EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
6. Intangible assets
The Company's intangible assets consist of products acquired via business combinations or asset acquisitions. The following table summarizes the Company's Intangible assets, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 |
Asset Type | Estimated Life | | Cost | Accumulated Amortization | Net | | Cost | Accumulated Amortization | Net |
Products (1) | 8-22 years | | $ | 958.1 | | $ | 235.4 | | $ | 722.7 | | | $ | 798.0 | | $ | 193.5 | | $ | 604.5 | |
CDMO | 8 years | | 5.5 | | 5.5 | | — | | | 5.5 | | 5.4 | | 0.1 | |
Total intangible assets | | $ | 963.6 | | $ | 240.9 | | $ | 722.7 | | | $ | 803.5 | | $ | 198.9 | | $ | 604.6 | |
| | | | | | | | | |
(1) During the three months ended September 30, 2022, we acquired certain assets through asset acquisitions, and the related intangible assets were assigned to the "Products" asset type, of which $154.7 million was related to the Transaction. |
Amortization expense associated with the Company's intangible assets was recorded as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization Expense | $ | 14.0 | | | $ | 14.5 | | | $ | 42.0 | | | $ | 44.5 | |
As of September 30, 2022, the weighted average amortization period remaining for intangible assets was 11.4 years.
The table below summarizes the changes in the carrying amount of the Company's goodwill balance:
| | | | | |
| |
Goodwill, December 31, 2021 | $ | 224.9 | |
Foreign currency translation adjustments | — | |
Goodwill, September 30, 2022 | $ | 224.9 | |
The carrying amount of goodwill included accumulated impairments of $41.7 million as of September 30, 2022 and December 31, 2021, respectively.
The Company has $224.9 million of total goodwill which is composed of our Products and Services segments. There is the risk of future impairments in our reporting units as any further deterioration in their performance compared to forecast, changes in order volumes or delivery schedules for major customers, as well as any changes in economic forecasts and expected recovery in the biopharmaceutical industry, may require the Company to complete additional impairment tests in future quarters and could result in the reporting unit’s fair value falling below carrying value in subsequent quarters. In the event the Company experiences factors that it believes indicate a decline in fair value, including negative changes to long-term growth rates or if discount rates increase, we may be required to record impairments of goodwill and other identified intangible assets. Further, if the composition of the Company’s reporting unit’s assets and liabilities were to change and result in an increase in the reporting unit’s carrying value, it could lead to additional impairment testing and further impairment losses.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
7. Fair value measurements
The table below presents information about the Company's assets and liabilities that are regularly measured and carried at fair value and indicates the level within the fair value hierarchy of the valuation techniques the Company utilized to determine fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Total | Level 1 | Level 2 | Level 3 | | Total | Level 1 | Level 2 | Level 3 |
Assets: | | | | | | | | | |
Money market accounts | $ | 25.3 | | $ | 25.3 | | $ | — | | $ | — | | | $ | 152.4 | | $ | 152.4 | | $ | — | | $ | — | |
Time deposits | 50.4 | | — | | 50.4 | | — | | | 200.0 | | — | | 200.0 | | — | |
Derivative instruments | — | | — | | — | | — | | | — | | — | | — | | — | |
Total | $ | 75.7 | | $ | 25.3 | | $ | 50.4 | | $ | — | | | $ | 352.4 | | $ | 152.4 | | $ | 200.0 | | $ | — | |
Liabilities: | | | | | | | | | |
Contingent consideration | $ | 7.8 | | $ | — | | $ | — | | $ | 7.8 | | | $ | 37.2 | | $ | — | | $ | — | | $ | 37.2 | |
Derivative instruments | — | | — | | — | | — | | | 6.1 | | — | | 6.1 | | — | |
Total | $ | 7.8 | | $ | — | | $ | — | | $ | 7.8 | | | $ | 43.3 | | $ | — | | $ | 6.1 | | $ | 37.2 | |
Contingent consideration
Contingent consideration liabilities associated with business combinations are measured at fair value. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders and owners if future events occur or conditions are met. These liabilities associated with business combinations are measured at fair value at inception and at each subsequent reporting date. The changes in the fair value are primarily due to the expected amount and timing of future net sales, which are inputs that have no observable market. Any changes in fair value for the contingent consideration liabilities related to the Company’s products are classified in the Company's statement of operations as cost of product sales.
The table below is a reconciliation of the beginning and ending balance of the Company's contingent consideration liability:
| | | | | | | | |
| | Liability for Contingent Consideration |
Balance at December 31, 2021 | | $ | 37.2 | |
Change in fair value | | 2.4 | |
Settlements | | (31.8) | |
Balance at September 30, 2022 | | $ | 7.8 | |
As of September 30, 2022 and December 31, 2021, the current portion of the contingent consideration liability was $3.5 million and $32.7 million, respectively, and was included in other current liabilities on the condensed consolidated balance sheets. The non-current portion of the contingent consideration liability is included in other liabilities on the condensed consolidated balance sheets.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
The recurring Level 3 fair value measurements for the Company's contingent consideration liability include the following significant unobservable inputs:
| | | | | | | | | | | | | | | | | |
Contingent Consideration Liability | Fair Value as of September 30, 2022 | Valuation Technique | Unobservable Input | Range | Weighted Average |
Revenue milestone and royalty based | 7.8 | Discounted cash flow | Discount rate | 10.1% | 10.1% |
Probability of payment | 25% - 50% | 40.0% |
Projected year of payment | 2022 - 2028 | 2024 |
Derivative instruments
Refer to Note 8, "Derivative instruments and hedging activities" for more information about the Company's derivative instruments.
Non-variable rate debt
As of September 30, 2022 and December 31, 2021, the fair value of the Company's 3.875% Senior Unsecured Notes was $299.9 million and $433.3 million, respectively. The fair value was determined through market sources, which are level 2 inputs and directly observable. The carrying amounts of the Company’s other long-term variable interest rate debt arrangements approximate their fair values (see Note 9, "Debt").
8. Derivative instruments and hedging activities
Risk management objective of using derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company has entered into interest rate swaps to manage exposures that arise from payments of variable interest rate debt associated with the Company's senior secured credit agreements.
If current fair values of designated interest rate swaps remained static over the next twelve months, the Company would reclassify $9.0 million of net deferred gains from accumulated other comprehensive loss into the condensed consolidated statement of operations over the next twelve-month period. All outstanding cash flow hedges mature in October 2023.
As of September 30, 2022, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| | | | | | | | | | | |
(in millions, except number of instruments) | 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 sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| September 30, 2022 | December 31, 2021 | | September 30, 2022 | December 31, 2021 |
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value |
Interest Rate Swaps | Other Current Assets | $ | 8.9 | | Other Current Assets | $ | — | | | Other Current Liabilities | $ | — | | Other Current Liabilities | $ | 4.5 | |
Other Assets | $ | 0.4 | | Other Assets | $ | — | | | Other Liabilities | $ | — | | Other Liabilities | $ | 1.6 | |
The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of 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. 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 not 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 loss.
| | | | | | | | | | | | | | | | | |
| Cumulative Amount of Gain/(Loss) Recognized in OCI on Derivatives | Location of Loss Reclassified from | Amount of Loss Reclassified from Accumulated OCL into Income (Loss) |
September 30, | December 31, | Accumulated OCL into Income (Loss) | Nine Months Ended September 30, |
2022 | 2021 | 2022 | 2021 |
Interest Rate Swaps | $ | 9.3 | | $ | (6.1) | | Interest expense | $ | (1.9) | | $ | (4.3) | |
9. Debt
The components of debt were as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Senior secured credit agreement - Term loan due 2023 | $ | 371.3 | | | $ | 396.6 | |
Senior secured credit agreement - Revolver loan due 2023 | 238.0 | | | — | |
3.875% Senior Unsecured Notes due 2028 | 450.0 | | | 450.0 | |
Other | 3.0 | | | 3.0 | |
Total debt | $ | 1,062.3 | | | $ | 849.6 | |
| | | |
Current portion of long-term debt, net of debt issuance costs | (21.2) | | | (31.6) | |
Unamortized debt issuance costs | (9.0) | | | (8.5) | |
Non-current portion of debt | $ | 1,032.1 | | | $ | 809.4 | |
As of September 30, 2022 and December 31, 2021 there was $238.0 million and no outstanding revolver balance, respectively. The Company classifies debt issuance costs associated with the revolver loan as other current assets and other assets on the Company's consolidated balance sheets. As of September 30, 2022, the Company
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
had $4.1 million and $4.9 million of debt issuance costs associated with the revolver loan classified as other current assets and other assets, respectively. As of December 31, 2021, the Company had approximately $2.0 million and $1.6 million of debt issuance costs associated with the revolver loan that were classified as other current assets and other assets, respectively.
3.875% Senior Unsecured Notes due 2028
On August 7, 2020, the Company completed its offering of $450.0 million aggregate principal amount of 3.875% Senior Unsecured Notes due 2028 (the 2028 Notes) of which the majority of the net proceeds were used to pay down the Revolving Credit Facility (as defined below). Interest on the 2028 Notes is payable on February 15th and August 15th of each year until maturity, beginning on February 15, 2021. The 2028 Notes will mature on August 15, 2028.
On or after August 15, 2023, the Company may redeem the 2028 Notes, in whole or in part, at the redemption prices set forth in the related Indenture, plus accrued and unpaid interest. Prior to August 15, 2023 the Company may redeem all or a portion of the 2028 Notes at a redemption price equal to 100% of the principal amount of the 2028 Notes plus a “make-whole” premium and accrued and unpaid interest. Prior to August 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of the 2028 Notes using the net cash proceeds of certain equity offerings at the redemption price set forth in the related Indenture. Upon the occurrence of a change of control, the Company must offer to repurchase the 2028 Notes at a purchase price of 101% of the principal amount of such 2028 Notes plus accrued and unpaid interest.
Negative covenants in the Indenture governing the 2028 Notes, among other things, limit the ability of the Company to incur indebtedness and liens, dispose of assets, make investments, enter into certain merger or consolidation transactions and make restricted payments.
Senior secured credit agreement
Also on August 7, 2020, the Company entered into a Second Amendment (the “Credit Agreement Amendment”) to its senior secured credit agreement, dated October 15, 2018, with multiple lending institutions relating to the Company’s senior secured credit facilities (the “Credit Agreement,” and as amended, the “Amended Credit Agreement”), consisting of a senior revolving credit facility (the “Revolving Credit Facility”) and senior term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”). The Credit Agreement Amendment amended, among other things, the definition of incremental facilities limit, the consolidated net leverage ratio financial covenant by increasing the maximum level, increased the permissible applicable margins based on the Company’s consolidated net leverage ratio and increased the commitment fee that the Company is required to pay in respect of the average daily unused commitments under the Revolving Credit Facility, depending on the Company’s consolidated net leverage ratio.
The Amended Credit Agreement includes (i) a Revolving Credit Facility of $600.0 million and (ii) a Term Loan Facility with a principal amount of $450.0 million. The Company may request incremental term loan facilities or increases in the Revolving Credit Facility (each an "Incremental Loan") as long as certain requirements involving the Company's net leverage ratio will be maintained on a pro forma basis. Borrowings under the Revolving Credit Facility and the Term Loan Facility bear interest at a rate per annum equal to (a) a eurocurrency rate plus a margin ranging from 1.25% to 2.25% 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 1.25%, depending on the Company's consolidated net leverage ratio). The Company is required to make quarterly payments on the last business day of each calendar quarter under the Amended Credit Agreement for accrued and unpaid interest on the outstanding principal balance, based on the above interest rates. In addition, the Company is required to pay commitment fees ranging from 0.15% to 0.35% per annum, depending on the Company's consolidated net leverage ratio, for the average daily unused commitments under the Revolving Credit Facility. The Company is to repay the outstanding principal amount of the Term Loan Facility in quarterly installments on the last business day of each calendar quarter based on an annual percentage equal to 2.5% of the original principal amount of the Term Loan Facility during each of the first two years of the Term Loan Facility, 5% 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
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Facility without premium or penalty. The Revolving Credit Facility and the Term Loan Facility mature on October 13, 2023.
The Amended Credit Agreement also requires mandatory prepayments of the Term Loan Facility in the event the Company or its Subsidiaries (a) incur indebtedness not otherwise permitted under the Amended Credit Agreement or (b) receive cash proceeds in excess of $100.0 million during the term of the Credit Agreement from certain dispositions of property or from casualty events involving their property, subject to certain reinvestment rights. The financial covenants under the Amended Credit Agreement currently require the quarterly presentation of a minimum consolidated 12-month rolling debt service coverage ratio of 2.50 to 1.00, and a maximum consolidated net leverage ratio of 4.50 to 1.00 (subject to an increase to 5.00 to 1.00 for an applicable four quarter period, at the election of the Company, in connection with a permitted acquisition having an aggregate consideration in excess of $75.0 million). Negative covenants in the Amended Credit Agreement, among other things, limit the ability of the Company to incur indebtedness and liens, dispose of assets, make investments, enter into certain merger or consolidation transactions and make restricted payments. As of the date of these financial statements, the Company is in compliance with all affirmative and negative covenants.
10. Revenue Recognition
The Company operates as two operating segments (Note 14, "Segment information"). The Company's revenues disaggregated by the major sources were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
| U.S. Government | | Non-U.S. Government | | Total | | U.S. Government | | Non-U.S. Government | | Total |
Product sales, net | $ | 33.4 | | | $ | 152.8 | | | $ | 186.2 | | | $ | 129.9 | | | $ | 140.6 | | | $ | 270.5 | |
CDMO: | | | | | | | | | | | |
Services | — | | | 36.2 | | | 36.2 | | | — | | | 112.6 | | | 112.6 | |
Leases | — | | | 0.2 | | | 0.2 | | | (86.0) | | | 15.0 | | | (71.0) | |
Total CDMO | $ | — | | | $ | 36.4 | | | $ | 36.4 | | | $ | (86.0) | | | $ | 127.6 | | | $ | 41.6 | |
Contracts and grants | 16.4 | | | 1.0 | | | 17.4 | | | 16.3 | | | 0.6 | | | 16.9 | |
Total revenues | $ | 49.8 | | | $ | 190.2 | | | $ | 240.0 | | | $ | 60.2 | | | $ | 268.8 | | | $ | 329.0 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| U.S. Government | | Non-U.S. Government | | Total | | U.S. Government | | Non-U.S. Government | | Total |
Product sales, net | $ | 255.0 | | | $ | 405.5 | | | $ | 660.5 | | | $ | 252.6 | | | $ | 337.0 | | | $ | 589.6 | |
CDMO: | | | | | | | | | | | |
Services | — | | | 90.7 | | | 90.7 | | | — | | | 283.7 | | | 283.7 | |
Leases | — | | | 4.7 | | | 4.7 | | | 81.9 | | | 50.7 | | | 132.6 | |
Total CDMO | $ | — | | | $ | 95.4 | | | $ | 95.4 | | | $ | 81.9 | | | $ | 334.4 | | | $ | 416.3 | |
Contracts and grants | 31.7 | | | 2.6 | | | 34.3 | | | 60.7 | | | 2.9 | | | 63.6 | |
Total revenues | $ | 286.7 | | | $ | 503.5 | | | $ | 790.2 | | | $ | 395.2 | | | $ | 674.3 | | | $ | 1,069.5 | |
Termination of manufacturing services agreement with Janssen Pharmaceuticals, Inc.On July 2, 2020, the Company, through its wholly-owned subsidiary, Emergent Manufacturing Operations Baltimore, LLC, entered into a manufacturing services agreement with Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson, for large-scale drug substance manufacturing of Johnson & Johnson’s investigational SARS-CoV-2 vaccine, Ad26.COV2-S, recombinant based on the AdVac technology (the “Product”).
On June 6, 2022, the Company provided to Janssen a notice (the “Notice”) of material breach of the Agreement for, among other things, failure by Janssen (i) to provide the Company the requisite forecasts of the required quantity of Product to be purchased by Janssen under the Agreement and (ii) to confirm Janssen’s intent to not purchase the requisite minimum quantity of the Product pursuant to the Agreement and instead, wind-down the Agreement ahead of
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
fulfilling these minimum requirements. Later on June 6, 2022, the Company received from Janssen a purported written notice of termination (the “Janssen Notice”) of the Agreement for asserted material breaches of the Agreement by the Company, including alleged failure by the Company to perform its obligations in compliance with current good manufacturing practices ("cGMP") or other applicable laws and regulations and alleged failure by the Company to supply Janssen with the Product. Janssen alleged that the Company’s breaches were not curable and that, therefore, termination of the Agreement would be effective as of July 6, 2022. The Company disputes Janssen's assertions and allegations, including Janssen's ability to effect termination pursuant to the Janssen Notice. The Company and Janssen disagree on the monetary amounts that are due to the Company as a result of termination by any means. The Company believes the amounts due to the Company include, but are not limited to, compensation for services provided, reimbursement for raw materials purchased and non-cancelable orders, and fees for early termination. Janssen has alleged that no additional amount is due to the Company and that the Company should pay Janssen an unspecified amount as a result of the Company's alleged failure to perform under the Agreement. The Company has not recorded any contingent liabilities related to Janssen's allegations as the Company believes they are without merit and intends to vigorously defend the Company's position during the dispute resolution process including through mediation and/or arbitration.
During the three months ended September 30, 2022, there were no impacts on previously recognized revenue or depreciation related to the conclusion of the Agreement. As of September 30, 2022, the Company has no billed or unbilled net accounts receivable related to the Agreement.
The Company has $131.0 million of raw materials inventory recorded in its condensed consolidated balance sheet as of September 30, 2022, representing materials purchased for the Agreement which Janssen has not reimbursed. The Company evaluated the net realizable value of this inventory as of September 30, 2022, concluding that because the Agreement specifies the Company is entitled to, among other things, reimbursement of raw materials and non-cancelable orders in the event of a contract termination for any reason, the Company is entitled to payment from Janssen for these raw materials. Therefore, this inventory remains an asset on the condensed consolidated balance sheet as of September 30, 2022. Additionally, the Company has an immaterial amount of non-cancelable orders as of September 30, 2022 which have not been received and Janssen has not reimbursed. The Company also recorded approximately $13.6 million to other assets, which relates to termination penalties and certain inventory related items.
BARDA COVID-19 Development Public-Private Partnership
In 2020, the Company announced the issuance of a task order under its existing Center for Innovation in Advanced Development and Manufacturing ("CIADM") agreement with BARDA for COVID-19 vaccine development and manufacturing (the "BARDA COVID-19 Development Public Private Partnership"). The BARDA COVID-19 Development Public Private Partnership is considered a lease and is accounted for under ASC 842. The initial task order had a contract value of up to $628.2 million and included the reservation of manufacturing capacity and accelerated expansion of fill/finish capacity valued at $542.7 million and $85.5 million, respectively. Subsequently, the task order was expanded to include incremental capital activities which increased the value to $650.8 million. On November 1, 2021, the Company and BARDA mutually agreed to the completion of the Company's CIADM contract and associated task orders, including the BARDA COVID-19 Development Public Private Partnership. The Company did not recognize lease revenues under this arrangement during the three and nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, the Company reversed lease revenues of $86.0 million and recognized lease revenues of $81.9 million, respectively, related to this arrangement.
CDMO operating leases
Certain multi-year CDMO service arrangements with commercial customers include operating leases whereby the customer has the right to direct the use of and obtain substantially all of the economic benefits of specific manufacturing suites operated by the Company. The associated revenue is recognized on a straight-line basis over the term of the lease. The remaining term on the Company's operating lease components approximates 2.5 years. The Company utilizes a cost-plus model to determine the stand-alone selling price of the lease component to allocate contract consideration between the lease and non-lease components. Excluding future amounts related to the Janssen Agreement as discussed above, the Company estimates future operating lease revenues to be $0.2 million in the remainder of 2022, $5.1 million in 2023, $0.9 million in 2024, $0.9 million in 2025 and $2.7 million in years beyond 2025.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Transaction price allocated to remaining performance obligations
As of September 30, 2022, the Company has future contract value on unsatisfied performance obligations of approximately $453.9 million associated with all arrangements entered into by the Company. The Company expects to recognize a majority of the $453.9 million of unsatisfied performance obligations within the next 24 months. The amount and timing of revenue recognition for unsatisfied performance obligations can change. The future revenues associated with unsatisfied performance obligations exclude the value of unexercised option periods in the Company’s revenue arrangements. Often the timing of manufacturing activities changes based on customer needs and resource availability. Government funding appropriations can impact the timing of product deliveries. The success of the Company's development activities that receive development funding support from the USG under development contracts can also impact the timing of revenue recognition.
Contract assets
The Company considers accounts receivable and deferred costs associated with revenue generating contracts, which are not included in inventory or property, plant and equipment and the Company does not currently have a contractual right to bill, to be contract assets. As of September 30, 2022 and December 31, 2021, the Company had $33.9 million and $21.5 million, respectively, of contract assets recorded within accounts receivable, net on the condensed consolidated balance sheets.
Contract liabilities
When performance obligations are not transferred to a customer at the end of a reporting period, cash received associated with amounts allocated to those performance obligations is reflected as contract liabilities on the condensed consolidated balance sheets and is deferred until control of these performance obligations is transferred to the customer. The following table presents the roll forward of the contract liability balances:
| | | | | | | | |
| | |
December 31, 2021 | | $ | 16.4 | |
Deferral of revenue | | 30.4 | |
Revenue recognized | | (16.5) | |
September 30, 2022 | | $ | 30.3 | |
As of September 30, 2022 and December 31, 2021, the current portion of contract liabilities was $24.8 million and $11.7 million, respectively, and was included in other current liabilities on the balance sheet.
Accounts receivable
Accounts receivable, including unbilled accounts receivable contract assets, consist of the following:
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Billed, net | | $ | 119.0 | | | $ | 224.9 | |
Unbilled | | 72.3 | | | 49.8 | |
Total accounts receivable, net | | $ | 191.3 | | | $ | 274.7 | |
As of September 30, 2022 and December 31, 2021, the allowances for doubtful accounts was $0.7 million and $3.2 million, respectively.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
11. Income taxes
The estimated effective annual tax rate as of September 30, 2022 and 2021 for the years ended December 31, 2022 and 2021, excluding the impact of discrete adjustments, was 3% and 24%, respectively. The decrease in the estimated effective annual tax rate is primarily due to decreased profitability, the impact of certain permanent adjustments, and a valuation allowance charge. The Company recorded discrete tax benefits of $10.9 million and $10.3 million for the three and nine months ended September 30, 2022, respectively, and $1.7 million and $7.2 million, for the three and nine months ended September 30, 2021, respectively. The discrete tax benefit in 2022 was primarily due to return to provision adjustments and the benefit of the release of an indemnified uncertain tax position offset by share-based compensation activity. The net discrete benefits in 2021 were primarily due to share-based compensation activity.
The Company establishes valuation allowances for deferred income tax assets in accordance with U.S. GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, the Company considers the scheduled reversal of deferred tax liabilities and assets, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.
As of September 30, 2022, the Company determined that it was more likely than not that deferred tax assets in the U.S. would not be realized due to reductions in estimates of future profitability in the U.S. Accordingly, the Company recorded a provision of $19.2 million associated with the establishment of a valuation allowance on those deferred tax assets.
12. Net income (loss) per share
The following table presents the calculation of basic and diluted net income (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net income (loss) | $ | (75.7) | | | $ | (32.7) | | | $ | (135.8) | | | $ | 41.6 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average number of shares—basic | 49.9 | | | 53.7 | | | 50.2 | | | 53.6 | |
Dilutive securities—equity awards | — | | | — | | | — | | | 0.7 | |
Weighted-average number of shares—diluted | 49.9 | | | 53.7 | | | 50.2 | | | 54.3 | |
| | | | | | | |
Net income (loss) per share - basic | $ | (1.52) | | | $ | (0.61) | | | $ | (2.71) | | | $ | 0.78 | |
Net income (loss) per share - diluted | $ | (1.52) | | | $ | (0.61) | | | $ | (2.71) | | | $ | 0.77 | |
| | | | | | | |
| | | | | | | |
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the treasury method by dividing net income (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 for the three and nine months ended September 30, 2022 as the effect would have been anti-dilutive due to the Company's net loss.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
In certain instances, awards may be anti-dilutive even if the average market price exceeds the exercise price when the sum of the assumed proceeds exceeds the difference between the market price and the exercise price. The following table presents the share-based awards that are not considered in the diluted income (loss) per share calculation generally because the exercise price of the awards was greater than the average per share closing price during the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Anti-dilutive stock awards | 3.3 | | | 1.4 | | | 2.6 | | | 0.6 | |
13. Equity
Repurchase programs
On November 11, 2021, the Company announced that its Board of Directors authorized management to repurchase up to an aggregate of $250.0 million of Common Stock under a board-approved Share Repurchase Program, of which $187.9 million has been utilized to purchase 4.4 million shares as of September 30, 2022. During the three months ended September 30, 2022, there were no shares repurchased. During the nine months ended September 30, 2022, the Company has utilized $75.5 million to purchase 1.8 million shares. The Share Repurchase Program does not obligate the Company to acquire any specific number of shares. Repurchased shares will be available for use in connection with the Company's stock plans and for other corporate purposes.
Share-based compensation
During the nine months ended September 30, 2022, the Company granted stock options to purchase 0.7 million shares of common stock and 1.5 million restricted and performance stock units under the Emergent BioSolutions Inc. Stock Incentive Plan. Typically, the stock option and restricted stock unit grants vest over three equal annual installments beginning on the day prior to the anniversary of the grant date. The performance stock units settle in stock at the end of the three-year performance period based on the Company's results compared to the performance criteria. Share-based compensation expense was recorded in the following financial statement line items:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Cost of product sales | $ | 1.8 | | | $ | 1.3 | | | $ | 5.4 | | | $ | 4.5 | |
Cost of CDMO | 0.4 | | | 0.3 | | | 1.4 | | | 0.8 | |
Research and development | 1.3 | | | 1.4 | | | 3.9 | | | 4.5 | |
Selling, general and administrative | 7.7 | | | 7.4 | | | 22.7 | | | 22.5 | |
Total share-based compensation expense | $ | 11.2 | | | $ | 10.4 | | | $ | 33.4 | | | $ | 32.3 | |
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Accumulated other comprehensive loss, net of tax
The following table includes changes in accumulated other comprehensive loss, net of tax by component:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Defined Benefit Pension Plan | | Derivative Instruments | | Foreign Currency Translation Adjustments | | Total |
| |
Balance, December 31, 2021 | | $ | (4.0) | | | $ | (4.5) | | | $ | (7.6) | | | $ | (16.1) | |
Other comprehensive income (loss) before reclassifications | | — | | | 9.4 | | | (0.4) | | | 9.0 | |
Amounts reclassified from accumulated other comprehensive loss | | — | | | 1.9 | | | — | | | 1.9 | |
Net current period other comprehensive income (loss) | | — | | | 11.3 | | | (0.4) | | | 10.9 | |
Balance, September 30, 2022 | | $ | (4.0) | | | $ | 6.8 | | | $ | (8.0) | | | $ | (5.2) | |
| | | | | | | | |
Balance, June 30, 2022 | | $ | (4.0) | | | $ | 4.6 | | | $ | (6.7) | | | $ | (6.1) | |
Other comprehensive income (loss) before reclassifications | | — | | | 2.6 | | | (1.3) | | | 1.3 | |
Amounts reclassified from accumulated other comprehensive loss | | — | | | (0.4) | | | — | | | (0.4) | |
Net current period other comprehensive income (loss) | | — | | | 2.2 | | | (1.3) | | | 0.9 | |
Balance, September 30, 2022 | | $ | (4.0) | | | $ | 6.8 | | | $ | (8.0) | | | $ | (5.2) | |
| | | | | | | | |
Balance, December 31, 2020 | | $ | (7.7) | | | $ | (11.0) | | | $ | (6.6) | | | $ | (25.3) | |
Other comprehensive loss before reclassifications | | — | | | (0.7) | | | (1.4) | | | (2.1) | |
Amounts reclassified from accumulated other comprehensive loss | | — | | | 4.3 | | | — | | | 4.3 | |
Net current period other comprehensive income (loss) | | — | | | 3.6 | | | (1.4) | | | 2.2 | |
Balance, September 30, 2021 | | $ | (7.7) | | | $ | (7.4) | | | $ | (8.0) | | | $ | (23.1) | |
| | | | | | | | |
Balance, June 30, 2021 | | $ | (7.7) | | | $ | (6.4) | | | $ | (8.3) | | | $ | (22.4) | |
Other comprehensive income (loss) before reclassifications | | — | | | (2.3) | | | 0.3 | | | (2.0) | |
Amounts reclassified from accumulated other comprehensive loss | | — | | | 1.3 | | | — | | | 1.3 | |
Net current period other comprehensive income (loss) | | — | | | (1.0) | | | 0.3 | | | (0.7) | |
Balance, September 30, 2021 | | $ | (7.7) | | | $ | (7.4) | | | $ | (8.0) | | | $ | (23.1) | |
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
The tables below present the tax effects related to each component of other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| Pretax | | Tax Expense | | Net of tax | | Pretax | | Tax Expense | | Net of tax |
| | | | | | | | | | | |
| | | | | | | | | | | |
Derivative instruments | $ | 3.0 | | | $ | (0.8) | | | $ | 2.2 | | | $ | 1.3 | | | $ | (2.3) | | | $ | (1.0) | |
Foreign currency translation adjustments | 0.1 | | | (1.4) | | | (1.3) | | | 0.3 | | | — | | | 0.3 | |
Total adjustments | $ | 3.1 | | | $ | (2.2) | | | $ | 0.9 | | | $ | 1.6 | | | $ | (2.3) | | | $ | (0.7) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Pretax | | Tax Expense | | Net of tax | | Pretax | | Tax Expense | | Net of tax |
| | | | | | | | | | | |
| | | | | | | | | | | |
Derivative instruments | $ | 15.4 | | | $ | (4.1) | | | $ | 11.3 | | | $ | 4.9 | | | $ | (1.3) | | | $ | 3.6 | |
Foreign currency translation adjustments | 2.1 | | | (2.5) | | | (0.4) | | | (1.4) | | | — | | | (1.4) | |
Total adjustments | $ | 17.5 | | | $ | (6.6) | | | $ | 10.9 | | | $ | 3.5 | | | $ | (1.3) | | | $ | 2.2 | |
14. Segment Information
The Company reports segment information based on the internal reporting used by management for making decisions and assessing performance. During the first quarter of 2022, the Company revised the reporting that the CODM reviews in order to assess Company performance. The CODM manages the business with a focus on two reportable segments: 1) Products segment consisting of the Government - MCM and Commercial business lines and 2) Services segment focused on CDMO. The Company evaluates the performance of these reportable segments based on revenue and adjusted gross margin. Segment revenue includes external customer sales, but it does not include inter-segment services. Adjusted gross margin for each segment is segment revenue less segment cost of sales reduced for significant one-time events. We do not allocate research and development, selling, general and administrative costs, amortization of intangibles assets, interest and other income (expense) or taxes to operating segments in the management reporting reviewed by the CODM. The accounting policies for segment reporting are the same as for the Company as a whole. The Company has recast the related historical information for consistency.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
The following tables include segment revenues and a reconciliation of the Company's segment adjusted gross margin to the condensed consolidated statement of operations for each of the Company's reporting segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
| Products | Services | Other | Consolidated | | Products | Services (1) | Other | Consolidated |
Revenues | $ | 186.2 | | $ | 36.4 | | $ | 17.4 | | $ | 240.0 | | | $ | 270.5 | | $ | 41.6 | | $ | 16.9 | | $ | 329.0 | |
Less: | | | | | | | | | |
Contracts and grants revenue | — | | — | | (17.4) | | (17.4) | | | — | | — | | (16.9) | | (16.9) | |
Cost of product sales | (85.5) | | — | | — | | (85.5) | | | (103.2) | | — | | — | | (103.2) | |
Cost of CDMO | — | | (63.1) | | — | | (63.1) | | | — | | (114.3) | | — | | (114.3) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross margin | 100.7 | | (26.7) | | — | | 74.0 | | | 167.3 | | (72.7) | | — | | 94.6 | |
Changes in fair value of contingent consideration | 0.6 | | — | | — | | 0.6 | | | 0.9 | | — | | — | | 0.9 | |
Adjusted gross margin | $ | 101.3 | | $ | (26.7) | | $ | — | | $ | 74.6 | | | $ | 168.2 | | $ | (72.7) | | $ | — | | $ | 95.5 | |
| | | | | | | | | |
(1) Services revenue and Services adjusted gross margin for the three months ended September 30, 2021 includes the impact of the reversal of $86.0 million of CDMO leases revenues related to the BARDA COVID-19 Development Public Private Partnership which ended in November 2021. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| Products | Services | Other | Consolidated | | Products | Services (1) | Other | Consolidated |
Revenues | $ | 660.5 | | $ | 95.4 | | $ | 34.3 | | $ | 790.2 | | | $ | 589.6 | | $ | 416.3 | | $ | 63.6 | | $ | 1,069.5 | |
Less: | | | | | | | | | |
Contracts and grants revenue | — | | — | | (34.3) | | (34.3) | | | — | | — | | (63.6) | | (63.6) | |
Cost of product sales | (256.8) | | — | | — | | (256.8) | | | (237.0) | | — | | — | | (237.0) | |
Cost of CDMO | — | | (217.5) | | — | | (217.5) | | | — | | (307.6) | | — | | (307.6) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross margin | 403.7 | | (122.1) | | — | | 281.6 | | | 352.6 | | 108.7 | | — | | 461.3 | |
Changes in fair value of contingent consideration | 2.4 | | — | | — | | 2.4 | | | 2.6 | | — | | — | | 2.6 | |
Adjusted gross margin | $ | 406.1 | | $ | (122.1) | | $ | — | | $ | 284.0 | | | $ | 355.2 | | $ | 108.7 | | $ | — | | $ | 463.9 | |
| | | | | | | | | |
(1) Services revenue and Services adjusted gross margin for the nine months ended September 30, 2021 includes the impact of $81.9 million of CDMO leases revenues related to the BARDA COVID-19 Development Public Private Partnership which ended in November 2021. |
The following table includes depreciation expense for each segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Depreciation: | | | | | | | |
Products | $ | 11.5 | | | $ | 5.0 | | | $ | 25.6 | | | $ | 20.9 | |
Services | 5.6 | | | 8.4 | | | 34.2 | | | 21.3 |
Other | 3.3 | | | 1.0 | | 5.7 | | | 4.3 |
Total | $ | 20.4 | | | $ | 14.4 | | | $ | 65.5 | | | $ | 46.5 | |
The Company manages its assets on a total company basis, not by operating segment, as the Company's operating assets are shared or commingled. Therefore, the Company's CODM does not regularly review any asset information by operating segment and, accordingly, the Company does not report asset information by operating segment.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
15. Commitments and Contingencies
Securities and shareholder litigation
With respect to the specific legal proceedings and claims described below, unless otherwise noted, the amount or range of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company's results of operations or cash flows for that period or on the Company's financial condition.
On April 20, 2021, May 14, 2021, and June 2, 2021, putative class action lawsuits were filed against the Company and certain of its current and former senior officers in the United States District Court for the District of Maryland on behalf of purchasers of the Company’s common stock, seeking to pursue remedies under the Securities Exchange Act of 1934. These complaints were filed by Palm Tran, Inc. – Amalgamated Transit Union Local 1577 Pension Plan; Alan I. Roth; and Stephen M. Weiss, respectively. The complaints allege, among other things, that the defendants made false and misleading statements about the Company's manufacturing capabilities with respect to COVID-19 vaccine bulk drug substance (referred to herein as "CDMO Manufacturing Capabilities"). These cases were consolidated on December 23, 2021, under the caption In re Emergent BioSolutions Inc. Securities Litigation, No. 8:21-cv-00955-PWG (the "Federal Securities Class Action"). The Lead Plaintiffs in the consolidated matter are Nova Scotia Health Employees’ Pension Plan and The City of Fort Lauderdale Police & Firefighters’ Retirement System. The defendants filed a motion to dismiss on May 19, 2022 and the Lead Plaintiff filed an opposition to that motion on July 19, 2022. The defendants believe that the allegations in the complaints are without merit and intend to defend the matters vigorously. Given the uncertainty of litigation, the preliminary stage of the cases, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot reasonably estimate the possible loss or range of loss, if any, that may result from the consolidated action.
On June 29, 2021, Lincolnshire Police Pension Fund (“Lincolnshire”), and on August 16, 2021, Pooja Sayal, filed putative shareholder derivative lawsuits in the United States District Court for the District of Maryland on behalf of the Company against certain of the Company's current and former officers and directors for breach of fiduciary duties, waste of corporate assets, and unjust enrichment, each allegation related to the CDMO Manufacturing Capabilities. In addition to monetary damages, the complaints seek the implementation of multiple corporate governance and internal policy changes. On November 16, 2021, the cases were consolidated under the caption In re Emergent BioSolutions Inc. Stockholder Derivative Litigation, Master Case No. 8:21-cv-01595-PWG. On January 3, 2022, the Lincolnshire complaint was designated as the operative complaint in the consolidated action. On April 13, 2022 the Court approved the parties joint stipulation to and stay of the proceedings and discovery until the close of fact discovery in the Federal Securities Class Action. The defendants believe that the allegations in the complaints are without merit and intend to defend the matter vigorously.
On September 15, 2021, September 16, 2021 and November 12, 2021, putative shareholder derivative lawsuits were filed by Chang Kyum Kim, Mark Nevins and Employees Retirement System of the State of Rhode Island, North Collier Fire Control and Rescue District Firefighters Pension Plan, and Pembroke Pines Firefighters & Police Officers Pension Fund, respectively, in The Court of Chancery of the State of Delaware on behalf of the Company against certain of its current and former officers and directors for breach of fiduciary duties, unjust enrichment and insider trading, each allegation related to the CDMO Manufacturing Capabilities. In addition to monetary damages, the complaints seek the implementation of multiple corporate governance and internal policy changes. On February 2, 2022, the cases were consolidated under the caption In re Emergent BioSolutions, Inc. Derivative Litigation, C.A. No. 2021-0974-MTZ with the institutional investors as co-lead plaintiffs. On March 4, 2022, the defendants’ filed a motion to dismiss the complaint. Ruling on this motion is stayed pursuant to a March 29, 2022 order staying all proceedings pending a final, non-appealable judgment in the Federal Securities Class Action.
On December 3, 2021, December 22, 2021 and January 18, 2022, putative shareholder derivative lawsuits were filed by Zachary Elton, Eric White and Jeffrey Reynolds in the Circuit Court for Montgomery County, Maryland on behalf of the Company against certain of its current and former officers and directors for breach of fiduciary duty, unjust enrichment, waste of corporate assets, failing to maintain internal controls, making or causing to be made false and/or misleading statements and material omissions, insider trading and otherwise violating the federal securities laws, each allegation related to the CDMO Manufacturing Capabilities. The complaints seek monetary and punitive damages. On February 22, 2022, the Court entered an order consolidating these actions under case number C-15-21-CV-000496. On March 9, 2022, the parties filed a Joint Stipulation of Stay of Proceedings and Discovery, pursuant to
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
which the parties agreed to stay all proceedings until 30 calendar days after a ruling on the defendants’ motion to dismiss the Federal Securities Class Action. The Court approved the Joint Stipulation on March 14, 2022.
In addition to the above actions, the Company has received preliminary inquiries and subpoenas to produce documents related to these matters from Representative Carolyn Maloney and Representative Jim Clyburn, members of the House Committee on Oversight and Reform and the Select Subcommittee on the Coronavirus Crisis, Senator Murray of the Committee on Health, Education, Labor and Pensions, the Department of Justice, the SEC, the Maryland Attorney General’s Office, and the New York Attorney General’s Office. The Company is producing and has produced documents as required in response and will continue to cooperate with these government inquiries.
Intellectual property
ANDA litigation - Teva 2mg
In 2018, Teva Pharmaceuticals Industries Limited and Teva Pharmaceuticals USA (collectively, "Teva") provided a notice to Emergent Devices Inc., a subsidiary of Emergent formerly known as Adapt Pharma Inc. ("EBPA"); Emergent Operations Ireland Limited, a subsidiary of Emergent formerly known as Adapt Pharma Operations Limited ("EIRE"); and Opiant Pharmaceuticals Inc. ("Opiant"). The notice stated that Teva had filed an abbreviated new drug application ("ANDA") with the FDA seeking regulatory approval to market a generic version of NARCAN® (naloxone HCI) Nasal Spray 2 mg/spray before the expiration of certain Orange Book Listed Patents for the 2 mg/spray dose of NARCAN®. Teva’s notice letter alleged that claims of certain Orange Book Listed Patents for the 2 mg/spray dose of NARCAN® were invalid and/or would not be infringed by the activities described in Teva’s ANDA. Emergent and Opiant filed complaints against Teva in the U.S. District Court for the District of New Jersey alleging infringement of certain Orange Book Listed Patents for the 2 mg/spray dose of NARCAN. This case was dismissed July 27, 2022.
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
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes and other financial information included elsewhere in this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, includes information with respect to our plans and strategy for our business and financing, as well as forward-looking statements that involve risks and uncertainties. You should carefully review the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this quarterly report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
BUSINESS OVERVIEW
Emergent BioSolutions Inc. (the Company or Emergent) is a global life sciences company focused on providing innovative preparedness and response solutions addressing accidental, deliberate, and naturally occurring Public Health Threats (PHTs). The Company's solutions include a product portfolio, a product development portfolio, and a contract development and manufacturing (CDMO) services portfolio.
The Company is focused on the following five distinct PHT categories: chemical, biological, radiological, nuclear and explosives (CBRNE); emerging infectious diseases (EID); travel health; emerging health crises; and acute/emergency care. We have a product portfolio of thirteen products that contribute a substantial portion of our revenue and are sold to government and commercial customers. We also have a product candidate that is procured under special circumstances by the U.S. government (USG), although it is not approved by the U.S. Food and Drug Administration (FDA). Additionally, we have a development pipeline consisting of a diversified mix of both pre-clinical and clinical stage product candidates. Finally, we have a fully-integrated portfolio of CDMO services. Our CDMO service offerings cover development services, drug substance manufacturing and drug product manufacturing and packaging.
The majority of our product revenue comes from the following products and procured product candidates:
Government - MCM products
•Anthrax vaccines, including our AV7909 (Anthrax vaccine adsorbed (AVA), adjuvanted) procured product candidate being developed as a next-generation anthrax vaccine for post-exposure prophylaxis and BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the FDA for the general use prophylaxis and post-exposure prophylaxis of anthrax disease. AV7909 has not been approved by the FDA, but is procured by certain authorized government buyers for their use;
•ACAM2000®, (Smallpox (Vaccinia) Vaccine, Live), the only single-dose smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection;
•BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only heptavalent antitoxin licensed by the FDA and Health Canada for the treatment of botulism;
•CNJ-016® (Vaccinia Immune Globulin Intravenous (Human) (VIGIV)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination;
•Raxibacumab injection, a fully human monoclonal antibody, the first fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax;
•Anthrasil® (Anthrax Immune Globulin Intravenous (human)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada for the treatment of inhalational anthrax;
•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 AUTO-INJECTOR, a combination drug-device auto-injector procured product candidate that contains atropine sulfate and obidoxime chloride. It has not been approved by the FDA, but is procured by certain authorized government buyers under special circumstances for potential use as a nerve agent countermeasure.
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)
•TEMBEXA®, an oral antiviral formulated as 100 mg tablets and 10 mg/mL oral suspension dosed once weekly for two weeks. It has been approved by the FDA for the treatment of human smallpox disease caused by variola virus in adult and pediatric patients, including neonates; and
•Ebanga™ (ansuvimab-zykl, formerly referred to as mAb114) is a monoclonal antibody with antiviral activity provided through a single IV infusion for the treatment of Ebola. Under the terms of a collaboration with Ridgeback Biotherapeutics, Emergent will be responsible for the manufacturing, sale, and distribution of Ebanga™ in the United States and Canada, and Ridgeback Biotherapeutics will serve as the global access partner for Ebanga™.
Commercial products
•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;
•Vaxchora® (Cholera Vaccine, Live, Oral), the only single-dose oral vaccine approved by the FDA and EMA for the prevention of cholera; and
•Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral vaccine licensed by the FDA for the prevention of typhoid fever.
Services - contract development and manufacturing
Our services revenue consists of distinct but interrelated CDMO services: drug substance manufacturing; drug product manufacturing (also referred to as "fill/finish" services) and packaging; development services including technology transfer, process and analytical development services; and, when necessary, suite reservation obligations. These services, which we refer to as "molecule-to-market" offerings, employ diverse technology platforms (mammalian, microbial, viral and plasma) across a network of nine geographically distinct development and manufacturing sites operated by us for our internal products and pipeline candidates and third party CDMO services. We service both clinical-stage and commercial-stage projects for a variety of third-party customers, including government agencies, innovative pharmaceutical companies, and non-government organizations.
Asset Acquisition
During the three months ended September 30, 2022, the Company acquired from Chimerix the exclusive worldwide rights to brincidofovir, including TEMBEXA® and other related assets. TEMBEXA is a medical countermeasure for smallpox approved by the FDA in June 2021.
FINANCIAL OPERATIONS OVERVIEW
Revenues
We generate product revenues from the sale of our marketed products and procured product candidates which include vaccines, therapeutics and devices which have been described above. The USG is the largest purchaser of our MCM products and primarily purchases our products for the 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, generally with annual options. Our opioid overdose reversal product, NARCAN® Nasal Spray, and our travel health products, Vivotif and Vaxchora, are sold commercially through wholesalers and distributors, physician-directed or standing order prescriptions at retail pharmacies and to state and local community healthcare agencies, practitioners and hospitals.
We also generate revenue from our CDMO services provided at our established development and manufacturing infrastructure, technology platforms and expertise. Our services include a fully integrated molecule-to-market contract development and manufacturing services business offering across development services, drug substance and drug product for small to large pharmaceutical and biotechnology industry and government agencies/non-governmental organizations. From time to time, clients require suite reservations at our various manufacturing sites, which may be considered leases depending on the facts and circumstances.
We have received contracts and grants funding from the USG and other non-governmental organizations to perform research and development activities, particularly related to programs addressing certain CBRNE threats and EIDs.
Our revenue, operating results and profitability vary quarterly based on the timing of production and deliveries, the timing of manufacturing services performed and the nature of providing large scale bundles of products and services as needs arise. We
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)
expect continued variability in our quarterly financial statements.
Cost of product sales and CDMO services
Products - The primary expenses that we incur to deliver our products consist of fixed and variable costs. We determine the cost of product sales for products sold during a reporting period based on the average manufacturing cost per unit in the period those units were manufactured. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. Variable manufacturing costs primarily consist of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing operations, sales-based royalties, shipping and logistics. In addition to the fixed and variable manufacturing costs described above, the cost of product sales depends on utilization of available manufacturing capacity. For our commercial sales, other associated expenses include sales-based royalties (which include fair value adjustments associated with contingent consideration), shipping and logistics.
CDMO - The primary expenses that we incur to deliver our CDMO services consist of fixed and variable costs. We operate five facilities that perform manufacturing activities for CDMO services customers. We use the same manufacturing facilities and methods of production for our own products as well as for fulfillment of our CDMO service contracts. Our manufacturing process includes the production of bulk material and performing “fill/finish” work for containment and distribution of biological products. For “fill finish” customers, we receive work in process inventory to be prepared for distribution. When producing bulk material, we generally procure raw materials, manufacture the product and retain the risk of loss through the manufacturing and review process until delivery.
Research and development expenses
We expense research and development costs as incurred. Our research and development expenses consist primarily of:
▪personnel-related expenses;
▪fees to professional service providers for, among other things, analytical testing, independent monitoring or other administration of our clinical trials and obtaining and evaluating data from our clinical trials and non-clinical studies;
▪costs of CDMO services for clinical trial material; and
▪costs of materials and equipment used in clinical trials and research and development.
In many cases, we plan to seek funding for development activities from external sources and third parties, such as governments and non-governmental organizations, or through collaborative partnerships. We expect our research and development spending will be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of research and development spending, the number of product candidates under development, the size, structure and duration of any clinical programs that we may initiate, the costs associated with manufacturing and development of our product candidates on a large-scale basis for later stage clinical trials and our ability to use or rely on data generated by government agencies.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executives, sales and marketing, business development, government affairs, finance, accounting, information technology, legal, human resource functions and other corporate functions.
Income taxes
Uncertainty in income taxes is accounted for using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
Management believes that the assumptions and estimates related to the provision for income taxes are critical to the Company’s results of operations.
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
The preparation of our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from these estimates. There have been no significant changes to our critical accounting policies and estimates contained in "Critical Accounting Policies and Estimates" in the Management's Discussion and Analysis, in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.
New accounting standards
For a discussion of new accounting standards please see Note 2, "Basis of presentation and principles of consolidation", in Part I item 1, of this Quarterly Report on Form 10-Q.
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 September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
Product sales, net: | | | | | | | | | | | | | | | |
Nasal naloxone products | $ | 87.9 | | | $ | 133.3 | | | $ | (45.4) | | | (34) | % | | $ | 282.6 | | | $ | 313.7 | | | $ | (31.1) | | | (10 | %) |
ACAM2000 | 49.0 | | | 80.7 | | | (31.7) | | | (39 | %) | | 63.4 | | | 80.7 | | | (17.3) | | | (21 | %) |
Anthrax vaccines | 24.2 | | | 15.6 | | | 8.6 | | | 55 | % | | 223.4 | | | 122.1 | | | 101.3 | | | 83 | % |
Other product sales | 25.1 | | | 40.9 | | | (15.8) | | | (39) | % | | 91.1 | | | 73.1 | | | 18.0 | | | 25 | % |
Total product sales, net | 186.2 | | | 270.5 | | | (84.3) | | | (31) | % | | 660.5 | | | 589.6 | | | 70.9 | | | 12 | % |
CDMO: | | | | | | | | | | | | | | | |
Services | 36.2 | | | 112.6 | | | (76.4) | | | (68) | % | | 90.7 | | | 283.7 | | | (193.0) | | | (68) | % |
Leases | 0.2 | | | (71.0) | | | 71.2 | | | NM | | 4.7 | | | 132.6 | | | (127.9) | | | (96) | % |
Total CDMO | 36.4 | | | 41.6 | | | (5.2) | | | (13) | % | | 95.4 | | | 416.3 | | | (320.9) | | | (77) | % |
Contracts and grants | 17.4 | | | 16.9 | | | 0.5 | | | 3 | % | | 34.3 | | | 63.6 | | | (29.3) | | | (46) | % |
Total revenues | 240.0 | | | 329.0 | | | (89.0) | | | (27) | % | | 790.2 | | | 1,069.5 | | | (279.3) | | | (26) | % |
| | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | |
Cost of product sales | 85.5 | | | 103.2 | | | (17.7) | | | (17 | %) | | 256.8 | | | 237.0 | | | 19.8 | | | 8 | % |
Cost of CDMO | 63.1 | | | 114.3 | | | (51.2) | | | (45 | %) | | 217.5 | | | 307.6 | | | (90.1) | | | (29 | %) |
Research and development | 39.2 | | | 49.6 | | | (10.4) | | | (21 | %) | | 135.4 | | | 151.0 | | | (15.6) | | | (10 | %) |
Selling, general and administrative | 80.2 | | | 82.1 | | | (1.9) | | | (2 | %) | | 246.1 | | | 254.2 | | | (8.1) | | | (3 | %) |
| | | | | | | | | | | | | | | |
Amortization of intangible assets | 14.0 | | | 14.5 | | | (0.5) | | | (3 | %) | | 42.0 | | | 44.5 | | | (2.5) | | | (6 | %) |
Total operating expenses | 282.0 | | | 363.7 | | | (81.7) | | | (22 | %) | | 897.8 | | | 994.3 | | | (96.5) | | | (10 | %) |
| | | | | | | | | | | | | | | |
Income (loss) from operations | (42.0) | | | (34.7) | | | (7.3) | | | 21 | % | | (107.6) | | | 75.2 | | | (182.8) | | | NM |
| | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | |
Interest expense | (8.5) | | | (8.4) | | | (0.1) | | | 1 | % | | (24.5) | | | (25.5) | | | 1.0 | | | (4 | %) |
Other, net | (13.4) | | | (2.4) | | | (11.0) | | | NM | | (18.4) | | | (2.8) | | | (15.6) | | | NM |
Total other income (expense), net | (21.9) | | | (10.8) | | | (11.1) | | | NM | | (42.9) | | | (28.3) | | | (14.6) | | | 52 | % |
| | | | | | | | | | | | | | | |
Income (loss) before income taxes | (63.9) | | | (45.5) | | | (18.4) | | | 40 | % | | (150.5) | | | 46.9 | | | (197.4) | | | NM |
Income tax benefit (provision) | (11.8) | | | 12.8 | | | (24.6) | | | NM | | 14.7 | | | (5.3) | | | 20.0 | | | NM |
Net income (loss) | $ | (75.7) | | | $ | (32.7) | | | $ | (43.0) | | | NM | | $ | (135.8) | | | $ | 41.6 | | | $ | (177.4) | | | 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)
Total revenues
| | | | | | | | | | | |
Legend |
| Nasal naloxone products | | Other product sales |
| ACAM2000 | | CDMO |
| Anthrax vaccines | | Contracts and grants |
Product sales, net
Anthrax vaccines
Anthrax vaccine sales increased $8.6 million to $24.2 million for the three months ended September 30, 2022. The increase in sales for the three months ended September 30, 2022 was primarily due to an increase in the number of doses sold as a result of the timing of deliveries to the USG.
Anthrax vaccine sales increased $101.3 million to $223.4 million for the nine months ended September 30, 2022. The increase in sales for the nine months ended September 30, 2022 was primarily due to an increase in the number of doses sold as a result of the timing of deliveries to the USG.
The price per unit of Anthrax vaccines was largely consistent period over period. Anthrax vaccine product sales are made under annual purchase options exercised by the USG. Fluctuations in revenues result from the timing of the exercise of annual purchase options and the USG purchases and Company delivery of orders that follow.
Nasal naloxone products
Nasal naloxone products sales decreased $45.4 million to $87.9 million for the three months ended September 30, 2022. The decrease in sales for the three months ended September 30, 2022 was driven by a reduction in commercial retail sales following the launch of a generic version of NARCAN Nasal Spray 4mg in December 2021, partially offset by strong growth in unit sales of NARCAN Nasal Spray to U.S. public interest customers, as well as from sales of the authorized generic product licensed to Sandoz which launched in December 2021.
Nasal naloxone products sales decreased $31.1 million to $282.6 million for the nine months ended September 30, 2022. The decrease in sales for the nine months ended September 30, 2022 was driven by a reduction in commercial retail sales following the launch of a generic version of NARCAN Nasal Spray 4mg in December 2021, partially offset by increase in US public interest, Canadian and authorized generic sales.
ACAM2000
ACAM2000 sales decreased $31.7 million to $49.0 million for the three months ended September 30, 2022. The decrease was due to lower number of units sold to the USG, partially offset by an increased number of units sold to non-US customers at a higher price per unit.
ACAM2000 sales decreased $17.3 million to $63.4 million for the nine months ended September 30, 2022. The decrease in sales for the nine months ended September 30, 2022 was due to a lower number of units sold to the USG, partially offset by an increased number of units sold to non-US customers at a higher price per unit.
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)
Other product sales
Other product sales decreased $15.8 million to $25.1 million for the three months ended September 30, 2022. The decrease in sales for the three months ended September 30, 2022 was primarily due to reduced VIG and BAT sales due to timing of deliveries, partially offset by an increase in Anthrasil, RSDL and Vivotif sales.
Other product sales increased $18.0 million to $91.1 million for the nine months ended September 30, 2022. The increase in sales for the nine months ended September 30, 2022 was primarily due to increased sales of Vivotif, BAT, and Anthrasil.
CDMO
Services
CDMO services revenues decreased $76.4 million to $36.2 million for the three months ended September 30, 2022. The decrease in revenues for the three months ended September 30, 2022 is largely due to reduced production activities at the Company's Bayview facility as a result of a halt in manufacturing under the Janssen contract which began in the first quarter 2022 and no activities under the AstraZeneca contract in 2022. The combined services revenues from the Janssen and AstraZeneca contracts decreased $59.1 million during the three months ended September 30, 2022. Additionally, the Company's Camden facility had reduced production. The declines were partially offset by an increase in services revenues earned at the Company's Winnipeg facility.
CDMO services revenues decreased $193.0 million to $90.7 million for the nine months ended September 30, 2022. The decrease in revenues for the nine months ended September 30, 2022 is largely due to reduced production activities at the Company's Bayview facility as a result of a halt in manufacturing under the Janssen contract which began in the first quarter 2022 and no activities under the AstraZeneca contract in 2022. The combined services revenues from the Janssen and AstraZeneca contracts decreased $169.6 million during the nine months ended September 30, 2022. Additionally, the Company's Camden facility had reduced production. The decreases were partially offset by an increase in manufacturing activities at the Company's Winnipeg facility mentioned above.
Leases
CDMO leases revenues increased $71.2 million to $0.2 million for the three months ended September
30, 2022. The increase in revenues for the three months ended September 30, 2022 was primarily due to the reversal of $86.0 million during the three months ended September 30, 2021 associated with the completion of our COVID-19 development public-private partnership with BARDA in November 2021, partially offset by reduced lease revenues under the Janssen contract of $15.1 million.
CDMO leases revenues decreased $127.9 million to $4.7 million for the nine months ended September 30, 2022. The decrease in revenues for the nine months ended September 30, 2022 was primarily due to a reduction of $81.9 million associated with the completion of our COVID-19 development public-private partnership with BARDA in November 2021 and reduced lease revenues under the Janssen contract of $46.7 million.
Contracts and grants
Contracts and grants revenues were consistent for the three months ended September 30, 2022. Contracts and grants revenues decreased $29.3 million to $34.3 million for the nine months ended September 30, 2022. The decrease in revenues for the nine months ended September 30, 2022 was largely due to BARDA's completion of the Center of Innovation and Advanced Development and Manufacturing agreement in November 2021 as well as decreases in development activities associated with various other externally funded research and development projects, most notably the Company's COVID-HIG therapeutic product candidate, as well as decreases in development activities for AV7909. Decreases were partially offset by revenue increases relating to indirect rate adjustments during the quarter.
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)
Cost of product sales
| | | | | |
| Cost of product sales |
l | Gross profit margin for Product segment |
| |
Cost of product sales decreased $17.7 million to $85.5 million for the three months ended September 30, 2022. The decrease was primarily due to a decrease in product sales. The decrease in gross profit margin for the Product segment for the three months ended September 30, 2022 was due to lower margin for Nasal naloxone products. Cost of product sales increased $19.8 million to $256.8 million for the nine months ended September 30, 2022. The increase was primarily due to an increase in products sales. The increase in gross profit margin for the Product segment for the nine months ended September 30, 2022 was largely due to a favorable product revenue mix which was weighted more heavily to higher margin products.
Cost of CDMO services
| | | | | |
| Cost of CDMO services |
l | Gross profit margin for Services segment |
l | Not meaningful |
| |
Cost of CDMO services decreased $51.2 million to $63.1 million for the three months ended September 30, 2022. The decrease is primarily due to reduced production activities across our CDMO network in Q3 2022 compared with Q3 2021 resulting in decreased raw materials consumption. These decreases were partially offset by the Company's Camden facility due to additional investments in quality enhancement and improvement initiatives. Cost of CDMO services decreased $90.1 million to $217.5 million for the nine months ended September 30, 2022. The decrease is primarily due to reduced production activities across our CDMO network, as well as a $41.5 million inventory write-off in Q2 2021. The decrease in gross profit margin for the Services segment was also impacted by the completion of the BARDA lease in November 2021.
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)
Research and development expense
| | | | | |
| Research and development expense |
| |
Research and development expense decreased $10.4 million to $39.2 million for the three months ended September 30, 2022. The decrease was primarily due to a decrease in spending for the Company's COVID therapeutic product candidates along with a number of other developmental activities, partially offset by an increase in costs associated with the Company's Phase 3 study of our chikungunya virus-like particle vaccine candidate. Research and development expense decreased $15.6 million to $135.4 million for the nine months ended September 30, 2022. The decrease was primarily due to a decrease in spending for the Company's COVID therapeutic product candidates along with a number of other developmental activities, partially offset by an increase in costs associated with the Company's Phase 3 study of our chikungunya virus-like particle vaccine candidate.
Selling, general and administrative expenses
| | | | | |
| Selling, general and administrative expenses |
l | SG&A as a percentage of total revenue |
| |
Selling, general and administrative expenses decreased $1.9 million to $80.2 million for the three months ended September 30, 2022. The decrease was due to lower professional services and marketing expenses partially offset by increased employee costs, primarily due to increased travel. Selling, general and administrative expenses decreased $8.1 million to $246.1 million for the nine months ended September 30, 2022. The decrease was due to lower professional services and marketing expenses partially offset by increased employee costs, primarily due to increased travel costs. Selling, general and administrative costs as a percentage of total revenue increased 8.4% and 7.3% for the three and nine months ended September 30, 2022. The increase was due to a decrease in revenues during the periods, partially offset by a decrease in selling, general and administrative expenses during the periods.
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)
Amortization of intangible assets
Amortization of intangible assets and the composition of intangible assets amortized during the three and nine months ended September 30, 2022 was consistent with the three and nine months ended September 30, 2021.
Total other income (expense), net
| | | | | |
| Interest expense |
| Other income (expense), net |
Other income (expense), net decreased $11.1 million to an expense of $21.9 million for the three months ended September 30, 2022. The decrease was primarily due to a write-off of a tax indemnity receivable, which is offset in income tax expense (benefit), and unrealized foreign currency losses recorded related to the remeasurement of certain intercompany balances. Interest expense was largely consistent between periods. Other income (expense), net decreased $14.6 million to an expense of $42.9
million for the nine months ended September 30, 2022. The decrease was due to a write-off of a tax indemnity receivable, which is offset in income tax expense (benefit), and unrealized foreign currency losses recorded related to the remeasurement of certain intercompany balances. Interest expense was largely consistent between periods.
Income tax expense (benefit)
| | | | | |
| Income tax expense (benefit) |
l | Effective tax rate |
| |
The estimated effective annual tax rate as of September 30, 2022 and 2021 for the years ended December 31, 2022 and 2021, excluding the impact of discrete adjustments, was 3% and 24%, respectively. The decrease in the estimated effective annual tax rate is primarily due to decreased profitability, the impact of certain permanent adjustments, and a valuation allowance charge. The Company recorded discrete tax benefits of $10.9 million and $10.3 million for the three and nine months ended September 30, 2022, respectively, and $1.7 million and $7.2 million for the three and nine months ended September 30, 2021, respectively. The discrete tax benefit in 2022 was primarily due to return to provision adjustments and the benefit of the release of an indemnified uncertain tax position offset by share-based compensation activity. The net discrete benefits in 2021 were primarily due to share-based compensation activity.
Income tax benefit decreased $24.6 million to an income tax expense of $11.8 million for the three months ended September 30, 2022. The decrease in tax benefit was due to a lower estimated effective annual tax rate.
Income tax benefit increased $20.0 million from an income tax expense of $5.3 million to an income tax benefit of $14.7 million for the nine months ended September 30, 2022. The increase in income tax
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)
benefit is largely due to the increase in net loss before income taxes.
The Company establishes valuation allowances for deferred income tax assets in accordance with U.S. GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, the Company considers the scheduled reversal of deferred tax liabilities and assets, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.
As of September 30, 2022, the Company determined that it was more likely than not that deferred tax assets in the U.S. would not be realized due to reductions in estimates of future profitability in the U.S. Accordingly, the Company recorded a provision of $19.2 million associated with the establishment of a valuation allowance on those deferred tax assets.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our financial condition is summarized as follows:
| | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | Change % |
Financial assets: | | | | | |
Cash and cash equivalents | $ | 240.9 | | | $ | 576.1 | | | (58) | % |
| | | | | |
Borrowings: | | | | | |
Debt, current portion | $ | 21.2 | | | $ | 31.6 | | | (33) | % |
Debt, net of current portion | 1,032.1 | | | 809.4 | | | 28 | % |
Total borrowings | $ | 1,053.3 | | | $ | 841.0 | | | 25 | % |
| | | | | |
Working capital: | | | | | |
Current assets | $ | 1,118.5 | | | $ | 1,272.1 | | | (12) | % |
Current liabilities | 268.4 | | | 373.8 | | | (28) | % |
Total working capital | $ | 850.1 | | | $ | 898.3 | | | (5) | % |
Sources of liquidity
We have historically financed our operating and capital expenditures through cash on hand, cash from operations, debt financing and contracts and grants development funding. We also obtain financing from the sale of our common stock upon exercise of stock options. We have operated profitably for each of the last five annual fiscal years through the period ended December 31, 2021. As of September 30, 2022, we had unrestricted cash and cash equivalents of $240.9 million and capacity under our revolving credit facility of $360.7 million.
Going Concern
As of September 30, 2022, there is $238.0 million outstanding on the revolver loan and $371.3 million on the term loan that matures in October 2023, which is within one year of the date that the consolidated financial statements are issued for the quarter ended September 30, 2022. The Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation considered the potential mitigating effect of management’s plans that have not been fully implemented. Management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company's plan to alleviate the substantial doubt includes amending its existing revolver loan and term loan that are due October 2023.
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)
While the Company is in the process of and expects to replace the current credit facility before it matures, management cannot make the assumption that it is probable that the Company will be able to obtain such debt refinancing on commercially reasonable terms or at all until the new credit facility is in place. The Company is currently working with its lenders and expects to refinance the credit facility with revised terms and conditions. The extent to which the Company will be able to affect such refinancing, replacement or maturity extension on terms that are favorable or at all is dependent on a number of uncertain factors, including then-prevailing credit and other market conditions, economic conditions, particularly in the pharmaceutical and biotechnology industry, disruptions or volatility caused by factors such as COVID-19, regional conflicts, inflation, and supply chain disruptions. In addition, rising interest rates could limit our ability to refinance our existing credit facility when it matures or cause us to pay higher interest rates upon refinancing.
As the replacement of the Company’s current debt facility is conditional upon the execution of agreements with new or existing third parties, which are considered outside of the Company’s control, until such time as they are completed, the refinancing cannot be considered to be probable to occur as of the date of this report. The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Cash flows
The following table provides information regarding our cash flows for the nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Net cash provided by (used in): | | | |
Operating activities | $ | (126.9) | | | $ | (7.9) | |
Investing activities | (335.9) | | | (178.3) | |
Financing activities | 128.1 | | | (31.0) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (0.6) | | | (0.3) | |
Net change in cash, cash equivalents and restricted cash | $ | (335.3) | | | $ | (217.5) | |
Operating activities
Net cash used in operating activities of $126.9 million for the nine months ended September 30, 2022 was due to a net income excluding non-cash items of $46.8 million offset by negative working capital changes of $173.7 million due to increases in inventory and an increase in payments for our contingent consideration and other accrued expenses, partially offset by collections on receivables.
Net cash used in operating activities of $7.9 million for the nine months ended September 30, 2021 was due to net income excluding non-cash items of $266.0 million offset by negative working capital changes of $273.9 million due to increases in receivables, the accumulation of inventory and prepaid expenses.
The increase of $119.0 million from cash used in operating activities of $7.9 million to cash used in operating activities of $126.9 million is due to a decrease in net income excluding non-cash items of $219.2 million partially offset by an increase in working capital changes of $100.2 million.
Investing activities
Net cash used in investing activities relates to purchases of property, plant and equipment as well as asset acquisitions and was $335.9 million and $178.3 million for the nine months ended September 30, 2022 and 2021, respectively. The cash used in investing activities increased during the nine months ended September 30, 2022 largely due the acquisition of TEMBEXA® during the three months ended September 30, 2022.
Financing activities
Net cash provided by financing activities of $128.1 million for the nine months ended September 30, 2022 was primarily due proceeds from our revolving credit facility of $238.0 million, partially offset by repurchases of stock of $81.9 million and payments on debt of $25.3 million.
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)
Net cash used in financing activities of $31.0 million for the nine months ended September 30, 2021 was primarily due to payments on debt of $27.5 million.
The increase of $159.1 million of cash provided by financing activities is largely due proceeds from our revolving credit facility of $238.0 million, partially offset by an increase in cash used for repurchases of stock of $81.9 million.
Funding requirements
We expect to continue to fund our anticipated operating expenses, capital expenditures and debt service requirements from the following sources:
▪existing cash and cash equivalents;
▪net proceeds from the sale of our products and CDMO services;
▪development contracts and grants funding; and
▪our Senior Secured Credit Facilities and any other lines of credit we may establish from time to time.
There are numerous risks and uncertainties associated with product sales, delivery of CDMO services and 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 cost of contract development and 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 shares of our common stock under our current 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 Unsecured Notes due 2028 and the Senior Secured Credit 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, 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.
Economic conditions, including market volatility and adverse impacts on financial markets may make it more 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.
Unused credit capacity
Available room under the revolving credit facility for the periods ended September 30, 2022 and December 31, 2021 was:
| | | | | | | | | | | |
Total Capacity | Outstanding Letters of Credit | Outstanding Indebtedness on Revolving Credit Facility | Unused Capacity |
| September 30, 2022 | |
$600.0 | 1.3 | 238.0 | $360.7 |
| December 31, 2021 | |
$600.0 | 2.3 | — | $597.7 |