performance for any subsequent year become unavailable;
decline, in whole or in part, to exercise an option to purchase product under a procurement contract or to fund additional development under a development contract;
decline to renew a procurement contract;
claim rights to facilities or to products, including intellectual property, developed under the contract;
require repayment of contract funds spent on construction of facilities in the event of contract default;
take actions that result in a longer development timeline than expected;
direct the course of a development program in a manner not chosen by the government to:contractor;
suspend or debar the contractor from doing business with the government or a specific government agency;
| control or prohibit the export of products. |
Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the U.S. government'sUSG’s convenience. Under general principles of government contracting law, if the U.S. governmentUSG terminates a contract for convenience, the government contractor may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the U.S. governmentUSG terminates a contract for default, the government contractor is entitled to
EMERGENT BIOSOLUTIONS INC.
recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. All of our contracts, both development and procurement, with the U.S. government,USG, are terminable at the U.S. government'sUSG’s convenience with these potential consequences.
In addition, our U.S. governmentUSG contracts grant the U.S. governmentUSG the right to use technologies developed by us under the government contract or the right to share data related to our technologies, for or on behalf of the U.S. government.USG. Under our U.S. governmentUSG contracts, we might not be able to prohibit third parties, including our competitors, from accessing such technology or data, including intellectual property, in providing products and services to the U.S. government.USG.
RELIANCE ON THIRD PARTIES
The loss of any of our non-exclusive, sole-source or single source suppliers or an increase in the price of inventory supplied to us could have an adverse effect on our business, financial condition and results of operations.
We purchase certain supplies used in our manufacturing processes from non-exclusive, or single sources due to quality considerations, costs or constraints resulting from regulatory requirements, including key components for NARCAN® Nasal Spray (Naloxone API, along with the vial, stopper and device). Where a particular single-source supply relationship is terminated, we may not be able to establish additional or replacement suppliers for certain components or materials quickly. This is largely due to the FDA approval system, which mandates validation of materials prior to use in our products, and the complex nature of manufacturing processes. In addition, we may lose a sole-source supplier due to, among other things, the acquisition of such a supplier by a competitor (which may cause the supplier to stop selling its products to us) or the bankruptcy of such a supplier, which may cause the supplier to cease operations. Any reduction or interruption by a sole-source supplier of the supply of materials or key components used in the manufacturing of our products or an increase in the price of those materials or components could adversely affect our business, financial condition and results of operations.
Additionally, any failure by us to forecast demand for, or our suppliers to maintain an adequate supply of, the raw material and finished product for producing NARCAN® Nasal Spray could result in an interruption in the supply of NARCAN® Nasal Spray and a decline in sales of the product.
If we are unable to obtain supplies for the manufacture of our products and product candidates in sufficientquantities, at an acceptable cost and in acceptable quality, our ability to manufacture or to
develop and commercialize our products and product candidatescould be impaired, which could materially harm our revenues, lead to a termination of one or more of our contracts, lead to delays in clinical trials or otherwise materially harm our business.
We depend on certain single-source suppliers for key materials and services necessary for the manufacture of BioThrax and our other products and product candidates. For example, we rely on a single-source supplier to provide us with Alhydrogel in sufficient quantities to meet our needs to manufacture BioThrax and AV7909, and currently rely on a single-source supplier to manufacture raxibacumab. We also rely on single-source suppliers for the sponge applicator device and the active ingredient used to make RSDL as well as the specialty plasma in our hyperimmune specialty plasma products and certain ingredients for ACAM2000. A disruption in the availability of such materials or services from these suppliers or in the quality of the material provided by such suppliers could require us to qualify and validate alternative suppliers. If we are unable to locate or establish alternative suppliers, our ability to manufacture our products and product candidates could be adversely affected and could harm our revenues, cause us to fail to satisfy contractual commitments, lead to a termination of one or more of our contracts or lead to delays in our clinical trials, any of which could be costly to us and otherwise materially harm our business, financial condition, operating results and cash flows.
We depend on third parties to conduct our clinical and non-clinical trials. If these third parties do not perform as contractuallyrequired or as we expect, we may not be able to obtain regulatory approval for orcommercialize our product candidates and, as a result, our business, financial condition, operating results and cash flows may suffer.
We do not have the ability to independently conduct the clinical and non-clinical trials required to obtain regulatory approval for our product candidates. We depend on third parties, such as independent clinical investigators, contract research organizations and other third-party service providers to conduct the clinical and non-clinical trials of our product candidates and expect to continue to do so. We rely heavily on these third parties for successful execution of our clinical and non-clinical trials, but do not exercise day-to-day control over their activities. Our reliance on these service providers does not relieve us of our regulatory responsibilities, including ensuring that our trials are conducted in accordance with good clinical practice regulations and the plan and protocols contained in the relevant regulatory application. In addition, these organizations may not complete these activities on our anticipated or desired timeframe. We also may experience unexpected cost
EMERGENT BIOSOLUTIONS INC.
increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider, which may prove difficult, costly and result in a delay of our trials. Any delay in or inability to complete our trials could delay or prevent the development, approval and commercialization of our product candidates.
In certain cases, government entities and non-government organizations conduct studies of our product candidates, and we may seek to rely on these studies in applying for marketing approval for certain of our product candidates. These government entities and non-government organizations have no obligation or commitment to us to conduct or complete any of these studies or clinical trials and may choose to discontinue these development efforts at any time. Furthermore, government entities depend on annual Congressional appropriations to fund their development efforts, which may not be approved.
If we are unable to obtain any necessary third-party services on acceptable terms or if these service providers do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for our product candidates may be delayed or prevented.
REGULATORY AND COMPLIANCE RISKS
Our long-term success depends, in part, upon our ability to develop, receive regulatory approval for and commercialize product candidates we develop or acquire and, if we are not successful, our business, financial condition, operating results and cash flows may suffer.
Our product candidates and the activities associated with their development, including testing, manufacture, recordkeeping, storage and approval, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Except under limited circumstances related to certain government sales, failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate.
In the United States, to obtain approval from the FDA to market any of our future biologic products, we will be required to submit a biologics license application or BLA,(BLA) to the FDA. Ordinarily, the FDA requires a company to support a BLA with substantial evidence of the product candidate'scandidate’s safety, purity and efficacypotency in treating the targeted indication based on data derived from adequate and well-controlled clinical trials, including Phase III safety and efficacy3 trials conducted in patients with the disease or condition being targeted.
However, NuThraxAV7909 and many of our MCM product candidates, for example, are subject tomay take advantage of a different regulatory approval pathway under the FDA's "AnimalFDA’s “Animal Rule."” The Animal Rule provides a regulatory pathway for drug and biologic products targeting indications for which human efficacy studies are not feasible or would be unethical. Instead, efficacy must be demonstrated, in part, by utilizing animal models rather than testing in humans. We cannot guarantee that the FDA will permit us to proceed with licensure of NuThraxAV7909 or any of our PHT MCM candidates under the Animal Rule. Even if we are able to proceed pursuant to the Animal Rule, the FDA may decide that our data are insufficient to support approval and require additional preclinical, clinical or other studies, refuse to approve our products, or place restrictions on our ability to commercialize those products. Furthermore, products approved under the Animal Rule are subject to certain additional post-marketing requirements. For example, to the extent feasible and ethical, manufacturers of products approved pursuant to the Animal Rule must conduct post-marketing studies, such as field studies, to verify and describe the product candidate's clinical benefit and to assess its safety when used as indicated. We cannot guarantee that we will be able to meet this regulatory requirement even if one or more of our product candidates are approved under the Animal Rule.
The process of obtaining these regulatory approvals is expensive, often takes many years if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidate involved. Changes in the regulatory approval process during the development period, changes in or the enactment of additional statutes or regulations, or changes in the regulatory review process generally may cause delays in the approval or rejection of an application.
The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient to support approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate.
Even if we or our collaborators obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to generate revenue.
Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation. We and our collaborators must therefore comply with requirements concerning advertising and
EMERGENT BIOSOLUTIONS INC.
promotion for any of our product candidates for which we obtain marketing approval. Promotional communications with respect to prescription products are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we will not be able to promote any products we develop for indications or uses for which they are not approved.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We and our collaborators and our contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.
Accordingly, were we to receive marketing approval for one or more of our product candidates, we would continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.
If we and our collaborators are not able to comply with post-approval regulatory requirements, we could have the marketing approvals for our products withdrawn by regulatory authorities and our ability to market any products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.
Any product candidate for which we or our collaborators obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to substantial penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.
Any product candidate for which we or our collaborators obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control and manufacturing, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product
candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the medicine, including the requirement to implement a risk evaluation and mitigation strategy.
The FDA and other agencies, including the Department of Justice (DOJ), closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA and DOJ impose stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the Federal Food, Drug, and Cosmetic Act and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription products may lead to investigations and enforcement actions alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
restrictions on such products, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on distribution or use of a product;
requirements to conduct post-marketing studies or clinical trials;
warning letters or untitled letters;
withdrawal of the products from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of products;
damage to relationships with collaborators;
unfavorable press coverage and damage to our reputation;
fines, restitution or disgorgement of profits or revenues;
suspension or withdrawal of marketing approvals;
EMERGENT BIOSOLUTIONS INC.
refusal to permit the import or export of our products;
product seizure;
injunctions or the imposition of civil or criminal penalties; and
litigation involving patients using our products.
Non-compliance with EU requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the EU’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.
Current and future legislation may increase the difficulty and cost for us and any collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any collaborators, may receive for any approved products.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the ACA). Among the provisions of the ACA of potential importance to our business and our product candidates are the following:
an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription products and biologic agents;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
| • | a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for products that are inhaled, infused, instilled, implanted or injected; |
| • | expansion of healthcare fraud and abuse laws, including the civil False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance; |
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand products to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient products to be covered under Medicare Part D;
extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
new requirements to report certain financial arrangements with physicians and teaching hospitals;
a new requirement to annually report product samples that manufacturers and distributors provide to physicians;
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;
a new Independent Payment Advisory Board (IPAB), which has authority to recommend certain changes to the Medicare program to reduce expenditures by the program that could result in reduced payments for prescription products; and
established the Center for Medicare and Medicaid Innovation within the Centers for Medicare & Medicaid Services (CMS) to test innovative payment and service delivery models.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to
EMERGENT BIOSOLUTIONS INC.
Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, became effective on January 1, 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewerAmericans to be insured in 2027 and premiums in insurance markets may rise. Further, each chamber of Congress has put forth multiple bills designed to repeal or repeal and replace portions of the ACA. Although none of these measures has been enacted by Congress to date, Congress may consider other legislation to repeal and replace elements of the ACA. Congress will likely consider other legislation to replace elements of the ACA, during the next Congressional session. It is possible that such initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. While the timing and scope of any potential future legislation to amend the ACA is highly uncertain in many respects, it is also possible that some of the ACA provisions that generally are not favorable for the research-based pharmaceutical industry could also be repealed along with an ACA coverage expansion provision. We will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on our business.
The Trump Administration has also taken executive actions to challenge or delay implementation of the ACA. Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the
implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the Trump Administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Further, on June 14, 2018, the U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap in reimbursement on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.
In addition, the CMS has proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. On November 30, 2018, CMS announced a proposed rule that would amend the Medicare Advantage and Medicare Part D prescription drug benefit regulations to reduce out of pocket costs for plan enrollees and allow Medicare plans to negotiate lower rates for certain drugs. Among other things, the proposed rule changes would allow Medicare Advantage plans to use pre authorization (PA) and step therapy (ST) for six protected classes of drugs, with certain exceptions, permit plans to implement PA and ST in Medicare Part B drugs; and change the definition of “negotiated prices,” while providing a definition of “price concession” in the regulations. It is unclear whether these proposed changes will be accepted, and if so, what effect such changes will have on our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. The Trump administration and CMS have both stated that the ruling will have no immediate effect, and on December 30, 2018 the same judge issued an order staying the judgment pending appeal. The Trump Administration
EMERGENT BIOSOLUTIONS INC.
has recently represented to the Court of Appeals considering this judgment that it does not oppose the lower court’s ruling. It is unclear how this decision and any subsequent appeals and other efforts to repeal and replace the ACA will impact the ACA and our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
The costs of prescription pharmaceuticals have also been the subject of considerable discussion in the United States, and members of Congress and the Trump Administration have stated that they will address such costs through new legislative and administrative measures. To date, there have been several recent U.S. congressional inquiries and proposed and enacted state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
Specifically, there have been several recent U.S. congressional inquiries and proposed federal and proposed and enacted state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. For example, on May 11, 2018, the Administration issued a plan to lower drug prices. Under this blueprint for action, the
Administration indicated that HHS will: take steps to end the gaming of regulatory and patent processes by drug makers to unfairly protect monopolies; advance biosimilars and generics to boost price competition; evaluate the inclusion of prices in drug makers’ ads to enhance price competition; speed access to and lower the cost of new drugs by clarifying policies for sharing information between insurers and drug makers; avoid excessive pricing by relying more on value-based pricing by expanding outcome-based payments in Medicare and Medicaid; work to give Part D plan sponsors more negotiation power with drug makers; examine which Medicare Part B drugs could be negotiated for a lower price by Part D plans, and improving the design of the Part B Competitive Acquisition Program; update Medicare’s drug-pricing dashboard to increase transparency; prohibit Part D contracts that include “gag rules” that prevent pharmacists from informing patients when they could pay less out-of-pocket by not using insurance; and require that Part D plan members be provided with an annual statement of plan payments, out-of-pocket spending, and drug price increases. More recently, on January 31, 2019, the HHS Office of Inspector General proposed modifications to the federal Anti-Kickback Statute discount safe harbor for the purpose of reducing the cost of drug products to consumers which, among other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers working with these organizations.
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
If we fail to comply with foreign, federal, state and local healthcare laws, including fraud and abuse and health information privacy and security laws, and
EMERGENT BIOSOLUTIONS INC.
antitrust laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.
In the United States, certain of our products are reimbursed under federal and state health care programs such as Medicaid, Medicare, TriCare, and or state pharmaceutical assistance programs. Many foreign countries have similar laws. Federal and state laws designed to prevent fraud and abuse under these programs prohibit pharmaceutical companies from offering valuable items or services to customers or potential customers to induce them to buy, prescribe, or recommend our product (the so-called “antikickback” laws). Exceptions are provided for discounts and certain other arrangements if specified requirements are met. Other federal and state laws, and similar foreign laws, not only prohibit us from submitting any false information to government reimbursement programs but also prohibit us and our employees from doing anything to cause, assist, or encourage our customers to submit false claims for payment to these programs. We are also subject to various federal, state and foreign antitrust and competition laws that prohibit certain activities that may have an impact against potential competitors. Violations of the various fraud and abuse and antitrust laws may result in severe penalties against the responsible employees and us, including jail sentences, large fines, and the exclusion of our products from reimbursement under federal and state programs. Some of the laws that may affect our ability to operate include:
the federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer or pay remuneration, directly or indirectly, overtly or covertly, to induce, or in return for, either the referral of an individual, or the purchase, lease, prescribing or recommendation of an item, good, facility or service reimbursable by a federally funded healthcare program, such as the Medicare or Medicaid program. The term “remuneration” has been interpreted broadly and may constrain our marketing practices, educational programs, pricing policies and relationships with healthcare providers or other entities, among other activities;
the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment by a federal healthcare program or making a false statement or record material
to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $10,781 to $21,563 per false claim;
the U.S. federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health (HITECH), and their respective implementing regulations mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy, security and transmission of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among other things, HITECH makes HIPAA's security standards directly applicable to “business associates,” or independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity;
the Physician Payments Sunshine Act and its implementing regulations, which requires certain manufacturers of drugs, biologics, medical devices and medical supplies for which payment is available under Medicare, Medicaid or the Centers for Medicare & Medicaid Services (CMS), certain payments and transfers of value made to physicians and teaching hospitals, and ownership or
EMERGENT BIOSOLUTIONS INC.
investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers will also be required to report information regarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; state, local and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, obtain pharmaceutical agent licensure, and/or otherwise restrict payments that may be made to healthcare providers and entities; and state, local and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to healthcare providers or entities, or marketing expenditures.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-Kickback Statute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Moreover, recent health care reform legislation has strengthened these laws. For example, the ACA, among other things, amends the intent requirement of the federal Anti-Kickback Statute and criminal health care fraud statutes, so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from funded healthcare programs and the curtailment or restructuring of our operations. Any such penalties could adversely affect
our financial results. We are developing and implementing a corporate compliance program designed to ensure that we will market and sell any future products that we successfully develop from our product candidates in compliance with all applicable laws and regulations, but we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusion from government funded healthcare programs.
We are committed to conducting the sales and marketing of our applicable products and all our activities in compliance with the healthcare fraud and abuse and antitrust laws, but certain applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity, a governmental authority may take a position contrary to a position we have taken, or should an employee violate these laws without our knowledge, a governmental authority may impose civil and/or criminal sanctions.
The United States government, state governments and private payors regularly investigate the pricing and competitive practices of pharmaceutical companies and biotechnology companies, and many file actions alleging that inaccurate reporting of prices has improperly inflated reimbursement rates. We may also be subject to investigations related to our pricing practices. Regardless of merit or eventual outcome, these types of investigations and related litigation can result in:
EMERGENT BIOSOLUTIONS INC.
Diversion of management time and attention;
Expenditure of large amounts of cash on legal fees, costs and payment of damages or penalties;
Limitations on our ability to continue some of our operations;
Decreased demand for our products; and
Injury to our reputation.
Moreover, an adverse outcome, or the imposition of penalties or sanctions for failing to comply with the fraud and abuse and antitrust laws, could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
If we fail to comply with our obligations under U.S. governmental pricing programs, we could be required to reimburse government programs for underpayments and could pay penalties, sanctions and fines.
The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid rebate program will continue to increase our costs and the complexity of compliance and will be time-consuming. Changes to the definition of “average manufacturer price” (AMP), and the Medicaid rebate amount under the ACA and CMS and the issuance of final regulations implementing those changes has affected and could further affect our 340B “ceiling price” calculations. Because we participate in the Medicaid rebate program, we are required to report “average sales price” (ASP), information to CMS for certain categories of drugs that are paid for under Part B of the Medicare program. Future statutory or regulatory changes or CMS binding guidance could affect the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations.
Pricing and rebate calculations vary among products and programs, involve complex calculations and are often subject to interpretation by us, governmental or regulatory agencies and the courts. The Medicaid rebate amount is computed each quarter based on our submission to CMS of our current AMP and “best price” for the quarter. If we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for a period not to exceed twelve quarters from the quarter in which the data originally were due. Any such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision.
Such restatements and recalculations increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Price recalculations also may affect the “ceiling price” at which we are required to offer our products to certain covered entities, such as safety-net providers, under the 340B/PHS drug pricing program.
In addition to retroactive rebate liability and the potential for 340B program refunds, if we are found to have made a misrepresentation in the reporting of ASP, we are subject to civil monetary penalties for each such price misrepresentation and for each day in which such price misrepresentation was applied. If we are found to have knowingly submitted false AMP or “best price” information to the government, we may be liable for civil monetary penalties per item of false information. Any refusal of a request for information or knowing provision of false information in connection with an AMP survey verification also would subject us to civil monetary penalties. In addition, our failure to submit monthly/quarterly AMP or “best price” information on a timely basis could result in a civil monetary penalty per day for each day the information is late beyond the due date. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in the Medicaid program. In the event that CMS terminates our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our submissions will not be found by CMS to be incomplete or incorrect.
In order for our products to be reimbursed by the primary federal governmental programs, we report certain pricing data to the USG. Compliance with reporting and other requirements of these federal programs is a pre-condition to: (i) the availability of federal funds to pay for our products under Medicaid and Medicare Part B; and (ii) procurement of our products by the Department of Veterans Affairs (DVA), and by covered entities under the 340B/PHS program. The pricing data reported are used as the basis for establishing Federal Supply Schedule (FSS), and 340B/PHS program contract pricing and payment and rebate rates under the Medicare Part B and Medicaid programs, respectively. Pharmaceutical companies have been prosecuted under federal and state false claims laws for submitting inaccurate and/or incomplete pricing information to the government that resulted in increased payments made by these programs. The rules governing the calculation of certain reported prices are highly complex. Although we maintain and follow strict procedures to ensure the maximum possible integrity for our federal pricing
EMERGENT BIOSOLUTIONS INC.
calculations, the process for making the required calculations involves some subjective judgments and the risk of errors always exists, which creates the potential for exposure under the false claims laws. If we become subject to investigations or other inquiries concerning our compliance with price reporting laws and regulations, and our methodologies for calculating federal prices are found to include flaws or to have been incorrectly applied, we could be required to pay or be subject to additional reimbursements, penalties, sanctions or fines, which could have a material adverse effect on our business, financial condition and results of operations.
To be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be purchased by certain federal agencies and certain federal grantees, we also must participate in the DVA FSS pricing program. To participate, we are required to enter into an FSS contract with the DVA, under which we must make our innovator “covered drugs” available to the “Big Four” federal agencies-the DVA, the DoD, the Public Health Service (including the Indian Health Service), and the Coast Guard-at pricing that is capped pursuant to a statutory federal ceiling price (FCP), formula set forth in Section 603 of the Veterans Health Care Act of 1992 (VHCA). The FCP is based on a weighted average wholesale price known as the Non-Federal Average Manufacturer Price (Non-FAMP), which manufacturers are required to report on a quarterly and annual basis to the DVA. Pursuant to the VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject us to significant penalties for each item of false information. If we overcharge the government in connection with our FSS contract or Section 703 Agreement, whether due to a misstated FCP or otherwise, we are required to disclose the error and refund the difference to the government. The failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We intend to transfer the manufacturing of Raxibacumab,raxibacumab, which we acquired from GSK, to our bulk and fill finish facilities in Baltimore, Maryland, and this transfer of manufacturing operations requires FDA approval.
Under our arrangements with GSK for our acquisition of the Raxibacumabraxibacumab product, we will continue to purchase product from GSK to satisfy deliveries to the SNS under the current BARDA
contract, which expires in November 2019. We intend to seek FDA approval to transfer the manufacturing of Raxibacumabraxibacumab to our Baltimore, Maryland bulk and fill finish manufacturing facilities and currently anticipate FDA approval of this technology transfer in 2020. Approval of this technology transfer may involve complications or may not be secured on a timely basis or at all. Any delay in the approval of this anticipated technology transfer would delay our expected benefits and synergies from this product acquisition and could materially harm our revenues and our business, financial condition, operating results and cash flows could be harmed.harmed. Until approval of this technology transfer, we must rely on GSK to supply product to us to satisfy deliveries to the SNS under the BARDA contract, and GSK may fail to meet delivery obligations, which could result in our inability to satisfy requirements under the BARDA contract.
Even after regulatory approval is received, if we fail to comply with regulatory requirements, or if we experience unanticipated problems with our approved products, they could be subject to restrictions, penalties or withdrawal from the market.
Any vaccine, therapeutic product or medical device for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory bodies. Our approved products are subject to these requirements and ongoing review. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, current good manufacturing practices, or cGMP, requirements relating to potency and stability, quality control, quality assurance, restrictions on advertising and promotion, import and export restrictions and recordkeeping requirements. In addition, various state laws require that companies that manufacture and/or distribute drug products within the state obtain and maintain a manufacturer or distributor license, as appropriate. Because of the breadth of these laws, it is possible that some of our business activities could be subject to challenge under one or more of such laws.
Our regulators enforce cGMP and other requirements through periodic unannounced inspections of manufacturing facilities. The FDA is authorized to inspect domestic manufacturing facilities without prior notice at reasonable times and in a reasonable manner. Health Canada may conduct similar inspections of our facilities where Canadian marketed products are produced, or related formulation and filling operations are conducted. The FDA, Health Canada, and other foreign regulatory agencies conduct periodic inspections of our facilities. Following several of these inspections, regulatory authorities have issued inspectional observations,
EMERGENT BIOSOLUTIONS INC.
some of which were significant, but all of which are being, or have been, addressed through corrective actions. If, in connection with any future inspection, regulatory authorities find that we are not in substantial compliance with all applicable requirements, or if they are not satisfied with the corrective actions we take, our regulators may undertake enforcement action against us, which may include:
warning letters and other communications;
| injunctions or the imposition of civil or criminal penalties. |
Similar action may be taken against us should we fail to comply with regulatory requirements, or later discover previously unknown problems with our products or manufacturing processes. For instance, our products are tested regularly to determine if they satisfy potency and stability requirements for their required shelf lives. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval. Regulatory approval ormay also contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. If we experience any of these post-approval events, our business, financial condition, operating results and cash flows could be materially and adversely affected.
Additionally, companies may not promote drugs for "off-label"“off-label” uses (i.e., uses that are not described in the product'sproduct’s labeling and that differ from those approved by the applicable regulatory agencies). A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies (such as entering into corporate integrity agreements with the U.S. government)USG), as well as criminal sanctions. If our employees or agents engage in "off-label"“off-label” marketing of any of our products, we could be subject to civil or criminal investigations and monetary and injunctive penalties, which could adversely impact our ability to conduct business in certain markets, negatively affect our business, financial condition, operating results and cash flows, and damage our reputation.
Failure to obtain or maintain regulatory approval in international jurisdictions could prevent usfrom marketing our products abroad and could limit the growth of our business.
We intend to sell certain of our products, outside the United States and recently received market authorization under the MRPmutual recognition procedure to sell BioThrax, in France, Italy, the Netherlands, Poland, and the U.K. and licensure of BioThrax in four out of the five CMS countries. To market our products in foreign jurisdictions under normal circumstances, we may need to obtain separate regulatory approvals and comply with numerous and varying regulatoryrequirements or use alternative “emergency use” or other exemptions from general approval and import requirements. Approval by the FDA in the United States or the MRPmutual recognition procedure in the CMSEuropean member states does not ensure approval by all foreign regulatory authorities. The approval procedures in foreign jurisdictions can vary widely and can involve additional clinical trials and data review beyond that required by the FDA or under the MRP.mutual recognition procedure. We and our collaborators may not be able to obtain foreign regulatory approvals on a timely basis, if at all, and we may be unable to successfully commercialize our products internationally.internationally if no alternate procurement pathway is identified for authorized government customers in a particular jurisdiction. We have limited experience in preparing, filing and prosecuting the applications necessary to gain foreign regulatory approvals and expect to rely on third-party contract research organizations and consultants to assist us in this process.
Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The United Kingdom had a period of a maximum of two years from the date of its formal notification to negotiate the terms of its withdrawal from, and future relationship with, the European Union. If no formal withdrawal agreement can be reached between the United Kingdom and the European Union, then it is expected that the United Kingdom’s membership of the European Union would automatically terminate on the deadline, which was initially March 29, 2019. That deadline has been extended to October 31, 2019 to allow the parties to negotiate a withdrawal agreement, which has proven to be extremely difficult to date. Discussions between the United Kingdom and the European Union will continue to focus on withdrawal issues and transition agreements. However, limited progress to date in these negotiations and ongoing uncertainty within the government of the United Kingdom sustains the possibility of the United Kingdom leaving the European Union without a withdrawal agreement and associated
EMERGENT BIOSOLUTIONS INC.
transition period in place, which is likely to cause significant market and economic disruption.
Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, Brexit could materially impact the regulatory regime with respect to the approval of our products or any future product candidate in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the United Kingdom and/or the European Union and restrict our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for our product candidates, which could significantly and materially harm our business.
Laws and regulations governing international operations increase our riskmay preclude us from developing, manufacturing and selling certain products outside of exposurethe United States and require us to potential claims of briberydevelop and corruption.
implement costly compliance programs.
As we continue to expand our commercialization activitiesoperations outside of the United States, we are subjectmust dedicate additional resources to an increased risk of inadvertently conducting activitiescomply with numerous laws and regulations in a manner that violates theeach jurisdiction in which we plan to operate. The FCPA prohibits any U.S. Foreign Corrupt Practices Act,individual or FCPA, the U.K. Bribery Act, Canada's Corruption of Foreign Public Officials Act, or other similar foreign laws, which prohibit corporations and individualsbusiness from paying, offering, to pay,authorizing payment or authorizing the paymentoffering of anything of value, directly or indirectly, to any foreign government official, government staff member, political party or political candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an attemptadequate system of internal accounting controls for international operations.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to obtain or retain business orhospitals in connection with clinical trials and other work have been deemed to otherwise influence a person working in an official capacity. Inbe improper payments to government officials and have led to FCPA enforcement actions.
Various laws, regulations and executive orders also restrict the course of establishinguse and expanding our commercial operations and seeking regulatory approvalsdissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside of the United States, it will needrequire us to establishdedicate additional resources to comply with these laws, and expand business relationshipsthese laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could limit our growth potential and increase our development costs.
The failure to comply with various third parties and will interact more frequently with foreign officials, including regulatory authorities and physicians employed by state-run healthcare institutions who may be deemed to be foreign officials under the FCPA or similar foreign laws. If ourlaws governing international business practices are found to bemay result in violation of the FCPA or similar foreign laws despite our training and compliance efforts, we and our senior management may be subject to significantsubstantial civil and criminal penalties potentialand suspension or debarment from public procurement and reputational damage, which could have a material adverse effectgovernment contracting. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
The expansion of our international operations increases our risk of exposure to credit losses.
As we continue to expand our business financial condition,activities with foreign governments in certain countries that have experienced deterioration in credit and economic conditions or otherwise, our exposure to uncollectible accounts will rise. Global economic conditions and liquidity issues in certain countries have resulted and may continue to result in delays in the collection of accounts receivables and may result in credit losses. Future governmental actions and customer specific actions may require us to re-evaluate the collectability of our accounts receivable and we may potentially incur credit losses that may materially impact our operating results, cash flows and growth prospects.
results.
MANUFACTURING RISKS
Disruption at, damage to or destruction of our manufacturing facilities could impede our ability to manufacture BioThrax or our other products, as well as deliver our contract development and manufacturing services, which would harm our business, financial condition, operating results and cash flows.
An interruption in our manufacturing operations could result in our inability to produce our PHT countermeasures for delivery to satisfy the product demands of our customers in a timely manner, which would reduce our revenues and materially harm our business, financial condition, operating results and cash flows.
EMERGENT BIOSOLUTIONS INC.
A number of factors could cause interruptions, including:
equipment malfunctions or failures;
| product contamination or tampering. |
Providers of PHT countermeasures could be subject to an increased risk of terrorist activities. The U.S. governmentUSG has designated both our Lansing, Michigan and our Bayview bulk manufacturing facility in Baltimore, Maryland as facilities requiring additional security. Although we continually evaluate and update security measures, there can be no assurance that any additional security measures would protect these facilities from terrorist efforts determined to disrupt our manufacturing activities.
The factors listed above could also cause disruptions at our other facilities, including our manufacturing facilities in Winnipeg, Manitoba, Canada; other Baltimore, Maryland facilities in Camden; facilities in Canton, Massachusetts; Rockville, Maryland;Maryland, Bern, Switzerland; and Hattiesburg, Mississippi. We do not have any redundant manufacturing facilities for any of our marketed products. Accordingly, any disruption, damage, or destruction of these facilities could impede our ability to manufacture our marketed products, our product candidates and our ability to produce products for external customers, result in losses and delays, including delay in the performance of our contractual obligations or delay in our clinical trials, any of which could be costly to us and materially harm our business, financial condition, operating results and cash flows.
We may not be able to utilize the full manufacturing capacity of our manufacturing facilities, which could impact our future revenues and materially harm our business, financial condition, operating results and cash flows.
Despite our ongoing efforts to optimize the utilization of our manufacturing infrastructure (including bulk, fill/finish, support, aseptic filling, lyophilization, final packaging), we may not be able to realize full utilization, which could adversely affect our future revenues, financial condition, operating results and cash flows.
Problems may arise during the production of our marketed products and product candidates due to the complexity of the processes involved in their manufacturing and shipment. Significant delays in product manufacturing or development could cause delays in revenues, which would harm our business, financial condition, operating results and cash flows.
BioThrax, Raxibacumab,raxibacumab, ACAM2000, Anthrasil, BAT, VIGIV, Vivotif, Vaxchora, and many of our current product candidates, including NuThrax,AV7909, are biologics. Manufacturing biologic products, especially in large quantities, is complex. The products must be made consistently and in compliance with a clearly defined manufacturing process. Problems during manufacturing may arise for a variety of reasons, including problems with raw materials, equipment malfunction and failure to follow specific protocols and procedures. In addition, slight deviations anywhere in the manufacturing process, including obtaining materials, maintaining master seed or cell banks and preventing genetic drift, seed or cell growth, fermentation, contamination including from particulates among other things, filtration, filling, labeling, packaging, storage and shipping, potency and stability issues and other quality control testing, may result in lot failures or manufacturing shut-downs, delays in the release of lots, product recalls, spoilage or regulatory action. Such deviations may require us to revise manufacturing processes or change manufacturers. Additionally, as our equipment ages, it will need to be replaced. Replacement of equipment has the potential to introduce variations in the manufacturing process that may result in lot failures or manufacturing shut-downs, delay in the release of lots, product recalls, spoilage or regulatory action. Success rates can also vary dramatically at different stages of the manufacturing process, which can reduce yields and increase costs. From time to time, we may experience deviations in the manufacturing process that may take significant time and resources to resolve and, if unresolved, may affect manufacturing output and could cause us to fail to satisfy customer orders or contractual commitments, lead to a termination of one or more of our contracts, lead to delays in our clinical trials, result in litigation or regulatory action against us, including warning letters and other restrictions on the marketing or manufacturing of a product, or cause the FDA to cease releasing product until the deviations are explained and corrected, any of which could be costly to us, damage our reputation and negatively impact our business.
We are contractually required to ship our biologic products at a prescribed temperature range and variations from that temperature range could result in loss of product and could significantly and adversely impact our revenues, which would harm our business, financial condition, operating results and cash flows.
EMERGENT BIOSOLUTIONS INC.
Manufacturing delays, lot failures, shipping deviations, spoilage or other loss during shipping could cause us to fail to satisfy customer orders or contractual commitments, lead to a termination of one or more of our contracts, lead to delays in potential clinical trials or result in litigation or regulatory action against us, any of which could be costly to us and otherwise harm our business.
We are required to obtain FDA approval prior to the release of each lot of BioThraxraxibacumab and ACAM2000,certain other products, which may not be obtained on a timely basis or at all.
FDA approval is required for the release of each lot of BioThrax and ACAM2000.raxibacumab. We are not able to sell any lots that fail to satisfy the FDA release testing specifications. For example, we must provide the FDA with the results of certain tests, including potency tests, before lots are released for sale. Potency testing of each lot of BioThrax and each lot of ACAM2000raxibacumab is performed against qualified control lots that we maintain. We continually monitor the status of our reference lots for FDA compliance and periodically produce and qualify a new reference lot to replace the existing reference lot. If we are not able to produce and qualify a new reference lot or otherwise satisfy the FDA'sFDA’s requirements for release of BioThrax or ACAM2000,raxibacumab, our ability to sell BioThrax or ACAM2000raxibacumab would be impaired until such time as we become able to meet the FDA'sFDA’s requirements, which wouldcould materially harm our future business, financial condition, operating results and cash flows.
Our operations, including our use of hazardous materials, chemicals, bacteria and viruses, require us to complywith regulatory requirements and expose us to significant potential liabilities.
Our operations involve the use of hazardous materials, including chemicals, bacteria and viruses, and may produce dangerous waste products. Accordingly, we, along with the third parties that conduct clinical trials and manufacture our products and product candidates on our behalf, are subject to federal, state, local and foreign laws and regulations that govern the use, manufacture, distribution, storage, handling, exposure, disposal and recordkeeping with respect to these materials. Under the Federal Select Agent Program, pursuant to the Public Health Security and Bioterrorism Preparedness and Response Act, we are required to register with and be inspected by the CDC and the Animal and Plant Health Inspection Service if we have in our possession, or if we use or transfer, select biological agents or toxins that could pose a threat to public health and safety, to animal or plant health or to animal or plant products. This legislation requires stringent safeguards and security measures for these select agents and toxins, including controlled access and the screening of entities and personnel and establishes a comprehensive national database of registered
entities. We are also subject to a variety of environmental and occupational health and safety laws. Compliance with current or future laws and regulations can require significant costs and we could be subject to substantial fines and penalties in the event of noncompliance. In addition, the risk of contamination or injury from these materials cannot be completely eliminated. In such event, we could be held liable for substantial civil damages or costs associated with the cleanup of hazardous materials. From time to time, we have been involved in remediation activities and may be so involved in the future. Any related cost or liability might not be fully covered by insurance, could exceed our resources and could have a material adverse effect on our business, financial condition, operating results and cash flows. In addition to complying with environmental and occupational health and safety laws, we must comply with special regulations relating to biosafety administered by the CDC, HHS, U.S. Department of Agriculture and the DoD, as well as regulatory authorities in Canada.
RISKS RELATED TO STRATEGIC ACQUISITIONS AND COLLABORATIONS
Our strategy of generating growth through acquisitions may not be successful.
Our business strategy includes growing our business through acquisition and in-licensing transactions. We may not be successful in identifying, effectively evaluating, structuring, acquiring or in-licensing, and developing and commercializing additional products on favorable terms, or at all. Competition for attractive product opportunities is intense and may require us to devote substantial resources, both managerial and financial, to an acquisition opportunity. A number of more established companies are also pursuing strategies to acquire or in-license products in the biopharmaceutical field. These companies may have a competitive advantage over us due to their size, cash resources, cost of capital, effective tax rate and greater clinical development and commercialization capabilities.
Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote significant resources to potential acquisitions that are never completed. Even if we are successful in acquiring a company or product, it may not result in a successfully developed or commercialized product or, even if an acquired product is commercialized, competing products or technologies could render a product noncompetitive, uneconomical or obsolete. Moreover, the cost of acquiring other companies or in-licensing products could be substantial, and in order to acquire companies or new products, we may need to incur substantial debt or issue dilutive securities. For example, our acquisition of the ACAM2000 business required initial payments of $117.5 million and an additional milestone payment of $7.5 million on the achievement of a regulatory event. In addition, our acquisition of Raxibacumab required a $76 million upfront payment and may require up to $20 million in additional future milestone payments.
EMERGENT BIOSOLUTIONS INC.
If we are unsuccessful in our efforts to acquire other companies or in-license and develop additional products, or if we acquire or in-license unproductive assets, it could have a material adverse effect on the growth of our business, and we could be compelled to record significant impairment charges to write-down the carrying value of our acquired intangible assets, which could materially harm our, business, financial condition, operating results and cash flows.
Our failure to successfully integrate acquired businesses and/or assets into our operations could adversely affect our ability to realize the benefits of such acquisitions and, therefore, to grow our business.
We may not be able to integrate any acquired business successfully or operate any acquired business profitably.profitably, including our acquisitions of Adapt and PaxVax. In addition, cost synergies, if achieved at all, may be less than we expect, or may take greater time to achieve than we anticipate.
Issues that could delay or prevent successful integration or cost synergies of an acquired business or products include, among others:
retaining existing customers and attracting new customers;
| managing tax costs or inefficiencies associated with integrating operations. |
If we are unable to successfully integrate pending and future acquisitions with our existing businesses, or operate any acquired business profitably, we may not obtain the advantages that the acquisitions were intended to create, which may materially adversely
affect the growth of our business, financial condition, operating results and cash flows.
COMPETITIVE AND POLITICAL RISKS
We face substantial competition, which may result in others developing orcommercializing products before or more successfully than we do.
The development and commercialization of new biopharmaceutical and medical technology products is highly competitive and subject to rapid technological advances. We may face future competition from other companies and governments, universities and other non-profit research organizations in respect to our products, any products that we acquire, our current product candidates and any products we may seek to develop or commercialize in the future. Our competitors may develop products that are safer, more effective, more convenient or less costly than any products that we may develop or market. Our competitors may have greater resources to devote to marketing or selling their products, adapt more quickly to new technologies, scientific advances or patient preferences and needs, initiate or withstand substantial price competition more successfully than we can, or more effectively negotiate third-party licensing and collaborative arrangements.
There are a number of companies with products or product candidates addressing PHT preparedness that are competing with us for both U.S. governmentUSG procurement and development resources. Many of our competitors have greater financial, technical and marketing resources than we do. Our competitors may receive patent protection that dominates, blocks or adversely affects our products or product candidates.
Any reduction in demand for our products or reduction or loss of development funding for our products or product candidates in favor of a competing product could lead to a loss of market share for our products and cause reduced revenues, margins and levels of profitability for us, which could adversely affect our business, financial condition, operating results and cash flows.
Our Biologic Products may face risks of competition from biosimilar manufacturers.
Competition for BioThrax, Raxibacumab,raxibacumab, ACAM2000, Anthrasil, BAT, VIGIV, Vivotif and VIGIV,Vaxchora otherwise referred to as our "Biologic“Biologic Products,"” may be affected by follow-on biologics, or "biosimilars,"“biosimilars,” in the United States and other jurisdictions. Regulatory and legislative activity in the United States and other countries may make it easier for generic drug manufacturers to manufacture and sell biological drugs similar or identical to our Biologic Products, which might affect the profitability or commercial viability of our Biologic Products. Under the Biologics Price Competition and Innovation Act of 2010, the FDA
EMERGENT BIOSOLUTIONS INC.
cannot approve a biosimilar application until the 12-year exclusivity period for the innovator biologic has expired. Regulators in the European Union and in other foreign jurisdictions have already approved biosimilars. The specific regulatory framework for this biosimilar approval path and the extent to which an approved biosimilar would be substituted for the innovator biologic are not yet clear and will depend on many factors. If a biosimilar version of one of our Biologic Products were approved, it could have a material adverse effect on the sales and gross profits of the affected Biologic Product and could adversely affect our business, financial condition, operating results and cash flows.
We expect our NARCAN® Nasal Spray marketed product to face future competition from other treatments.
Our marketed product NARCAN® Nasal Spray faces potentially substantial competition from other treatments, including injectable naloxone, auto-injectors, nasal sprays or improvised nasal spray kits. In addition, other entrants may seek approval to market generic versions of NARCAN® Nasal Spray before the underlying patents expire. For example, in 2016 Teva filed, and in 2018 Perrigo filed, ANDAs which seek regulatory approval to market generic versions of NARCAN® Nasal Spray before the expiration of certain underlying patents and in April 2019, Teva received FDA approval to market its generic version of NARCAN® Nasal Spray. Teva may decide to launch its approved generic product although the launch would be at risk since the litigation we instituted against Teva is still ongoing.
Additionally, in January 2019, the FDA released new proposed template Drug Facts Labels to assist sponsors of investigational naloxone nasal sprays and auto-injectors seeking approval from the FDA for over-the-counter naloxone products. Any reduction in demand for NARCAN® Nasal Spray in favor of a competing product, or unsuccessful efforts to defend underlying patents from infringement by generic entrants, could lead to a loss of market share and cause reduced revenues, margins and levels of profitability for us, which could adversely affect our business, financial condition, operating results and cash flows.
Political or social factors may delay or impair our ability to market our products and may require us to spend significant management time and financial resources to address these issues.
Products developed to counter the potential impact of PHTs, whether CBRNE or EID, are subject to changing political and social environments. The political responses and social awareness of the risks of these threats on military personnel or civilians may vary over time. If the threat of terrorism were to decline,
then the public perception of the risk on public health and safety may be reduced. This perception, as well as political or social pressures, could delay or cause resistance to bringing our products in development to market or limit pricing or purchases of our products, any of which could negatively affect our revenues and our business, financial condition, operating results and cash flows.
In addition, substantial delays or cancellations of purchases could result from protests or challenges from third parties. Lawsuits brought against us by third parties or activists, even if not successful, could require us to spend significant management time and financial resources defending the related litigation and could potentially damage the public's perception of us and our products. Any publicity campaigns or other negative publicity may adversely affect the degree of market acceptance of our PHT countermeasures and thereby limit the demand for our products, which would adversely affect our business, financial condition, operating results and cash flows.
PRODUCT DEVELOPMENT AND COMMERCIALIZATION RISKS
Our growth depends on our success in developing and commercializing our product candidates. If we are unable tocommercialize these product candidates, or experience significant delays or unanticipated costs indoing so, our business would be materially and adversely affected.
We have invested significant effort and financial resources in the development of our vaccines, therapeutics and medical device product candidates and the acquisition of additional product candidates. In addition to our product sales, our ability to generate revenue is dependent on a number of factors, including the success of our development programs, the U.S. government'sUSG's interest in providing development funding for or procuring certain of our product candidates, and the commercial viability of our acquired or developed product candidates. The commercial success of our product candidates will depend on many factors, including accomplishing the following in an economical manner:
successful development, formulation and cGMP scale-up of manufacturing that meets FDA or other foreign regulatory requirements;
EMERGENT BIOSOLUTIONS INC.
establishment of commercial manufacturing processes and product supply arrangements;
| successful registration and maintenance of relevant patent and/or other proprietary protection; and acceptance of the product by potential government and other customers. |
Under certain circumstances, we might sell unapproved MCMs to government entities. While this is permissible in some cases, the extent to which we may be able to lawfully market and sell unapproved products in many jurisdictions may be unclear or ambiguous. Such sales could subject us to regulatory enforcement action, product liability and reputational risk.
Under certain circumstances, MCMs may be procured by government entities prior to approval by the FDA or other regulatory authorities. In the United States, the Project BioShield Act of 2004 or Project BioShield,(Project BioShield) permits the Secretary of HHS to contract to purchase MCMs for the SNS prior to FDA approval of the countermeasure in specified circumstances. Project BioShield and the Pandemic and All-Hazards Preparedness Reauthorization Act of 2013 also allow the FDA Commissioner to authorize the emergency use of medical products that have not yet been approved by the FDA under an EUA pre-approval.EUA. Absent an applicable exception, our MCM product candidates generally will have to be approved by the FDA or other regulatory authorities through traditional pathways before we can sell those products to governments. Additionally, the laws in certain jurisdictions regarding the ability of government entities to purchase unapproved product candidates are ambiguous, and the permissibility of exporting unapproved products from the United States and importing them to foreign countries may be unclear. Nevertheless, government bodies, such as U.S. federal entities other than HHS, state and local governments within the United States, and foreign governments, may seek to procure our MCM product candidates that are not yet approved. If so, we would expect to assess the permissibility and liability implications of marketing our product candidates to such entities on a case-by-case basis, which presents certain challenges, both in the case of U.S. and foreign governments, and particularly under emergency conditions. In addition, agencies or branches of one country'scountry’s government may take different positions regarding the permissibility of such sales than another country'scountry’s government or even other agencies or branches of the same government. If we determine that we believe such activities are permissible, local enforcement authorities could
disagree with our conclusion and take enforcement action against us.
In addition, the sale of unapproved products also could give rise to product liability claims for which we may not be able to obtain indemnification or insurance coverage. For example, liability protections applicable to claims arising under U.S. law and resulting from the use of certain unlicensed products, such as a declaration issued under the Public Readiness and Emergency Preparedness Act or the(the PREP Act,Act) may not cover claims arising under non-U.S. law.
Regardless of the permissibility and liability risks, in the event a user of one or more of our products suffers an adverse event, we may be subject to additional reputational risk if the product has not been approved by the FDA or the corresponding regulatory authority of another country particularly because we will not have approved labeling regarding the safety or efficacy of those products. In addition, legislatures and other governmental bodies that have oversight responsibility for procuring agencies may raise concerns after the fact even if procurement was permissible at the time, which could result in negative publicity, reputational risk and harm to our business prospects.
Clinical trials of product candidates are expensive and time-consuming, and their outcome is uncertain. We must invest substantial amounts of time and financial resources in these trials, which may not yield viable products. Failure to obtain regulatory approval for product candidates, particularly in the United States, could materially and adversely affect our financial resources, which would adversely affect our business, financial condition, operating results and cash flows.
Before obtaining regulatory approval for the marketing of our product candidates, we and our collaborative partners, where applicable, must conduct preclinical studies and clinical trials to establish proof of concept and demonstrate the safety and efficacy of our product candidates. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in preclinical testing and early clinical trials does not ensure that later clinical trials or animal efficacy studies will be successful, and interim results of a clinical trial or animal efficacy study do not necessarily predict final results. An unexpected result in one or more of our clinical trials can occur at any stage of testing.
For certain of our product candidates addressing CBRNE threats, we expect to rely on the Animal Rule to obtain regulatory approval. The Animal Rule permits, in certain limited circumstances, the use of animal efficacy studies, together with human clinical safety and immunogenicity trials, to support an application for marketing approval. For a product
EMERGENT BIOSOLUTIONS INC.
approved under the Animal Rule, certain additional post-marketing requirements apply. For example, to the extent feasible and ethical, applicants must conduct post-marketing studies, such as field studies, to verify and describe the drug's clinical benefit and to assess its safety when used as indicated. We have limited experience in the application of these rules to the product candidates that we are developing. It is possible that results from these animal efficacy studies may not be predictive of the actual efficacy of our product candidates in humans.
Under Project BioShield, the Secretary of HHS can contract to purchase MCMs for the SNS prior to FDA approval of the countermeasure in specified circumstances. Project BioShield also allows the FDA commissioner to authorize the emergency use of medical products that have not yet been approved by the FDA under an Emergency Use Authorization.EUA. If our product candidates are not selected under this Project BioShield authority, they generally will have to be approved by the FDA through traditional regulatory mechanisms for distribution in the United States.
We may experience unforeseen events or issues during, or as a result of, preclinical testing, clinical trials or animal efficacy studies. These issues and events, which could delay or prevent our ability to receive regulatory approval for a product candidate, include, among others:
our inability to manufacture sufficient quantities of materials for use in trials;
| greater than anticipated costs of trials. |
We may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates.
We continue to evaluate our product development strategy and, as a result, may modify our strategy in the future. In this regard, we may, from time to time, focus our product development efforts on different product candidates or may delay or halt the development of various product candidates. We may change or refocus our existing product development, commercialization and manufacturing activities based on government funding decisions. This could require
changes in our facilities and our personnel. Any product development changes that we implement may not be successful. In particular, we may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates or choose candidates for which government development funds are not available. Our decisions to allocate our research and development, management and financial resources toward particular product candidates or therapeutic areas may not lead to the development of viable commercial products and may divert resources from better business opportunities. Similarly, our decisions to delay or terminate product development programs may also prove to be incorrect and could cause us to miss valuable opportunities.
INTELLECTUAL PROPERTY RISKS
If we are unable to protect our proprietary rights, our business, financial condition, operating results, and cash flows could be materially harmed.
Our success especially with respect to our small molecule product candidates, will depend, in large part, on our ability to obtain and maintain protection in the United States and other countries for the intellectual property coveringincorporated into or incorporated intocovering our technology, products, and product candidates. Obtaining and maintaining this protection of our intellectual property is very costly. The patentability of technology in the biopharmaceutical field generally is highly uncertain and involves complex legal and scientific questions.
We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may inadvertently lapse or be challenged, narrowed, invalidated, or circumvented, whichand such happenings could limit our ability to stop competitors from marketing similar products or limit the duration of patent protection we may have for our products. In the past, we have abandoned the prosecution and/or maintenance of patent applications related to patent families in the ordinary course of business. In the future we may choose to abandon such prosecution and/or maintenance in a similar fashion. If these patent rights are later determined to be valuable or necessary to our business, our competitive position may be adversely affected. Changes in patent laws or administrative patent office rules or changes in interpretations of patent laws in the United States and in other countries may diminish the value of our intellectual property, or narrow the scope of our patent protection, or result in costly defensive measures. In addition, some countries do not grant patent claims directed to methods of treating humans and, in these countries, patent protection may not be available at all to protect our products or product candidates.
The cost of litigation to uphold the validity of patents to prevent or stop infringement or to otherwise
EMERGENT BIOSOLUTIONS INC.
protect or enforce our proprietary rights could be substantial and, from time to time, our patents are subjectmay be subjected to opposition proceedings.proceedings or validity challenges. Some of our competitors may choose to or be better able to sustain the costs of complex patent litigation because they may have substantially greater financial resources.litigation. Intellectual property lawsuits are expensive and unpredictable and would consume management's time and attention and other resources, even if the outcome wereis successful. In addition, there is a risk that a court wouldcould decide that our patents are not valid, are unenforceable, or must be interpreted narrowly and that we doare not have the right to stop another party from using the inventions coveredinfringed by or incorporating them.a competitor product. There is also a risk that, even if the validity of a patent wereis upheld, a court wouldcould refuse to stop the other party from using the invention(s), including on the grounds that its activities do not infringe the patent. If any of these events were to occur, our business, financial condition, operating results and cash flows could be materially and adversely affected.
Our collaborators and licensors may not adequately protect our intellectual property rights. These third parties may have the first right to maintain or defend intellectual property rights in which we have an interest and, although we may have the right to assume the maintenance and defense of such intellectual property rights if these third parties do not do so, our ability to maintain and defend such intellectual property rights may be compromised by the acts or omissions of these third parties. For example, we license from Pfizer,from:
Opiant Pharmaceuticals, Inc. an oligonucleotide adjuvant, CPG 7909,formulations of naloxone, for use in our NuThrax anthrax vaccineNARCAN® Nasal Spray.
Pharma Consult GmbH autoinjectors, including the autoinjector used for our Trobigard® (atropine sulfate, obidoxime chloride) autoinjector.*
*Trobigard® 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 US. This product candidate.
is not distributed in the US.
We also will rely on current and future trademarks to establish and maintain recognized brands. If we fail to acquire and protect such trademarks, our ability to market and sell our products, and therefore our business, financial condition, operating results, and cash flows could be materially and adversely affected.
Third parties may choose to file patent infringement claims against us; defending ourselves from such allegations wouldcould be costly, time-consuming, distracting to management, and could materially and adversely affect our business, financial condition, operating results, and cash flows.
Our development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be claimed to infringe patents and other intellectual property rights of third parties for which we do not hold sufficient licenses or other rights. Additionally, third parties may be successful in obtaining patent protection for technologies that cover development and commercialization activities in which we are already engaged. Third parties may own or control these patents and intellectual property rights in the United States and abroad. These third parties may have substantially greater financial resources than us and could bring claims against us that could cause us to incur substantial expenses to defend against these claims and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement or other similar suit wereis brought against us, we could be forced to stop or delay development, manufacturing, or sales of the product or product candidate that is the subject of the suit. Intellectual property litigation in the biopharmaceutical industry is common, and we expect this trend to continue.
As a result of patent infringement or other similar claims, or to avoid potential claims, we may choose or be required to seek a license from thea third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we wereare able to obtain a license, the rights may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations. If, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms, if at all, or if an injunction is granted against us, these could materially harm our business, financial condition, operating results, and cash flows.
If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.
We are a party to a number of license agreements and expect to enter into additional license agreements in the future. Our existing licenses impose, and we expect future licenses will impose, various diligence, milestone payment, royalty, insurance, and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license and/or sue us for breach, which could cause us to not be able to market any product that is covered by the licensed patentslicense and subject us to damages, which may be material.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
EMERGENT BIOSOLUTIONS INC.
We also rely upon unpatented proprietary technology, processes, and know-how, particularly as to our proprietary manufacturing processes. Because we do not have patent protection for all of our current products, our only other intellectual property protection for products, other than trademarks, is confidentiality regarding our manufacturing capability and specialty know-how, such as techniques, processes, and unique starting materials. However, these types of confidential information and trade secrets can be difficult to protect. We seek to protect this confidential information, in part, through agreements with our employees, consultants, and third parties, as well as confidentiality policies and audits, although these may not be successful in protecting our trade secrets and confidential information.
These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known, including through a potential cyber security breach, or may be independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, or if others independently develop our proprietary information or processes, competitors may be able to use this information to develop products that compete with our products, which could materially and adversely impact our business.
One or more of our products could be subject to early competition from generic drugs and biosimilars.
One or more of our products is approved as a drug product under the provisions of the U.S. Food, Drug and Cosmetic Act (FDCA), which renders it susceptible to potential competition from generic manufacturers via the Hatch-Waxman Act and ANDA process. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on the innovator’s data regarding safety and efficacy. Additionally, generic drug companies generally do not expend significant sums on sales and marketing activities, instead relying on pharmacists or payers to substitute the generic form of a drug for the branded form. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical or biotechnology companies who have incurred substantial expenses associated with the research and development of the drug product and who must spend significant sums marketing a new drug.
The ANDA procedure includes provisions allowing generic manufacturers to challenge the innovator’s patent protection by submitting “Paragraph IV” certifications to the FDA in which the generic manufacturer claims that the innovator’s patents are
invalid, unenforceable, and/or will not be infringed by the manufacture, use, or sale of the generic product. A patent owner who receives a Paragraph IV certification may choose to sue the generic applicant for patent infringement. If the patent owner files suit within 45 days of receiving notice from an ANDA filer, the patent owner is entitled to receive a 30 month stay on the FDA’s ability to give final approval for the generic product that is the subject of the ANDA.
In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge the validity of patents listed in the FDA’s Approved Drug Products List with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book, on a wide array of innovative therapeutic products. We expect this trend to continue and to affect drug products with even relatively modest revenues.
Although we intend to vigorously enforce our intellectual property rights, there can be no assurance that we will prevail in our enforcement or defense of our patent rights. Our existing patents could be invalidated, found unenforceable, or found not to cover a generic form of our product.
Further, the 2010 Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, included a subtitle called the Biologics Price Competition and Innovation Act of 2009 (BPCIA). That Act established a regulatory scheme authorizing the FDA to approve biosimilars and interchangeable biosimilars. As of January 1, 2018, the FDA has approved nine biosimilar products for use in the United States. No interchangeable biosimilars, have been approved. The FDA has issued several guidance documents outlining an approach to review and approval of biosimilars. Additional guidances are expected to be finalized by FDA in the near term.
Under the Act, a manufacturer may submit an application for licensure of a biologic product that is “biosimilar to” or “interchangeable with” a previously approved biological product or “reference product.” In order for the FDA to approve a biosimilar product, it must find that there are no clinically meaningful differences between the reference product and proposed biosimilar product in terms of safety, purity and potency. For the FDA to approve a biosimilar product as interchangeable with a reference product, the agency must find that the biosimilar product can be expected to produce the same clinical results as the reference product, and (for products administered multiple times) that the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.
EMERGENT BIOSOLUTIONS INC.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date of approval of the reference product. The FDA may not approve a biosimilar product until 12 years from the date on which the reference product was approved. Even if a product is considered to be a reference product eligible for exclusivity, another company could market a competing version of that product if the FDA approves a full BLA for such product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily substituted by pharmacies, which are governed by state pharmacy law.
FINANCIAL RISKS
We have incurred significant indebtedness in connection with our acquisitions and servicing our debt requires a significant amount of cash. We may not have sufficient cash flow from our operations to pay our substantial debt.
Our currentability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness and any additional debt financing may restrict the operation ofdepends on our business and limit the cash available for investment in our business operations.
requiring us to dedicate a substantial portion of any cash flow from operations to payment on our debt, which would reduce the amounts available to fund other corporate initiatives;
debt, better debt servicing options or stronger debt servicing capacity.
We may not have sufficient funds or be able to obtain additional financing to pay the amounts due under our indebtedness. In addition, failure to comply with the covenants under our senior secured credit facilities and other debt agreements could result in an event of default under those agreements. An event of default could result in the acceleration of amounts due under a particular debt agreement and a cross default and acceleration under other debt agreements, and we may not have sufficient funds to pay or be able to obtain additional financing to make any accelerated payments. Under these circumstances, our lenders could seek to enforce security interests in our assets securing our indebtedness.
Our current indebtedness and any additional debt financing may restrict the operation of our business and limit the cash available for investment in ourbusiness operations.
In connection with the acquisition of Adapt, we entered into an amendment and restatement of our 2017 credit agreement to provide for new five-year syndicated senior secured credit facilities that replaced our existing facility. The senior secured credit facilities include a $450 million Term Loan and the ability to borrow up to a $600 million revolver, of which we had outstanding borrowings of $442 million and $398 million, respectively, as of June 30, 2019. We may also seek additional debt financing to support our ongoing activities or to provide additional financial flexibility. Debt financing could have significant adverse consequences for our business, including:
the level, timing and cost of product sales and contract manufacturing services;
the extent to which we acquire or invest in and integrate companies, businesses, products or technologies;
the acquisition of new facilities and capital improvements to new or existing facilities;
the payment obligations under our indebtedness;
the scope, progress, results and costs of our development activities;
our ability to obtain funding from collaborative partners, government entities and non-governmental organizations for our development programs;
EMERGENT BIOSOLUTIONS INC.
the extent to which we repurchase additional common stock under our authorized share repurchase program; and
the costs of commercialization activities, including product marketing, sales and distribution.
We may not have sufficient funds or be able to obtain additional financing to pay the amounts due under our indebtedness. In addition, failure to comply with the covenants under our debt instrumentsagreements could result in an event of default under those instruments. An event of default could result in the acceleration of amounts due under a particular debt instrumentagreement and a cross default and acceleration under other debt instruments,agreements, and we may not have sufficient funds or be able to obtain additional financing to make any accelerated payments. Under these circumstances, our lenders could seek to enforce security interests in our assets securing our indebtedness.
Our hedging program is subject to counterparty default risk
We manage our interest rate risk in part by entering into interest rate swaps with a number of counterparties to swap a portion of our indebtedness that is based on variable interest rates to a fixed rate. As a result, we are subject to the risk that the counterparty to one or more of these contracts defaults on its performance under the contract. During an economic downturn, the counterparty's financial condition may deteriorate rapidly and with little notice and we may be unable to take action to protect our exposure. In the event of a counterparty default, we could incur losses, which may harm our business and financial condition. In the event that one or more of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty.
We may require significant additional funding and may be unable to raise capital when needed or on acceptable terms, which would harm our ability to grow our business, and our operating results of operations and financial condition and cash flows.
condition.
If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings, bank loans or collaboration and licensing arrangements. In August 2018, we filed an automatic shelf registration statement, which immediately became effective under SEC rules. For so long as we continue to satisfy the requirements to be deemed a “well-known seasoned issuer” under SEC rules (which include, among other things, the timely filing of our reports under the Exchange Act and maintenance of
at least $700 million of public float or issuing an aggregate amount of $1 billion of non-convertible securities, other than common stock, in registered offerings for cash during the past three years), this shelf registration statement, effective until August 8, 2021, allows us to issue an unrestricted amount of equity, debt and certain other types of securities through one or more future primary or secondary offerings. If we do not file a new shelf registration statement prior to August 8, 2021, the existing shelf registration statement will expire, and we will not be able to publicly raise capital or issue debt until a new registration statement is filed and becomes effective. There can be no assurance that we will be eligible to file an automatically effective shelf registration statement at a future date when we may need to raise funds publicly.
If we raise funds by issuing equity securities, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants, like those contained in our senior secured revolving credit facility,facilities, limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us. We are not restricted under the terms of the indenture governing our 2.875% Convertible Senior Notes due 2021 or Senior(Senior Convertible Notes,Notes) from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that could have the effect of diminishing our ability to make payments on our indebtedness. However, our senior secured credit facility restrictsfacilities restrict our ability to incur additional indebtedness, including secured indebtedness.
Economic conditions may make it difficult to obtain financing on attractive terms, or at all. If financing is unavailable or lost, our business, operating results, financial condition and cash flows would be adversely affected, and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.
We may not maintain profitability in future periods or on a consistent basis.
Although we have been profitable for each of the last five fiscal years, we have not been profitable for every quarter during that time. For example, we incurred a net loss in the second quarter of 2016 and in each of the first quarters of 2018, 2015, 2014 and 2013. Our profitability has been substantially dependent on BioThrax product sales, which historically have fluctuated significantly from quarter to quarter, and we expect that they will continue to fluctuate significantly based primarily on the timing of our fulfillment of orders from the U.S. government.USG. We may not be able to achieve consistent profitability on a quarterly
EMERGENT BIOSOLUTIONS INC.
basis or sustain or increase profitability on an annual basis.
RISKS
If the spin-off distribution on August 1, 2016 of all of the outstanding shares of Aptevo Therapeutics Inc. common stock to our stockholders does not qualify as a tax-free transaction for U.S. federal income tax purposes, we and our stockholders could be subject to significant tax liabilities.
It was our intention that our distribution on August 1, 2016 of all of the outstanding shares of Aptevo common stock to our stockholders or the Distribution,(the Distribution), together with certain related transactions, qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended or the Code.(the Code). In anticipation of the Distribution, we received a favorable private letter ruling from the Internal Revenue Service or the IRS,(the IRS), regarding certain U.S. federal income tax matters relating to the Distribution and certain related transactions and an opinion of counsel substantially to the effect that, for U.S. federal income tax purposes, the Distribution, together with certain related transactions, will qualify as a transaction described under Sections 355 and 368(a)(1)(D) of the Code. A "private“private letter ruling,"” is a written statement issued to a taxpayer by an Associate Chief Counsel Office of the Office of Chief Counsel that interprets and applies the tax laws to a specific set of facts. Our private letter ruling is based on certain facts and representations submitted by us to the IRS and the opinion of counsel was based upon and relied on, among other things, the IRS private letter ruling and certain facts and assumptions, as well as certain representations and covenants of us and Aptevo contained in a tax matters agreement and certain representations contained in representation letters provided by us, Aptevo and certain stockholders to such counsel, including representations and covenants relating to the past and future conduct of us, Aptevo and such stockholders. If any of these facts, assumptions, representations, or covenants are, or become, inaccurate or incomplete, the IRS private letter ruling and/or the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized and, as a result, the Distribution, together with certain related transactions, could fail to qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the Code for U.S. federal income tax purposes.
In addition, the IRS private letter ruling only addresses certain limited matters relevant to determining whether the Distribution, together with certain related transactions, qualifies as a transaction described under Sections 355 and 368(a)(1)(D) of the Code, and the opinion of counsel only represents the
judgment of such counsel, which is not binding on the IRS or any court. Accordingly, notwithstanding the IRS private letter ruling and the opinion of counsel, there can be no assurance that the IRS will not assert that the Distribution, together with certain related transactions, should be treated as a taxable transaction for U.S. federal income tax purposes or that a court would not sustain such a challenge.
If the Distribution, together with certain related transactions, fails to qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the Code, for U.S. federal income tax purposes, in general, (i) we would recognize taxable gain on the Distribution equal to the amount by which the fair market value of the Aptevo shares distributed to our stockholders exceeded our tax basis in the Aptevo shares and (ii) each of our stockholders who received Aptevo shares in the Distribution would be treated as receiving a taxable distribution equal to the fair market value of the Aptevo shares received by such stockholder.
Under the tax matters agreement that we entered into with Aptevo in connection with the spin-off, Aptevo may be required to indemnify us against any tax liabilities and related expenses resulting from the failure of the Distribution, together with certain related transactions, to qualify as a transaction described under Sections 355 and 368(a)(1)(D) of the Code to the extent that the failure to so qualify is attributable to actions, events or transactions relating to Aptevo'sAptevo’s stock, assets or business, or a breach of the relevant representations or covenants made by Aptevo in the tax matters agreement or the IRS private letter ruling or in the representation letters provided to our counsel for purposes of their opinion. Any such indemnity obligations could be material, and there can be no assurance that Aptevo will be able to pay any such indemnification.
To preserve the tax-free treatment of the Distribution, together with certain related transactions, and in addition to Aptevo's indemnity obligation, the tax matters agreement, which expired on August 2, 2018, restricted Aptevo from taking any action that prevents such transactions from being tax-free for U.S. federal income tax purposes. In particular, for the two-year period following the Distribution, Aptevo was restricted from taking certain actions (including restrictions on share issuances, business combinations, sales of assets, amendments to organizational documents and similar transactions) that could cause the Distribution, together with certain related transactions, to fail to qualify as a tax-free transaction for U.S. federal income tax purposes. There can be no assurance that Aptevo adequately complied with these restrictions. If a finding is made by the IRS through a tax audit that Aptevo failed to satisfy its obligations, this could have a substantial
EMERGENT BIOSOLUTIONS INC.
impact on our tax obligations, consolidated financial condition and cash flows.
In connection with Aptevo'sAptevo’s separation from us, Aptevo agreed to indemnify us for certain matters. This indemnity may not be sufficient to hold us harmless from the full amount of losses that we may incur in connection with these matters, and Aptevo may not be able to satisfy its indemnification obligations to us.
Pursuant to the agreements that we entered into with Aptevo at the time of Aptevo'sAptevo’s separation from us, Aptevo agreed to indemnify us for certain matters, including liabilities related to Aptevo'sAptevo’s business or for which Aptevo otherwise agreed to be responsible in the separation. This indemnity from Aptevo may not be sufficient to protect us against the full amount of losses that we may incur in connection with these matters, including if third parties assert claims against us for liabilities that were allocated to Aptevo in the separation. Moreover, Aptevo may dispute its indemnification obligation to us or have insufficient resources to satisfy its indemnification obligations to us. Even if we ultimately succeed in recovering from Aptevo the amount of any losses that we incur in connection with these matters, the recovery could take a substantial amount of time and we may be required to bear these losses ourselves while we seek recovery. Each of these risks could negatively affect our business, operating results, financial condition and cash flows.
OTHER BUSINESS RISKS
We face product liability exposure, which could cause us to incur substantial liabilities andnegatively affect our business, financial condition and results of operations.
We face an inherent risk of product liability exposure related to the sale of our products, any other products that we successfully acquire or develop and the testing of our product candidates in clinical trials.
One measure of protection against such lawsuits is coverage under the Public Readiness and Emergency Preparedness Act, or PREP Act, which was signed into law in December 2005. The PREP Act creates liability protection for manufacturers of biodefense countermeasures when the Secretary of HHS issues a declaration for their manufacture, administration or use. A PREP Act declaration is meant to provide liability protection from all claims under federal or state law for loss arising out of the administration or use of a covered countermeasure under a government contract. The Secretary of HHS has issued PREP Act declarations identifying certain of our products, namely BioThrax, ACAM2000, Raxibacumab,raxibacumab, Anthrasil, BAT and VIGIV, as covered countermeasures. These declarations expire in 2022. Manufacturers are not entitled to protection under the PREP Act in cases of willful misconduct. We cannot predict whether the Secretary of HHS will renew the declarations when
they expire, whether Congress will fund the relevant PREP Act compensation programs, or whether the necessary prerequisites for immunity would be triggered with respect to our products or product candidates.
Additionally, certain of our products, namely BioThrax and RSDL, are certified anti-terrorism products covered under the protections of the Support Anti-Terrorism by Fostering Effective Technology Act of 2002 or(the SAFETY Act.Act). The SAFETY Act creates product liability limitations for qualifying anti-terrorism technologies for claims arising from or related to an act of terrorism. Although we are entitled to the benefits of the SAFETY Act for BioThrax and RSDL, the SAFETY Act may not provide adequate protection from claims made against us.
If we cannot successfully defend ourselves against future claims that our products or product candidates caused injuries and if we are not entitled to indemnity by the U.S. government,USG, or the U.S. governmentUSG does not honor its obligations to us under the PREP Act or SAFETY Act, or if the indemnification under the PREP Act and SAFETY Act is not adequate to cover all claims, we may incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
| decreased demand or withdrawal of a product; |
| injury to our reputation; |
| withdrawal of clinical trial participants; |
| costs to defend the related litigation; |
| substantial monetary awards to trial participants or patients; |
| loss of revenue; and |
| an inability to commercialize products that we may develop. |
The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may occur.incur. Further product liability insurance may be difficult and expensive to obtain. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy all potential liabilities. For example, we may not have sufficient insurance against potential liabilities associated with a possible large-scale deployment of BioThrax as a countermeasure to a bioterrorism threat. We rely on PREP Act protection for BioThrax, Raxibacumab,raxibacumab, ACAM2000, Anthrasil, BAT and VIGIV, and SAFETY Act protection for BioThrax and RSDL in addition to our insurance coverage to help mitigate our product
EMERGENT BIOSOLUTIONS INC.
liability exposure for these products. Additionally, potential product liability claims related to our commercial products, including NARCAN® Nasal Spray, Vivotif and Vaxchora, may be made by patients, health care providers or others who sell or consume these products. Such claims may be made even with respect to those products that possess regulatory approval for commercial sale. Claims or losses in excess of our product liability insurance coverage could have a material adverse effect on our business, financial condition, operating results and cash flows.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. If we identify aA material weakness in our internal control over financial reporting it could have an adverse effect on our business and financial results and our ability to meet our reporting obligations could be negatively affected, each of which could negatively affect the trading price of our common stock.
Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Failure to maintain effective internal control over financial reporting, or lapses in disclosure controls and procedures, could impact our financial information and disclosures, require significant resources to remediate, and expose us to legal or regulatory proceedings.
We regularly review and update our internal controls and disclosure controls and procedures. In addition, we are required under the Sarbanes-Oxley Act of 2002 to report annually on our internal control over financial reporting. Our system of internal controls, however well-designed, can provide only reasonable, not absolute, assurances that the objectives of the system are met. If we, or our independent registered public accounting firm, determine that our internal controls over financial reporting, or the internal controls of other companies we may acquire, are not effective, or we discover areas that need improvement in the future, these shortcomings could have an adverse effect on our business and financial reporting, and the trading price of our common stock could be negatively affected.
We rely significantly on information technology systems and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our business effectively or result in data leakage of
proprietary and confidential business and employee information.
Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentially vulnerable to interruption, invasion, computer viruses, destruction, malicious intrusion and additional related disruptions, which may result in the impairment of production and key business processes.
In addition, our systems are potentially vulnerable to data security breaches—whetherbreaches-whether by employee error, malfeasance or other disruption—whichdisruption-which may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property or could lead to the public exposure of personal information, including sensitive personal information, of our employees, clinical trial patients, customers and others.
A significant business disruption or a breach in security resulting in misappropriation, theft or sabotage with respect to our proprietary and confidential business and employee information could result in financial, legal, business or reputational harm to us, any of which could materially and adversely affect our business, financial condition and operating results.
Our success is dependent on our continued ability to attract, motivate and retain key personnel, and any failure to attract or retain key personnel maynegatively affect our business.
Because of the specialized scientific nature of our business, our ability to develop products and to compete with our current and future competitors largely depends upon our ability to attract, retain and motivate highly qualified managerial and key scientific and technical personnel. If we are unable to retain the services of one or more of the principal members of senior management or other key employees, our ability to implement our business strategy could be materially harmed. We face intense competition for qualified employees from biopharmaceutical companies, research organizations and academic institutions. Attracting, retaining or replacing these personnel on acceptable terms may be difficult and time-consuming given the high demand in our industry for similar personnel. We believe part of being able to attract, motivate and retain personnel is our ability to offer a competitive compensation package, including equity incentive awards.
EMERGENT BIOSOLUTIONS INC.
If we cannot offer a competitive compensation package to attract and retain the qualified personnel necessary for the continued development of our business, we may not be able to maintain our operations or grow our business.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Fuad El-Hibri, executive chairman of our Board of Directors, hassignificant influence over us through his substantial beneficial ownership of our common stock, including an ability to influence the election ofthe members of our Board of Directors, or delay or prevent a change ofcontrol of us.
Mr. El-Hibri has the ability to significantly influence the election of the members of our Board of Directors due to his substantial beneficial ownership of our common stock. As of July 27, 2018,26, 2019, Mr. El-Hibri was the beneficial owner of approximately 11% of our outstanding common stock. As a result, Mr. El-Hibri could exercise substantial influence over all corporate actions requiring board or stockholder approval, including a change of control, or any amendment of our certificate of incorporation or by-laws. The control by Mr. El-Hibri may prevent other stockholders from influencing significant corporate decisions. In addition, Mr. El-Hibri's significant beneficial ownership of our shares could present the potential for a conflict of interest.
Provisions in our certificate of incorporation and by-laws and under Delaware law may discourage acquisition proposals, delay a change in control or prevent transactions that stockholders may consider favorable.
Provisions in our certificate of incorporation and by-laws may discourage, delay or prevent a merger, acquisition or other changes in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.
These provisions include:
the classification of our directors;
limitations on changing the number of directors then in office;
limitations on the removal of directors;
| limitations on filling vacancies on the board; |
advance notice requirements for stockholder nominations of candidates for election to the Board of Directors and other proposals;
the inability of stockholders to call special meetings; and |
| the ability of our Board of Directors to designate the terms of and issue a new series of preferred stock without stockholder approval. |
The affirmative vote of holders of our capital stock representing at least 75% of the voting power of all outstanding stock entitled to vote is required to amend or repeal the above provisions of our certificate of incorporation. The affirmative vote of either a majority of the directors present at a meeting of our Board of Directors or holders of our capital stock representing at least 75% of the voting power of all outstanding stock entitled to vote is required to amend or repeal our by-laws.
In addition, we are subject to Section 203 of the Delaware General Corporation Law or Section 203.(Section 203). In general and subject to certain exceptions, Section 203 prohibits a publicly-held corporation from engaging in a business combination with an interested stockholder, generally a person which, together with its affiliates, owns or within the last three years has owned 15% or more of the corporation's voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of us.
Our Board of Directors may implement a new stockholder rights plan without stockholder approval, which could prevent a change in control of us in instances inwhich some stockholders may believe a change in control is in their best interests.
Our Board of Directors may implement a stockholder rights plan without stockholder approval. We previously implemented a stockholder rights plan, which expired on November 14, 2016. Under our prior stockholder rights plan, we issued to each of our stockholders one preferred stock purchase right for each outstanding share of our common stock. Each right, when exercisable, would have entitled its holder to purchase from us a unit consisting of one one-thousandth of a share of series A junior participating preferred stock at a purchase price of $150 in cash, subject to adjustments. Our stockholder rights plan was intended to protect stockholders in the event of an unfair or coercive offer to acquire us and to provide our Board of Directors with adequate time to evaluate unsolicited offers.
Our Board of Directors may implement a new stockholder rights plan, which may have anti-takeover effects, potentially preventing a change in control of us in instances in which some stockholders may
EMERGENT BIOSOLUTIONS INC.
believe a change in control is in their best interests. This could cause substantial dilution to a person or group that attempts to acquire us on terms that our Board of Directors does not believe are in our best interests or those of our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares.
Our stock price is volatile and purchasers of our common stock could incursubstantial losses.
Our stock price has been, and is likely to continue to be, volatile. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this "Risk Factors"“Risk Factors” section, or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability. From November 15, 2006, when our common stock first began trading on the New York Stock Exchange, through July 27, 2018,26, 2019, our common stock has traded as high as $55.94$73.89 per share and as low as $4.40$4.20 per share. The stock market in general as well as the market for biopharmaceutical companies in particular has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock may be influenced by many factors, including, among others:
| the success of competitive products or technologies; |
| results of clinical and non-clinical trials of our product candidates; |
| announcements of acquisitions, financings or other transactions by us; |
| litigation or legal proceedings; |
| public concern as to the safety of our products; |
| termination or delay of a development program; |
| the recruitment or departure of key personnel; |
the other factors described in this “Risk Factors” section. |
Because we currently do not pay dividends, investors will benefit from an investment in our common stock only if it appreciates in value.
We currently do not pay dividends on our common stock. Our senior secured credit facility limitsfacilities limit and any future debt agreements that we enter into may limit our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our stockholders for the foreseeable future.
A significant portion of our shares may be sold into the market at any time. This could cause the market price of our common stock to dropsignificantly.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales or the perception in the market that the holders of a large number of shares intend to sell shares could reduce the market price of our common stock. Moreover, holders of an aggregate of approximately 6 million shares of our common stock outstanding as of July 27, 2018,June 30, 2019, have the right to require us to register these shares of common stock under specified circumstances.
EMERGENT BIOSOLUTIONS INC.
Recent Sales of Unregistered Securities
Not applicable.
Use of Proceeds
Not applicable.
Purchases of Equity Securities
Not applicable.
Not applicable.
Not applicable.
On June 27, 2019, certain amendments were made to the Amended Credit Agreement which extended the covenant relief period (collectively, the Amendment). The information set forth below isAmendment included, hereinamong other things, a change to the maximum consolidated net leverage ratio of 4.95 to 1.00 for the purpose of providingquarter ended June 30, 2019 and 4.75 to 1.00 for the disclosure required under "Item 1.02 - Termination of a Material Agreement" of Form 8-K.
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits hereto.
EMERGENT BIOSOLUTIONS INC.
EXHIBIT INDEX
Exhibit Number | Description |
Modification No. | |
| Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a). | |
31.2# | |
32.1# | |
32.2# | |
| 101. INS | XBRL Instance |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | Inline XBRL Taxonomy Calculation Linksbase Document. |
| 101.DEF | Inline XBRL Taxonomy Definition Linksbase Document. |
| 101.LAB | Inline XBRL Taxonomy Label Linksbase Document. |
| 101.PRE | Inline XBRL Taxonomy Presentation Linksbase Document. |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language):
| (i) | Condensed Consolidated Statements of Operations for the |
| (ii) | Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2019 and 2018; |
| (iii) | Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018; |
| (iv) | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018; and |
| (v) | Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2019 and 2018; and |
| (vi) | Notes to Condensed Consolidated Financial Statements. |
| # | Filed herewith. |
† Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
EMERGENT BIOSOLUTIONS INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EMERGENT BIOSOLUTIONS INC. |
By: /s/ROBERT G. KRAMER, SR. Robert G. Kramer, Sr. President and Chief Executive Officer (Principal Executive Officer) |
| Date: August 1, 2019 |
By: /s/RICHARD S. LINDAHL Richard S. Lindahl Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
| Date: August 1, 2019 |
70