Emergent BioSolutions Inc. and Subsidiaries
The accompanying notes are an integral part of the consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries
Emergent BioSolutions Inc. (the "Company" or "Emergent") is a global life sciences company seeking to protect and enhance life by focusingfocused on providing specialty products for civilian and military populations that address accidental, intentionaldeliberate and naturally emerging public health threats. The Company is focused on developing, manufacturing and commercializing medical countermeasures, or MCM, that addressoccurring public health threats or PHTs. ("PHTs," each a “PHT”).
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▪ | VIGIV [Vaccinia Immune Globulin Intravenous (Human)]BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only heptavalent antibody therapeutic licensed by the FDA and Health Canada for the treatment of botulism; and |
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▪ | VIGIV (Vaccinia Immune Globulin Intravenous (Human)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination;vaccination. |
Product Candidates
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▪ | RSDLAV7909® (Reactive Skin Decontamination Lotion Kit)(Anthrax Vaccine Absorbed with Adjuvant), is a product candidate being developed as a next generation anthrax vaccine for post-exposure prophylaxis of disease resulting from suspected or confirmed Bacillus antracis exposure. The USG has started procuring AV7909 for the only device clearedSNS prior to its approval by the FDA to remove or neutralize chemical warfare agents and T-2 toxins from the skin; andhas been reducing its purchases of BioThrax as a result;
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▪ | Trobigard™ (atropine sulfate, obidoxime chloride), anTrobigard® is a combination drug-device auto-injector device designed for intramuscular self-injection ofproduct candidate that contains atropine sulfate and obidoxime chloride, a nerve agent countermeasure. This productchloride. It has not been approved by the FDA or any othersimilar health regulatory agency,body, but is not promoted or distributed in the U.S., and is only sold to non-U.S.procured by certain authorized government buyers. buyers under special circumstances for potential use as a nerve agent countermeasure. |
WeThe Company also providegenerates revenue from contract development and manufacturing services on a clinical and commercial (small and large) scale by providing such services to third-party customers. We performthe pharmaceutical productand biotechnology industry. These services include process development and fillingbulk drug substance and drug product manufacturing of biologics, fill/finish formulation and analytical development services for injectable and other sterile products, as well asinclusive of process design, technical transfer, manufacturing validation, laboratory support,validations, aseptic filling, lyophilization, final packaging and acceleratedstability studies, as well as manufacturing of vial and ongoing stability studies.pre-filled syringe formats across bacterial, viral and mammalian therapy technology platforms.
We operate as 1 operating segment.
On August 6, 2015, the Company announced its plan to separate into two independent publicly-traded companies. On August 1, 2016, the Company accomplished this plan through the completion of the spin-off of Aptevo Therapeutics Inc. ("Aptevo"), a biotechnology company focused on novel oncology and hematology therapeutics to meaningfully improve patients' lives.
2. Summary of significant accounting policies
Basis of presentation and consolidation
The accompanying consolidated financial statements include the accounts of Emergent and its wholly owned and majority owned subsidiaries. All significant intercompanyinter-company accounts and transactions have been eliminated in consolidation.
In anticipation of the spin-off, the Company realigned certain components of its biosciences business to the new Aptevo segment to be consistent with how the Company's chief operating decision maker ("CODM") allocates resources and makes decisions about the operations of the Company. Effective January 1, 2016, the Company changed its segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation. On August 1, 2016, the Company completed the spin-off of Aptevo. As of December 31, 2016, the results of operations and financial position of Aptevo are reflected as discontinued operations for all periods presented through the date of the spin-off. The historical financial statements and footnotes have been revised accordingly. See Note 3. "Discontinued operations" for further details regarding the spin-off. For periods following the spin-off, the Company reports financial results under one business segment.
Use of estimates
The preparation of financial statements in conformityaccordance with U.S. generally accepted accounting principles generally accepted in the United States(“GAAP”) requires management to make estimates, judgments and assumptions that affect the amounts and disclosures reported amounts of assets and liabilities andin the disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenuesaccompanying notes. Management continually re-evaluates its estimates, judgments and expenses during the reporting period.assumptions, and management’s evaluations could change. These estimates are sometimes complex, sensitive to changes in assumptions and require fair value determinations using Level 3 fair value measurements. Actual results couldmay differ materially from those estimates.
Estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, allowances for doubtful accounts, inventory, depreciation and amortization, business combinations, contingent consideration, stock-based compensation, income taxes, and other contingencies.
Cash, and cash equivalents
and restricted cash
Cash equivalents are highly liquid investments with a maturity of 90 days or less at the date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions. Also, the Company maintains cash balances with financial institutions in excess of insured limits. The Company does not anticipate any losses with such cash balances.
Restricted cash includes cash that is not readily available for use in the Company's operating activities. Restricted cash is primarily comprised of cash pledged under letters of credit.
Fair value of measurements
The Company measures and records cash equivalents and investment securities considered available-for-sale at fair value in the accompanying financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value include:
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Level 1 — | Observable inputs for identical assets or liabilities such as quoted prices in active markets; |
| Level 2 — | Inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
| Level 3 — | Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use. |
On a recurring basis, the Company measures and records money market funds (level 1), contingent purchase considerations (level 3) and interest-rate swap arrangements (level 2) using fair value measurements in the accompanying financial statements. On a non-recurring basis, the Company measures its IPR&D assets (level 3) using fair value measurements. The carrying amounts of the Company's short-term financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their short maturities. The
carrying amounts of the Company’s long-term debt arrangements approximates their fair values due to variable interest rates which fluctuate with changes in market rates.
Significant customers and accounts receivable
The Company has derived a majority of its revenue from sales of BioThrax under contracts with the U.S. government. The Company's current Centers for Disease Control ("CDC"), an operating division of the U.S. Department of Health and Human Services ("HHS"), contract does not necessarily increase the likelihood that it will secure future comparable contracts with the U.S. government. The Company expects that a significant portion of the business that it will seek in the near future, in particular for BioThrax, will be under government contracts that present a number of risks that are not typically present in the commercial contracting process. U.S. government contracts for BioThrax are subject to unilateral termination or modification by the government. The Company may fail to achieve significant sales of BioThrax to customers in addition to the U.S. government, which would harm its growth opportunities. The Company may not be able to sustain or increase profitability. The Company may not be able to manufacture BioThrax consistently in accordance with FDA specifications.
For the years ended December 31, 2016, 2015 and 2014, the Company's primary customer was the HHS. For the years ended December 31, 2016, 2015 and 2014, revenues from HHS and HHS agencies comprised 83%, 86% and 83%, respectively, of total revenues. As of December 31, 2016 and 2015, the Company'sBilled accounts receivable balances were comprised of 83% and 83%, respectively, from this customer. The overall increase in the percentage of accounts receivable attributed to HHS was due primarily to the timing of payments received for BioThrax product sales under the Company's contract with the CDC. As of December 31, 2016 and 2015, unbilled accounts receivable, which is included in accounts receivable, were $48.0 million and $18.2 million, respectively. Unbilled accounts receivable relates to various service contracts for which work has been performed, though invoicing has not yet occurred. Accounts receivable are stated at invoice amounts and consist primarilymostly of amounts due from the U.S. government,USG, as well as amounts due under reimbursement contracts with other government entities and non-government organizations. Our opioid overdose reversal product is sold commercially through physician-directed or standing order prescriptions at retail pharmacies, as well as state health departments, law enforcement agencies, state and local community based organizations, substance abuse centers and federal agencies. If necessary, the Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable. This provision is based upon an analysis of the Company's prior collection experience, customer creditworthiness and current economic trends. Unbilled accounts receivable relates to various service contracts for which work has been performed, though invoicing has not yet occurred.
Concentration Risk
ConcentrationsCustomers
The Company has long-term contracts with the USG that expire at various times from 2020 through 2029. The Company has derived a significant portion of its revenue from sales of ACAM2000 and Anthrax Vaccines under contracts with the USG. The Company's current USG contracts do not necessarily increase the likelihood that it will secure future comparable contracts with the USG. The Company expects that a significant portion of the business will continue to be under government contracts that present a number of risks that are not typically present in the commercial contracting process. USG contracts for ACAM 2000 and Anthrax Vaccines are subject to unilateral termination or modification by the government. The Company may fail to achieve significant sales of ACAM 2000 and Anthrax Vaccines to customers in addition to the USG, which would harm its growth opportunities. The Company may not be able to manufacture Anthrax Vaccines consistently in accordance with FDA specifications. The Company's other product sales are largely sold commercially through physician-directed or standing order prescriptions at retail pharmacies, as well as to state health departments, local law enforcement agencies, community-based organizations, substance abuse centers and other federal agencies.
Although the Company seeks expand its customer base and to renew its agreements with its customers prior to expiration of a contract, a delay in securing a renewal or a failure to secure a renewal or a renewal on less favorable terms may have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s trade receivables do not represent a significant concentration of credit riskrisk. The USG accounted for approximately 61%, 76% and uncertainties
Financial instruments that potentially subject the Company to concentrations78% of credit risk consist primarilytotal revenues for 2019, 2018 and 2017, respectively, and approximately 69% and 76% of cashtotal accounts receivable as of December 31, 2019 and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high quality financial institutions. Management believes that the financial risks associated with its cash and cash equivalents are minimal.2018, respectively. Because accounts receivable consistconsists primarily of amounts due from the U.S. governmentUSG for product sales and from government agencies under government grants and development contracts, management deems theredoes not deem the credit risk to be significant.
Financial Institutions
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
Lender Counterparties
There is lender counterparty risk associated with the Company's revolving credit facility and derivatives instruments. There is risk that the Company’s revolving credit facility investors and derivative counterparties will not be available to fund as obligated. If funding under the revolving credit facility is unavailable, the Company may have to acquire a replacement credit facility from different counterparties at a higher cost or may be unable to find a suitable replacement. The Company seeks to manage risks from its revolving credit facility and derivative instruments by contracting with experienced large financial institutions and monitoring the credit quality of its lenders. As of December 31, 2019, the Company did not anticipate nonperformance by any of its counterparties.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost being determined using a standard cost method, which approximates average cost. Average cost consists primarily of material, labor and manufacturing overhead expenses (including fixed production-overhead costs) and includes the services and products of third partythird-party suppliers.
The Company analyzes its inventory levels quarterly and writes down, in the applicable period, inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected customer demand. The Company also writes off, in the applicable period, the costs related to expired inventory. Costs of purchased inventories are recorded using weighted-average costing. The Company determines normal capacity for each production facility and allocates fixed production-overhead costs on that basis.
The Company records inventory acquired in business acquisitions utilizing the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
Property, plant and equipment
Property, plant and equipment are stated at cost.cost less accumulated depreciation and impairments. Depreciation is computed using the straight-line method over the following estimated useful lives:
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Buildings | 31-39 years |
Building improvements | 10-39 years |
Furniture and equipment | 3-15 years |
Software | 3-7 years or product life |
Leasehold improvements | Lesser of the asset life or lease term |
Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.
The Company capitalizes internal-use software when both (a) the software is internally developed, acquired, or modified solely to meet the entity'sentity’s internal needs and (b) during the software'ssoftware’s development or modification, no substantive plan either exists or is being developed to market the software externally. Capitalization of qualifying internal-use software costs begins when the preliminary project stage is completed, management with the relevant authority, implicitly or explicitly, authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended.
The Company determines the fair value of the property, plant and equipment acquired in a business combination utilizing either the cost approach or the sales comparison approach. The cost approach is determined by establishing replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.
Income taxes
Income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and research and development tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.
Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recognized under the asset and liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws in the year of enactment. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). Further information on the tax impacts of the Tax Reform Act is included in Note 12 of the Company’s consolidated financial statements.
The Company's ability to realize deferred tax assets depends upon future taxable income as well as the limitations discussed below. For financial reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized prior to expiration. The Company considers future taxable income and ongoing tax planning strategies in assessing the need for valuation allowances. In general, if the Company determines that it is more likely than not to realize more than the recorded amounts of net deferred tax assets in the future, the Company will reverse all or a portion of the valuation allowance
established against its deferred tax assets, resulting in a decrease to the provision for income taxes in the period in which the determination is made. Likewise, if the Company determines that it is not more likely than not to realize all or part of the net deferred tax asset in the future, the Company will establish a valuation allowance against deferred tax assets, with an offsetting increase to the provision for income taxes, in the period in which the determination is made.
Under sections 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a "loss corporation", as defined therein, there are annual limitations on the amount of net operating losses and deductions that are available. The Company believeshas recognized the useportion of net operating losses and research and development tax credits acquired in the Trubion acquisitionthat will not be significantly limited. Duelimited and are more likely than not to the acquisition of Microscience in 2005 and the Company's initial public offering, the Company believes the use of the operating losses incurred prior to 2005 will be significantly limited.
realized.
Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company makes certain estimates and assumptions, in (1) calculating the Company's income tax expense, deferred tax assets and deferred tax liabilities, (2) determining any valuation allowance recorded against deferred tax assets and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The Company's estimates and assumptions may differ significantly from tax benefits ultimately realized.
Acquisitions
Revenue recognition
The Company recognizes revenues from product sales and contract manufacturing if four basic criteria have been met:
| | there is persuasive evidence of an arrangement; |
| | delivery has occurred or title has passed to the Company's customer; |
| | the fee is fixed or determinable; and |
| | collectability is reasonably assured. |
UnderIn determining whether an acquisition is a business combination versus an asset acquisition, the Company's contracts with the CDC, the Company invoices the CDC and recognizes the related revenue upon acceptance by the government at delivery site, at which time titleaccounting guidance requires an entity to the product passes to the CDC.
Agreements with multiple components ("deliverables" or "items") are evaluated to determine if the deliverables can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if bothfirst evaluate whether substantially all of the following criteria are met:
(1) the delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. In the context of a customer's ability to resell the delivered item(s), this criterion does not require the existence of an observable market for the deliverable(s); and
(2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in control of the Company. Items that cannot be divided into separate units are combined with other units of accounting, as appropriate. Consideration received is allocated among the separate units based on the relative selling price of each deliverable. The Company deems service to have been rendered if no continuing obligation exists on the part of the Company.
The Company's contract with the Biomedical Advanced Research and Development Authority ("BARDA") to establish a Center for Innovation in Advanced Development and Manufacturing ("CIADM") is a service arrangement that includes multiple elements. The CIADM contract requires the Company to provide a flexible infrastructure to supply medical countermeasures to the U.S. government over the contract period and includes such items as construction and facility design, workforce development and licensure of a pandemic flu vaccine. Since none of the individual elements by themselves satisfy the purpose of the contract, the Company has concluded that the CIADM contract elements cannot be separated as they do not have stand-alone value to the U.S. government. Therefore, the Company has concluded that there is a single unit of accounting associated with the CIADM contract. The Company recognizes revenue under the CIADM contract on a straight-line basis, based upon its estimate of the total payments to be received under the contract. The Company analyzes the estimated payments to be received on a quarterly basis to determine if an adjustment to revenue is required. Changes in estimates attributed to modifications in the estimate of total payments to be received are recorded prospectively.
The Company's BAT contract with BARDA is a service arrangement that includes multiple elements. The deliverables to BARDA include the supply product to the SNS, perform stability testing for the product, achievement of extended product expiry dating, maintenance of horse populations and plasma extraction. The Company has determined that each of the deliverables above represents a separate units of accounting as they have standalone value to the U.S. government. The Company allocated thefair value of the contract togross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If that threshold is met, the undelivered elements based on best estimateset of selling price ("BESP"). BESP methodology forassets and activities is not a business and therefore treated as an asset acquisition. If that threshold is not met, the deliverables, excludingentity evaluates whether the product sales, was developed usingset meets the definition of a cost build-up for internal and external costs, plusbusiness. If an acquired asset or asset group does not meet the definition of a specified mark-up. The allocation of value tobusiness, the product sales was based on the remaining unallocated value. The Company intends to complete the final delivery of the BAT product in 2017. The Company recognizes revenue for:
| § | BAT product sales upon delivery to the SNS; |
| § | stability testing based on the required testing schedule of the product; |
| § | extended product expiry based on achievement of the extension; |
| § | horse maintenance based on a per horse basis; and |
| § | plasma collection on a per liter basis. |
The Company's contracts for VIGIV with the CDC and for Anthrasil with BARDA are service arrangements that include multiple elements. The deliverables to BARDA include to supply product to the SNS, perform stability testing for the product, achievement of extended product expiry dating and plasma extraction. The Company has determined that each of the deliverables above represents separate units of accounting as they have standalone value to the U.S. government. The Company allocated the value of the contract to the undelivered elements based on best estimate of selling price ("BESP"). BESP methodology for the deliverables, excluding the product sales, was developed using a cost build-up for internal and external costs, plus a specified mark-up. The allocation of value to the product sales was based on the remaining unallocated value. The Company recognizes revenue for:
| § | VIGIV and Anthrasil product sales upon delivery to the CDC; |
| § | stability testing based on the required testing schedule of the product; |
| § | extended product expiry based on achievement of the extension; and |
| § | plasma collection on a per liter basis. |
The Company's contract for the NuThrax product candidate with BARDA, which was entered into on September 30, 2016transaction is a service arrangement that includes multiple elements. The deliverables to BARDA are the completion of development for NuThrax and the procurement of product for the SNS. The Company has determined that each of the deliverables above are a separate unit of accounting as they have standalone value to the U.S. government. The Company allocated the value of the contract to the undelivered elements based on best estimate of selling price ("BESP"). BESP methodology for the development deliverable was developed using a cost build-up for internal and external costs, plus a specified mark-up. The allocation of value to the product sales was based on the remaining unallocated value.
Revenue associated with non-refundable upfront license fees under arrangements where the license fees and research and development activities cannot be accounted for as separate units of accountingan asset acquisition. Otherwise, the acquisition is deferred and recognizedtreated as revenue either on a straight-line basis over the Company's continued involvement in the research and development process or based on the proportional performance of the Company's expected future obligation under the contract. Revenues from the achievement of research and development milestones, if deemed substantive, are recognized as revenue when the milestones are achieved, and the milestone payments are due and collectible. If not deemed substantive, the Company recognizes such milestone as revenue on a straight-line basis over the remaining expected term of continued involvement in the research and development process.
Milestones are considered substantive if all of the following conditions are met: (1) the milestone is non-refundable, (2) achievement of the milestone was not reasonably assured at the inception of the arrangement, (3) substantive effort is involved to achieve the milestone, and (4) the amount of the milestone appears reasonable in relation to the effort expended. Payments received in advance of work performed are recorded as deferred revenue.
The Company generates contracts and grants revenue from cost-plus-fee contracts. Revenues from reimbursable contracts are recognized as costs are incurred, generally based on allowable costs incurred during the period, plus any recognizable earned fee. The Company considers fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract. The Company analyzes costs for contracts and reimbursable grants to ensure reporting of revenues gross versus net is appropriate. For each of the three years in the period ended December 31, 2016, the costs incurred under the contracts and grants approximated the revenue earned.
Research and development
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 contract manufacturing services for clinical trial material; and |
| § | costs of materials used in clinical trials and research and development. |
We intend to focus on developing innovative products based on our platforms with a focus on third-party funding. 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 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, such as studies involving BioThrax conducted by the CDC.
Mergers and Acquisitions
business combination.
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the merger or acquisition at their respective fair values with limited exceptions. Assets acquiredexceptions and liabilities assumed in a business combination that arise from contingencies are recognized atgenerally use Level 3 fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized.measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measuresvalues that do not reflect the Company's intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company's consolidated financial statements after the date of the merger or acquisition. If the Company determines the assets acquired do not meet the definition of a business under the acquisition method of accounting, the transaction will be accounted for as an asset acquisition of assetsand recorded at cost rather than a business combination and, therefore, no goodwill will be recorded.
The fair values of intangible assets, including acquired in-process research and development ("IPR&D"), are determined utilizing information available at or near the merger or acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets. Upon successful completion of each project, the Company will make a separate determination as to the remaining useful life of the asset and begin amortization. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset lives, can materially affect the Company'sCompany’s results of operations.
The fair values of identifiable intangible assets related to currently marketedcurrent products and product rights are primarily determined by using an "income approach"income approach through which fair value is estimated based on each asset'sasset’s discounted projected net cash flows. The Company's estimates of market participant net cash flows consider historical and projected pricing, margins and expense levels, the performance of competing products where applicable, relevant industry and therapeutic area growth drivers and factors, current and expected trends in technology and product life cycles, the time and investment that will be required to develop products and technologies, the ability to obtain marketing and regulatory approvals, the ability to manufacture and commercialize the products, the extent and timing of potential new product introductions by the Company'sCompany’s competitors, and the life of each asset'sasset’s underlying patent, if any. The net cash flows are then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the
risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to IPR&D are determined using an income approach, through which fair value is estimated based on each asset'sasset’s probability-adjusted future net cash flows, which reflect the different stages of development of each product and the associated probability of successful completion. The net cash flows are then discounted to present value using an appropriate discount rate. Indefinite-lived intangible assets are tested for impairment annually or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized.
In process researchAsset Impairment Analysis
Goodwill and development and long-lived assetsIndefinite-lived Intangible Assets
Goodwill is allocated to the Company's reporting units, which are one level below its operating segment. The Company assesses IPR&Devaluates goodwill and other indefinite-lived intangible assets for impairment on an annual basis or more frequently if indicatorsannually as of impairment are present. The Company's annual assessment includes a comparison of the fair value of IPR&D assets to existing carrying value, and recognizes an impairment when the carrying value is greater than the determined fair value. The Company believes that the assumptions used in valuing the intangible and IPR&D assets are reasonable and are based upon its best estimate of likely outcomes of sales and clinical development. The underlying assumptions and estimates used to value these assets are subject to change in the future, and actual results may differ significantly from the assumptions and estimates. The Company has selected October 1 as its annual impairment test date for indefinite-lived intangible assets.
The Company assesses the recoverability of its long-lived assetsand earlier if an event or asset groups for which an indicator of impairment exists by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If the Company concludesother circumstance indicates that the carrying value willwe may not be recovered, the Company measures the amount of such impairment by comparing the fair value torecover the carrying value of the assets or asset groups.
Goodwill
The Company assesses the carrying value of goodwill on an annual basis, or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, to determine whether any impairment in this asset may exist and, if so, the extent of such impairment. The provisions of the relevant accounting guidance require thatasset. If the Company performbelieves that as a two-step impairment test. In the first step, the Company compares the fair valueresult of its reporting unit to the carrying value of the reporting unit. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of the reporting unit's goodwill exceeds its implied fair value, an impairment loss equal to the difference is recognized. The Company calculates the fair value of the reporting unit utilizing the income approach. The income approach utilizes a discounted cash flow model, using a discount rate based on the Company's estimated weighted average cost of capital. The Company also evaluates goodwill for all reporting units using the qualitative assessment method, which permits companies to qualitatively assess whether it is more-likely-than-notmore likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is lessgreater than its carrying amount. amount, the quantitative impairment test is not required. If however it is determined that it is not more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is greater than its carrying amount, a quantitative test is required.
The Company considers developmentsquantitative goodwill impairment test is performed using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the quantitative impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative goodwill impairment test is required to be performed to measure the amount of impairment loss, if any. The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in its operations, the industrysame manner as the amount of goodwill recognized in which it operates and overall macroeconomic factors that could have affecteda business combination. In other words, the estimated fair value of the reporting unit’s identifiable net assets excluding goodwill is compared to the fair value of the reporting unit sinceas if the date of the most recent quantitative analysis ofreporting unit had been acquired in a reporting unit's fair value.
The determination ofbusiness combination and the fair value of athe reporting unit is judgmental in nature and involveswas the usepurchase price paid. If the carrying amount of significant estimates and assumptions. The estimates and assumptions used in calculatingthe reporting unit’s goodwill exceeds the implied fair value include identifyingof that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company used a qualitative assessment for our goodwill impairment testing for 2019 and 2018. The qualitative evaluation completed during the years ended December 31, 2019 and 2018 indicated 0 impairment losses.
The Company has material indefinite lived intangible assets associated with in-process research and development (IPR&D) which were acquired as part of the acquisitions completed in the fourth quarter of 2018. Following a qualitative assessment indicating that it is not more likely than not that the fair value of the indefinite lived intangible asset exceeds its carrying amount, impairment of other intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Determining fair value requires the exercise of judgment about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The Company used a quantitative assessment for our IPR&D impairment testing for 2019 and determined there was an impairment loss of $12.0 million, which was recorded as a component of R&D expense (see Notes 4 Acquisitions and 5 Fair value measurements).
Long-lived Assets
Long-lived assets such as intangible assets and property, plant and equipment are not required to be tested for impairment annually. Instead, long-lived assets are tested for impairment whenever circumstances indicate that the carrying amount of the asset may not be recoverable, such as when the disposal of such assets is likely or there is an adverse change in the market involving the business employing the related assets. If an impairment analysis is required, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first requires a comparison
of undiscounted future cash flows which requiresto the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, the asset would not be deemed to be recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value. Fair value is typically determined by discounting the future cash flows associated with that asset. If the intent is to hold the asset for sale and certain other criteria are met, the impairment test involves comparing the asset’s carrying value to its fair value less costs to sell. To the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized in an amount equal to the difference. Significant judgments used for long-lived asset impairment assessments include identifying the appropriate asset groupings and primary assets within those groupings, determining whether events or circumstances indicate that the Company makes a number of critical legal, economic, market and business assumptions that reflect best estimates ascarrying amount of the testing date. The Company'sasset may not be recoverable, determining the future cash flows for the assets involved and assumptions applied in determining fair value, which include, reasonable discount rates, growth rates, market risk premiums and estimates may differ significantly from actual results, or circumstances could change that would causeother assumptions about the Company to conclude that an impairment now exists or that it previously understated the extent of impairment. The Company selected October 1 as its annual impairment test date.
economic environment.
Contingent Consideration
TheIn connection with the Company's acquisitions accounted for as business combinations, the Company records contingent consideration associated with (a) sales basedsales-based royalties, sales-based milestones and (b) development and regulatory milestones at fair value. The fair value model used to calculate this obligationthese obligations is based on the income approach (a discounted cash flow model) that has been risk adjusted based on the probability of achievement of net sales and achievement of the milestones. The inputs the Company uses for determining the fair value of the contingent consideration associated with sales basedsales-based royalties, sales-based milestones and development and regulatory milestones are Level 3 fair value measurements. The Company re-evaluates the fair value on a quarterly basis. Changes in the fair value can result from adjustments to the discount rates and updates in the assumed timing of or achievement of net sales.sales and/or the achievement of development and regulatory milestones. Any future increase in the fair value of the contingent consideration associated with sales basedsales-based royalties and sales-based milestones along with development and regulatory milestones are based on an increased likelihood that the underlying net sales or milestones will be achieved.
The associated payment or payments which will become due and payable for sales basedsales-based royalties associated with marketed products willand milestones result in a charge to cost of product sales and contract development and manufacturing in the period in which the increase is determined. Similarly, any future decrease in the fair value of contingent consideration associated with sales basedsales-based royalties and sales-based milestones will result in a reduction in cost of product sales and contract development and manufacturing. The changes in fair value for potential future sales basedsales-based royalties associated with product candidates in development will result in a charge to selling, generalcost of product sales and administrativecontract development and manufacturing services expense in the period in which the increase is determined. Similarly, any future decrease in the fair value of contingent consideration associated with potential future sales based royalties for products candidates will result in a reduction in selling, general and administrative expense.
The associated payment or payments which will become due and payable for development and regulatory milestones will result in a charge to research and development expense in the period in which the increase is determined. Similarly, any future decrease in the fair value for development and regulatory milestones will result in a reduction in research and development expense.
Revenue recognition
On January 1, 2018 the Company adopted ASC topic 606 using the modified retrospective approach applied to those contracts in effect as of January 1, 2018. Under this transition method, results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with historical accounting under Topic 605. See further discussion of the adoption of Topic 606, including the impact to our 2018 financial statements within the recently issued accounting standards section below.
The Company recognizes revenue when the Company's customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services by analyzing the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. To indicate the transfer of control for the Company’s product sales and contract development and manufacturing services, it must have a present right to payment, legal title must have passed to the customer, and the customer must have the significant risks and rewards of ownership. Revenue for long-term development contracts is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with transferring control of the good or service over time.
Multiple performance obligations
A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606. Contracts sometimes include options for customers to purchase additional products or services in the future. Customer options that provide a material right to the customer, such as free or discounted products or services, give rise to a separate performance obligation. For contracts with multiple performance obligations, the Company allocates the contract price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers, however when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price. Allocation of the transaction price is determined at the contracts’ inception.
Transaction price and variable consideration
Once the performance obligations in the contract have been identified, the Company estimates the transaction price of the contract. The estimate includes amounts that are fixed as well as those that can vary based on expected outcomes of the activities or contractual terms. The Company's variable consideration includes for example consideration transferred under its development contracts with the USG as consideration received can vary based on developmental progression of the product candidate(s). When a contract's transaction price includes variable consideration, the Company evaluates the variable consideration to determine whether the estimate needs to be constrained; therefore, the Company includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration estimates are updated at each reporting date. There were no significant constraints or material changes to the Company's variable consideration estimates as of or during the twelve months ended December 31, 2019.
Contract financing
In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer with a significant benefit of financing the transfer of goods or services to the customer, which is called a significant financing component. The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less.
Product sales
CBRNE
The primary customer for the Company's CBRNE products and the primary source of funding for the development of its CBNRE product candidate portfolio is the USG. The Company's contracts for the sale of CBRNE products generally have a single performance obligation. Certain product sales contracts with the USG include multiple performance obligations, which generally include the marketed product, stability testing associated with that product, expiry extensions and plasma collection. The USG contracts for the sale of the Company's CBRNE products are normally multi-year contracts. AV7909 and Trobigard are product candidates that are not approved by the FDA or any other health agency, but are procured by certain government agencies under special circumstances.
The transaction price for product sales are based on a cost build-up model with a mark-up. For our product sales, we recognize revenue at a "point in time" when the Company’s performance obligations have been satisfied and control of the products transfer to the customer. This “point in time” depends on several factors, including delivery, transfer of legal title, transition of risk and rewards of the product to the customer and the Company's right to payment. The USG contracts for the sale of the Company's CBRNE products also include certain acceptance criteria before title passes to the USG.
Opioid and travel health products
Revenues are recognized when control of the goods are transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Allowances for returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government
rebates, chargebacks and rebates under managed care plans are considered in determining the variable consideration. Revenues from sales of products is recognized to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with such variable consideration is subsequently resolved. Product sales revenue is recognized when control has transferred to the customer, which occurs at a point in time, which is typically upon delivery to the customer. Provisions for variable consideration revenues from sales of products are recorded at the net sales price, which includes estimates of variable consideration for which provisions are established and which relate to returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government rebates, chargebacks and rebates under managed care plans. Calculating certain of these provisions involves estimates and judgments and the Company determines their expected value based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, the Company's expectations regarding future utilization rates for these programs and channel inventory data. These provisions reflect the Company's best estimate of the amount of consideration to which the Company is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company reassesses the Company's provisions for variable consideration at each reporting date. Historically, adjustments to estimates for these provisions have not been material.
Provisions for returns, specialty distributor fees, wholesaler fees, government rebates and rebates under managed care plans are included within current liabilities in the Company's consolidated balance sheets. Provisions for chargebacks and prompt payment discounts are shown as a reduction in accounts receivable.
Contract development and manufacturing services
The Company performs contract development and manufacturing services for third parties. Under these contracts, activities can include pharmaceutical product process development, manufacturing and filling services for injectable and other sterile products, inclusive of process design, technical transfer, manufacturing validations, laboratory analytical development support, aseptic filling, lyophilization, final packaging and accelerated and ongoing stability studies. These contracts, with a duration that is less than one year, generally include a single performance obligation as the customer benefits from our performance upon full completion of our services. The performance obligation is satisfied when the Company must have a present right to payment because legal title has passed to the customer, the goods are in the customer’s possession with all the risks and rewards of ownership, and the efficacy of the goods has been confirmed. The Company recognizes revenue at a "point in time" based on when the performance obligation to the customer is satisfied.
Contracts and grants
The Company generates contract and grant revenue primarily from cost-plus-fee contracts associated with development of certain product candidates. Revenues from reimbursable contracts are recognized as costs are incurred, generally based on allowable costs incurred during the period, plus any recognizable earned fee. The Company uses this input method to measure progress as the customer has the benefit of access to the development research under these projects and therefore benefits from the Company's performance incrementally as research and development activities occur under each project. We consider fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract. We analyze costs for contracts and reimbursable grants to ensure reporting of revenues gross versus net is appropriate. Revenue for long-term development contracts is considered variable consideration, because the deliverable is dependent on the successful completion of development and is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with satisfying the performance obligation over time. The USG contracts for the development of the Company's CBRNE product candidates are normally multi-year contracts.
Research and development
We expense research and development costs as incurred. The Company's research and development expenses consist primarily of:
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▪ | personnel-related expenses; |
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▪ | fees to professional service providers for, among other things, analytical testing, independent monitoring or other administration of the Company's clinical trials and obtaining and evaluating data from the Company's clinical trials and non-clinical studies; |
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▪ | costs of contract development and manufacturing services for clinical trial material; and |
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▪ | costs of materials used in clinical trials and research and development. |
Comprehensive income
Comprehensive income is comprised of net income and other changes in equity that are excluded from net income. The Company includes translation gains and losses incurred when converting its subsidiaries' financial statements from their functional currency to the U.S. dollar in accumulated other comprehensive income as well as gains and losses on its pension benefit obligation and derivative instruments.
Translation of Foreign Currencies
For our non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive income, a separate component of equity. For subsidiaries where the functional currency of the assets and liabilities differ from the local currency, non-monetary assets and liabilities are translated at the rate of exchange in effect on the date assets were acquired while monetary assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average foreign currency rates for the period. Translation adjustments of these subsidiaries are included in other income (expense), net in our consolidated statements of income.
Earnings per share
The Company calculates basic earnings per share by dividing net income by the weighted average number of shares of common stock outstanding during the period.
For the years ended December 31, 2016, 20152019 and 2014,2018, the Company calculated diluted earnings per share using the treasury method by dividing net income by the weighted average number of shares of common stock outstanding during the period. For the year ended December 31, 2017, the Company calculated diluted earnings per share using the if-converted method by dividing the adjusted net income by the adjusted weighted average number of shares of common stock outstanding during the period. The adjusted net income iswas adjusted for interest expense and amortization of debt issuance cost, both net of tax, associated with the Company's 2.875% Convertible Senior Notes due 2021 (the "Notes"). The weighted average number of diluted shares iswas adjusted for the potential dilutive effect of the exercise of stock options and the vesting of restricted stock units along with the assumption of the conversion of the Notes, each at the beginning of the period.
During the fourth quarter of 2017, the Company issued a notice of termination of conversion rights related to the Notes and issued 8.5 million shares of common stock due to conversions that occurred in 2017. After the date of conversion and during the years ended December 31, 2019 and 2018, the Notes are strictly debt instruments and, therefore, no longer impact the diluted earnings per share calculation.
Accounting for stock-based compensation
The Company has two1 stock-based employee compensation plans,plan, the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan (the "2006"Emergent Plan") and, under which the Emergent BioSolutions Employee Stock Option Plan (the "2004 Plan" and together with the 2006 Plan, the "Emergent Plans"). The Company has grantedmay grant various types of equity awards including stock options, to purchase shares of common stock under the Emergent Plans and has granted restricted stock units under the 2006 Plan. The Emergent Plans have both incentive and non-qualifiedperformance stock option features. The Company no longer grants equity awards under the 2004 Plan.units.
As of December 31, 2016, an aggregate of 18.9 million shares of common stock were authorized for issuance under the 2006 Plan, of which a total of approximately 6.1 million shares of common stock remain available for future awards to be made to plan participants. The exercise price of each option must be not less than 100% of the fair market value of the shares underlying such option on the date of grant. Awards granted under the 2006 Plan have a contractual life of no more than 10 years. The terms and conditions of equity awards (such as price, vesting schedule, term and number of shares) under the Emergent Plans arePlan is determined by the compensation committee of the Company's board of directors, which administers the Emergent Plans.Plan. Each equity award granted under the Emergent PlansPlan vests as specified in the relevant agreement with the award recipient and no option can be exercised after either seven or ten years from the date of grant.
grant depending on the grant date. The Company charges the estimated fair value of awards against income on a straight-line basis over the requisite service period, which is generally the vesting period. Where awards are made with non-substantive vesting periods (for instance, where a portion of the award vests upon retirement eligibility), the Company estimate and recognize expense based on the period from the grant date to the date the employee becomes retirement eligible.
The Company determines the fair value of restricted stock units using the closing market price of the Company's common stock on the day prior to the date of grant. The Company's performance stock units settle in stock. The fair value is determined on the date of the grant using the number of shares expected to be earned and the ending market value of the stock on the grant date. The number of shares expected to vest is determined by assessing the probability that the performance criteria will be met and the associated targeted payout level that is forecasted will be achieved.
The Company utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted. Set forth below are the assumptions used in valuing the stock options granted andis a discussion of the Company's methodology for developing each of the assumptions used:
| Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Expected dividend yield | | 0% | | 0% | | 0% |
Expected volatility | | 31-33% | | 34-35% | | 35-38% |
Risk-free interest rate | | 0.93-1.22% | | 1.27-1.61% | | 1.14-1.65% |
Expected average life of options | | 4.3 years | | 4.3 years | | 4.5 years |
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▪ | Expected dividend yield — the Company does not pay regular dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. |
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▪ | Expected volatility — a measure of the amount by which a financial variable, such as share price, has fluctuated (historical volatility) or is expected to fluctuate (implied volatility) during a period. The Company analyzed its own historical volatility to estimate expected volatility over the same period as the expected average life of the options. |
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▪ | Risk-free interest rate — the range of U.S. Treasury rates with a term that most closely resembles the expected life of the option as of the date on which the option is granted. |
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▪ | Expected average life of options — the period of time that options granted are expected to remain outstanding, based primarily on the Company's expectation of optionee exercise behavior subsequent to vesting of options. |
Pension plans
Comprehensive income
Comprehensive income is comprised of net income and other changes in equity that are excluded from net income. The Company includes translationmaintains defined benefit plans for employees in certain countries outside the U.S., including retirement benefit plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increase, and pension adjustments. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. Actuarial gains and losses incurred when converting its subsidiaries' financial statements from their functional currency to the U.S. dollarare deferred in accumulated other comprehensive income.income, net of tax and are amortized over the remaining service attribution periods of the employees under the corridor method. Differences between the expected long-term return on plan assets and the actual annual return are amortized to net periodic benefit cost over the estimated remaining life as a component of selling, general and administrative expenses in the consolidated statements of operations.
Derivative Instruments and Hedging Activities
Foreign currencies
ExceptThe Company's interest rate swaps qualify for hedge accounting as cash flow hedges. All derivatives are recorded on the balance sheet at fair value. Hedge accounting provides for the Company's Canadian subsidiaries,matching of the local currency istiming of gain or loss recognition on these interest rate swaps with the functional currency forrecognition of the changes in interest expense on the Company's foreign subsidiariesvariable rate debt. For derivatives designated as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as such,interest payments are made on the Company’s variable-rate debt. The cash flows from the designated interest rate swaps are classified as a component of operating cash flows, similar to interest expense.
Recently issued accounting standards
Recently Adopted
ASU 2016-2, Leases (Topic 842) ("ASU 2016-2")
In February 2016, the FASB issued ASU 2016-2. ASU 2016-2 increased transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities are translated into U.S. dollarson the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors. The Company adopted the new standard effective January 1, 2019 using the modified retrospective approach. An entity that applies the transition provisions at year-end exchange rates. Income and expense items are translated at average exchange rates during the year. Translation adjustments resulting from this process are charged or credited to other comprehensive income. The Company's Canadian subsidiaries functional currency is U.S. dollars due primarily to a significant amountbeginning of the transactionsperiod of adoption records its cumulative adjustment to the subsidiaries being denominatedopening balance of retained earnings in U.S. dollars.
Capitalized interest
the period of adoption rather than in the earliest period presented (i.e., January 1, 2019). In this case, an entity continues to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year it adopts the standard.
The Company capitalizes interest basedutilized the transition package of certain practical expedients permitted: ASC 842-10-65-1(f) and ASC 842-10-65-1(g). The Company made an accounting policy election that kept leases with an initial term of 12 months or less off of the balance sheet which resulted in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the cost of major ongoing capital projects which have not yet been placed in service. For the years ended December 31, 2016, 2015 and 2014,lease term. In addition, the Company incurred interesthas made an accounting policy election, by class of $8.3 million, $7.8 millionunderlying asset, to not separate non-lease components from lease components and $7.5 million, respectively. Of these amounts, the Company capitalized $2.2 million, $2.9 million and $2.5 million, respectively.instead to account
Recently issued
for each separate lease component, and adoptedthe non-lease components associated with that lease component, as a single lease component.
As of January 1, 2019 the total right of use assets increased $13.4 million, while total operating lease liabilities increased $14.0 million. There was no adjustment to the opening balance of retained earnings as of January 1, 2019. The standard has not materially affect the Company's consolidated net earnings. The Company continues to apply the legacy guidance from the old lease accounting standardsstandard, including its disclosure requirements, in the comparative periods presented (see Note 14).
ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-9")
In AprilMay 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08").2014-9. ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results. ASU No. 2014-08 also requires expanded disclosures for discontinued operations and disposals of individually significant components of an entity that do not qualify for discontinued operations reporting. ASU No. 2014-08 was effective for disposals and components classified2014-9 (known as held-for-sale that occurred within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption was permitted. The new guidance is effective for the Company prospectively for all disposals of components of an entity that occurred after January 1, 2015. The spin-off of Aptevo by the Company on August 1, 2016 meets the definition of a discontinued operation under the new guidance and, as a result, the Company reflected the provisions of the new guidance for the years ended December 31, 2016, 2015 and 2014.
In May 2014, the FASB issued ASU No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (TopicASC 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40) ("ASU No. 2014-09"). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. InThe Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method resulting in an adjustment to opening retained earnings of $32.5 million for the cumulative effect of initially applying the new standard.
Under ASC 606, the Company finalized the review of its portfolio of revenue contracts that were not complete as of the adoption date and made its determination of its revenue streams as well as completed extensive contract specific reviews to determine the impact of the new standard on its historical and prospective revenue recognition. Because many of the Company's significant contracts with customers have unique contract terms, the Company reviewed all its non-standard agreements in order to determine the effect of adoption. The Company tested a sample of remaining agreements to verify that there were no changes in accounting based on the assumption that these contracts had similar characteristics and that the effects on the financial statements would not differ materially from applying this guidance to the individual contracts. To estimate the financial impacts of the adoption, the Company did not apply the contract modification practical expedient and retrospectively restated long-term contracts for a providerany contract modifications.
The opening balance sheet adjustment as of promised goods or servicesJanuary 1, 2018, was the result of the Centers for Innovation in Advanced Development and Manufacturing ("CIADM") contract with the Biomedical Advanced Research and Development Authority ("BARDA"). Under ASC 606 at January 1, 2018, the Company determined that the performance obligation under the arrangement is to provide ongoing manufacturing capability to the USG and would recognize as revenue the consideration received in the initial 7 years year base period on a straight-line basis over a 24-year period as the capability being created during the base period of the contract is being provided to the customer over both the base period contract term as well as 17 additional option periods. As the Company’s performance obligation is providing the USG with continuous access to its production capabilities throughout the contract duration, a time-based measure resulting in straight-line revenue recognition is proportionate to the Company’s progress in satisfying the performance obligation when compared to the total progress. This measure of progress is most reflective of the Company satisfying the performance obligation over time. Beginning in June 2013, the Company was expected to be able to stand ready and be available to respond to the USG and importantly to respond to any task orders that it expectsmay be issued during the base period and additional option periods. Being able to stand ready to perform in the event of an outbreak is of importance to the USG and by entering into this arrangement with the Company, the USG expected to receive the benefit of having access to Company’s readiness and its capability to immediately respond to public health threats. The Company concluded the identified stand-ready performance obligations represent a series of distinct services that are substantially the same and have the same pattern of transfer to the customer.
In addition, the Company determined the CIADM contract includes a significant financing component which is included in exchange for the promised goodstransaction price. The Company calculated the financing component using an interest rate the Company had on its other debt obligations at inception of the contract. The difference in revenue recognized under ASC 605 vs. ASC 606, as of the adoption date, was primarily attributable to the difference in the overall consideration or services, the provider should apply the following five steps: (1) identifytransaction price resulting from different accounting treatment related to options within the contract withand the inclusion of a customer(s); (2) identifysignificant financing component under ASC 606.
Prior to the performance obligationsadoption of ASC 606, the Company recognized revenue under the CIADM contract on a straight-line basis, based upon its estimate of the total payments to be received under the contract. The Company analyzes the estimated payments to be received on a quarterly basis to determine if an adjustment to revenue was required. As a result of the adoption of ASC 606, as of January 1, 2018, there was an increase in the contract; (3) determinedeferred revenue liability of $42.4 million and an increase in deferred tax assets of $9.9 million with an offsetting reduction to retained earnings of $32.5 million.
ASU 2018-2, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-2")
In February 2018, the transaction price; (4) allocateFASB issued ASU 2018-2. ASU 2018-2 provides the transaction priceoption to reclassify certain income tax effects related to the performance obligationsTax Cuts and Jobs Act passed in the contract;December of 2017 between accumulated other comprehensive income and (5) recognize revenue when (or as) the entity satisfies a performance obligation.retained earnings and also requires additional disclosures. ASU No. 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The standard will be2018-2 is effective for annual reporting periodsall entities for fiscal years beginning after December 15, 2017, including2018, and interim periods within that reportingthose fiscal years, with early adoption permitted. Adoption of ASU 2018-2 is to be applied either in the period of adoption or retrospectively to each period in which for the Company will be its 2018 first quarter. The Company is permitted to use either the retrospective or the modified retrospective method when adopting ASU No. 2014-09. The Company has begun an initial assessmenteffect of the potential impact that ASU No. 2014-09 will have on its financial statements and disclosures and believes that there could be changes to the revenue recognition related to the Company's multiple element contracts, primarily those with the U.S. government.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU No. 2014-15"). The amendment requires management to evaluate, for each annual and interim reporting period, whether there are conditions and events, consideredchange in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issuedtax laws or are available to be issued. If substantial doubt is raised, additional disclosures around management's plan to alleviate these doubts are required. This update was effective for all annual periods and interim reporting periods ending after December 15, 2016. Asrates were recognized. The adoption of December 31, 2016, the Company adopted this guidance and itASU 2018-2 did not have a material impact on the current disclosures in theCompany's consolidated financial statements.
Not Yet Adopted
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13")
In April 2015,June 2016, the FASB issued ASU No. 2015-03, Interest - Imputation2016-13. ASU 2016-13 provides guidance on measurement of Interest(Subtopic 835-30) ("ASU No. 2015-03"), which simplifiescredit losses on financial instruments that changes the presentation ofimpairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt issuance costs. ASU No. 2015-03securities and loans, and that requires entities to use a new, forward-looking “expected loss” model that debt issuance costs relatedis expected to a recognized debt liability be presentedgenerally result in the balance sheet as a direct deduction from the carrying amountearlier recognition of that debt liability, consistent with debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset on the balance sheet. ASU No. 2015-03 isallowances for losses. The guidance became effective for interim and annual periods beginning after December 15, 2015. During 2016,2019, including interim periods within those years, but early adoption is permitted. The Company has evaluated the Company adoptedeffects of this standard and applieddetermined that the guidanceadoption will not have a material impact on the Company's consolidated financial statementsstatements.
ASU 2017-4, Intangibles - Goodwill and related disclosures on a retrospective basis.
Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-4")
In March 2016,January 2017, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) ("2017-4. ASU No. 2016-09").2017-4 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including: (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. ASU No. 2016-092017-4 is effective for the annual reporting periodand interim goodwill tests beginning after December 15, 2016, including2019. Early adoption is permitted for interim periods within that reporting period, with early adoption permitted.or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company is currently evaluating the impact that the adoption of ASU No. 2016-09this standard will have on theits consolidated financial statementsstatements.
ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820) ("ASU 2018-13")
In August 2018, the FASB issued ASU 2018-13. ASU 2018-13 improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and relatedinterim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.
ASU 2018-14, Compensation -Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14")
In August 2018, the FASB issued ASU 2018-14. ASU 2018-14 modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for all entities for fiscal years ending after December 15, 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-14 on its consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")
In August 2018, the FASB issued ASU 2018-15. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for all entities for fiscal years beginning after December 15, 2019, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-15 on its consolidated financial statements.
ASU 2019-12, Simplifications to Accounting for Income Taxes ("ASU 2019-12")
In December 2019, the FASB issued ASU 2019-12. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including deferred taxes for goodwill and allocating taxes for members of a consolidated group. ASU 2019-12 is effective for all entities for fiscal years beginning after December
There are no other recently issued accounting pronouncements that are expected to have a material effect
15, 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements.
3. Revenue recognition
The Company operates in 1 business segment. Therefore, results of the Company's financial position, results of operations or cash flows.
3. Discontinued operations
On August 1, 2016, the Company completed the spin-off of Aptevo through the distribution of 100% of the outstanding shares of common stock of Aptevo to the Company's shareholders (the "Distribution"). The Distribution was made to the Company's shareholders of record as of the close of business on July 22, 2016 (the "Record Date"), who received one share of Aptevo common stock for every two shares of Emergent common stock held as of the Record Date. The Distribution was intended to qualify as a tax-free distribution for federal income tax purposes in the United States. In the aggregate, approximately 20.2 million shares of Aptevo common stock were distributed to the Company's shareholders of record as of the Record Date in the Distribution. After the Distribution, the Company no longer holds shares of Aptevo's common stock. In addition, on August 1, 2016, the Company entered into a non-negotiable, unsecured promissory note with Aptevo to provide an additional $20 million in funding, which the Company paid in January 2017.
The historical balance sheet and statements of operations of Aptevo have been presented as discontinued operations in the consolidated financial statements and prior periods have been restated. Discontinued operations include results of Aptevo's business except for certain allocated corporate overhead costs and certain costs associated with transition services provided by the Company to Aptevo. These allocated costs remain part of continuing operations. Due to differences between the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of Aptevo included within discontinued operations for the Company may not be indicative of actual financial results of Aptevo.
In conjunction with the spin-off, the Company entered into a Separation and Distribution Agreement with Aptevo to effect the separation of Aptevo from the Company (the "Separation"). The Company also entered into various other agreements to provide a framework for its relationship with Aptevo after the Separation, including a manufacturing services agreement, transition services agreement, a tax matters agreement and an employee matters agreement.
The Separation and Distribution Agreement with Aptevo sets forth, among other things, the assets that were transferred, the liabilities assumed, and the contracts that were assigned to each of Aptevo and the Company as part of the Separation of the Company into two companies, and provided for when and how these transfers, assumptions and assignments were to occur.
Under the terms of the manufacturing services agreement, the Company agreed to provide contract manufacturing services for certain of Aptevo's products commencing on the date of the Distribution. The contract has a term of ten years. As of December 31, 2016, approximately $0.8 million of contract manufacturing services revenue is associated with the provision of services to Aptevo.
Under the terms of the transition services agreement, the Company agreed to provide on an interim, transitional basis, various services, including, but not limited to, accounts payable administration, information technology services, regulatory and clinical support, general administrative services and other support services commencing on the date of the Distribution and terminating up to two years following the date of the Distribution. During the year ended December 31, 2016, approximately $1.1 million of transition services revenue has been recorded in contracts and grants.
The tax matters agreement governs the respective rights, responsibilities and obligations of Aptevo and the Company with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the Distribution and certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, tax returns, tax proceedings and certain other tax matters.
The employee matters agreement governs certain compensation and employee benefit obligations and allocates liabilities and responsibilities relating to employment matters, employee compensation and benefit plans and programs and other related matters, including the transfer or assignment of employees from the Company to Aptevo.
The following table represents the carrying value of Aptevo's assets and liabilities distributed as part of the Separation on August 1, 2016:
(in thousands) | | August 1, 2016 | |
| | | |
Assets: | | | |
Cash and cash equivalents | | $ | 45,000 | |
Accounts receivable, net | | | 4,465 | |
Inventories | | | 11,959 | |
Note receivable | | | 20,000 | |
Other current assets | | | 4,870 | |
Current assets of discontinued operations | | | 86,294 | |
| | | | |
Property, plant and equipment, net | | | 6,128 | |
In-process research and development | | | 41,800 | |
Intangible assets, net | | | 15,402 | |
Goodwill | | | 13,902 | |
Non-current assets of discontinued operations | | | 77,232 | |
Total assets of discontinued operations | | $ | 163,526 | |
| | | | |
Liabilities: | | | | |
Accounts payable | | $ | 6,285 | |
Accrued expenses and other current liabilities | | | 64 | |
Accrued compensation | | | 2,456 | |
Contingent consideration | | | 191 | |
Provisions for chargebacks | | | 2,341 | |
Deferred revenue, current portion | | | 433 | |
Current liabilities of discontinued operations | | | 11,770 | |
| | | | |
Deferred revenue, net of current portion | | | 3,232 | |
Other liabilities | | | 91 | |
Non-current liabilities of discontinued operations | | | 3,323 | |
Total liabilities of discontinued operations | | $ | 15,093 | |
The following table represents Aptevo's assets and liabilities presented as discontinued operations and classified as held-for-disposition as of December 31, 2015:
(in thousands) | | December 31, 2015 | |
| | | |
Assets: | | | |
Cash and cash equivalents | | $ | 4,492 | |
Accounts receivable, net | | | 6,861 | |
Inventories | | | 16,049 | |
Prepaid expenses and other current assets | | | 1,880 | |
Current assets of discontinued operations | | | 29,282 | |
| | | | |
Property, plant and equipment, net | | | 4,046 | |
In-process research and development | | | 41,800 | |
Intangible assets, net | | | 16,617 | |
Goodwill | | | 13,902 | |
Non-current assets of discontinued operations | | | 76,365 | |
Total assets of discontinued operations | | $ | 105,647 | |
| | | | |
Liabilities: | | | | |
Accounts payable | | $ | 8,134 | |
Accrued expenses and other current liabilities | | | 22 | |
Accrued compensation | | | 2,684 | |
Contingent consideration, current portion | | | 306 | |
Provisions for chargebacks | | | 2,238 | |
Deferred revenue, current portion | | | 3,964 | |
Current liabilities of discontinued operations | | | 17,348 | |
| | | | |
Deferred revenue, net of current portion | | | 3,163 | |
Other liabilities | | | 71 | |
Non-current liabilities of discontinued operations | | | 3,234 | |
Total liabilities of discontinued operations | | $ | 20,582 | |
The following table summarizes results from discontinued operations of Aptevo included in the consolidated statements of operations:
| | | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Revenues: | | | | | | | | | |
Product sales | | $ | 21,183 | | | $ | 27,947 | | | $ | 30,036 | |
Collaborations | | | 187 | | | | 5,511 | | | | 15,636 | |
Total revenues | | | 21,370 | | | | 33,458 | | | | 45,672 | |
| | | | | | | | | | | | |
Operating expense: | | | | | | | | | | | | |
Cost of product sales | | | 11,556 | | | | 16,809 | | | | 16,449 | |
Research and development | | | 18,024 | | | | 34,811 | | | | 46,108 | |
Selling, general and administrative | | | 23,792 | | | | 27,313 | | | | 14,248 | |
Loss from operations | | | (32,002 | ) | | | (45,475 | ) | | | (31,133 | ) |
| | | | | | | | | | | | |
Other income (expense), net: | | | (41 | ) | | | (472 | ) | | | - | |
| | | | | | | | | | | | |
Loss from discontinued operations before benefit from income taxes | | | (32,043 | ) | | | (45,947 | ) | | | (31,133 | ) |
Benefit from income taxes | | | (21,295 | ) | | | (17,401 | ) | | | (13,608 | ) |
Net loss from discontinued operations | | $ | (10,748 | ) | | $ | (28,546 | ) | | $ | (17,525 | ) |
The following table summarizes the cash flows of Aptevo included in the years ended December 31, 2016, 2015 and 2014 consolidated statements of cash flows:
| | Years ended December 31, | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
Net cash (used in) provided by operating activities | | $ | (10,299 | ) | | $ | (12,716 | ) | | $ | (14,683 | ) |
Net cash used in investing activities | | | (1,926 | ) | | | (1,518 | ) | | | (48,822 | ) |
Net cash provided by (used in) financing activities | | | 7,733 | | | | 15,012 | | | | 67,219 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | $ | (4,492 | ) | | $ | 778 | | | $ | 3,714 | |
4.Fair value measurements
The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair valueare reported on a recurring basis:
| December 31, 2016 | |
(in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | |
Investment in money market funds (1) | | $ | 10 | | | $ | - | | | $ | - | | | $ | 10 | |
Total assets | | $ | 10 | | | $ | - | | | $ | - | | | $ | 10 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Contingent consideration | | $ | - | | | $ | - | | | $ | 13,185 | | | $ | 13,185 | |
Total liabilities | | $ | - | | | $ | - | | | $ | 13,185 | | | $ | 13,185 | |
| | | | | | | | | | | | | | | | |
| December 31, 2015 | |
(in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Investment in money market funds (1) | | $ | 3,323 | | | $ | - | | | $ | - | | | $ | 3,323 | |
Total assets | | $ | 3,323 | | | $ | - | | | $ | - | | | $ | 3,323 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Contingent price consideration | | $ | - | | | $ | - | | | $ | 25,155 | | | $ | 25,155 | |
Total liabilities | | $ | - | | | $ | - | | | $ | 25,155 | | | $ | 25,155 | |
(1) Included in cash and cash equivalents in accompanying consolidated balance sheets.
Asbasis for purposes of December 31, 2016 and 2015, the Company did not have any transfers between Level 1 and Level 2 assets or liabilities.
For the year ended December 31, 2016 and 2015, the contingent consideration obligation associatedsegment reporting, consistent with the EV-035 series of molecules and the broad spectrum antiviral platform program decreased by $5.4 million and $9.4 million, respectively. These changes are primarily due to the estimated timing and probability of success for certain development and regulatory milestones and the estimated timing and volume of potential future sales of the EV-035 series of molecules and the broad spectrum antiviral platform, which are inputs that have no observable market (Level 3), along with the novation of the Defense Threat Reduction Agency ("DTRA") contract for the EV-035 series of molecules. These decreases in the contingent consideration were classified in the Company's statement of operations as both selling, general and administrative expense and research and development expense. During 2015, the Company received novation of the DTRA contract and paid the $4.0 million milestone to Evolva in the second quarter of 2015.
internal management reporting.
For the years ended December 31, 20162019, 2018 and 2015,2017 the contingent considerationCompany's revenues disaggregated by the major sources was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| U.S Government | | Non-U.S. Government | | Total | | U.S Government | | Non-U.S. Government | | Total | | U.S Government | | Non-U.S. Government | | Total |
Product sales | $ | 568.8 |
| | $ | 334.7 |
| | $ | 903.5 |
| | $ | 526.1 |
| | $ | 80.4 |
| | $ | 606.5 |
| | $ | 374.8 |
| | $ | 46.7 |
| | $ | 421.5 |
|
Contract development and manufacturing services | — |
| | 80.0 |
| | 80.0 |
| | — |
| | 98.9 |
| | 98.9 |
| | — |
| | 68.9 |
| | 68.9 |
|
Contracts and grants | 105.9 |
| | 16.6 |
| | 122.5 |
| | 71.5 |
| | 5.5 |
| | 77.0 |
| | 65.1 |
| | 5.4 |
| | 70.5 |
|
Total revenues | $ | 674.7 |
| | $ | 431.3 |
| | $ | 1,106.0 |
| | $ | 597.6 |
| | $ | 184.8 |
| | $ | 782.4 |
| | $ | 439.9 |
| | $ | 121.0 |
| | $ | 560.9 |
|
Contract liabilities
When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations are reflected as contract liabilities on the consolidated balance sheets and are deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of contract liabilities:
|
| | | |
(in millions) | |
December 31, 2017 | $ | 30.5 |
|
Adoption of new accounting standard (ASC 606) | 42.4 |
|
January 1, 2018 | 72.9 |
|
Deferral of revenue | 29.3 |
|
Revenue recognized | (29.1 | ) |
Balance at December 31, 2018 | 73.1 |
|
Deferral of revenue | 46.7 |
|
Revenue recognized | (30.9 | ) |
Balance at December 31, 2019 | $ | 88.9 |
|
Transaction price allocated to remaining performance obligations
As of December 31, 2019, the Company had expected future revenues of approximately $600 million associated with RSDL decreased by $5.4performance obligations that have not been satisfied. The Company expects to recognize a majority of these revenues within the next 24 months, with the remainder recognized thereafter. However, the amount and timing of revenue recognition for unsatisfied performance obligations can materially change due to timing of funding appropriations from the USG and the overall success of the Company's development activities associated with its PHT product candidates that are then receiving development funding support from the USG under development contracts. In addition, the amount of future revenues associated with unsatisfied performance obligations excludes the value associated with unexercised option periods in the Company's contracts (which are not performance obligations as of December 31, 2019).
Contract assets
The Company considers unbilled accounts receivables and deferred costs associated with revenue generating contracts, which are not included in inventory or property, plant and equipments, as contract assets. As of December 31, 2019 and 2018, the Company had contract assets associated with deferred costs of $34.0 million and $1.5$1.2 million, respectively.respectively, which is included in prepaid expenses and other current assets and other assets on the Company's consolidated balance sheets.
Accounts receivable
Accounts receivable including unbilled accounts receivable contract assets consist of the following:
|
| | | | | | | |
| December 31, |
(in millions) | 2019 | | 2018 |
Billed, net | $ | 227.3 |
| | $ | 234.0 |
|
Unbilled | 43.4 |
| | 28.5 |
|
Total, net | $ | 270.7 |
| | $ | 262.5 |
|
As of December 31, 2019 and 2018, the Company's accounts receivable balances were comprised of 69% and 76%, respectively, from the USG. As of December 31, 2019 and 2018 allowance for doubtful accounts were de minimis.
4. Acquisitions
Adapt
On October 15, 2018, the Company acquired Adapt, a company focused on developing new treatment options and commercializing products addressing opioid overdose and addiction. Adapt's NARCAN® (naloxone HCI) Nasal Spray marketed product is the first needle-free formulation of naloxone approved by the FDA and Health Canada for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression. This acquisition included approximately 50 employees, located in the U.S., Canada, and Ireland, including those responsible for supply chain management, research and development, government affairs, and commercial operations. The products and product candidates within Adapt's portfolio are consistent with the Company's mission and expand the Company's core business of addressing public health threats.
The total purchase price revised for adjustments is summarized below:
|
| | | |
(in millions) | October 15, 2018 |
Cash | $ | 581.5 |
|
Equity | 37.7 |
|
Fair value of contingent purchase consideration | 48.0 |
|
Preliminary purchase consideration | 667.2 |
|
Adjustments | 1.5 |
|
Final purchase consideration | $ | 668.7 |
|
The Company issued 733,309 shares of Common Stock at $60.44 per share, the closing price of Emergent's share price on October 15, 2018, for a total of $44.3 million (inclusive of adjustments). The $44.3 million value of the common stock shares issued has been adjusted to a fair value of $37.7 million considering a discount for lack of marketability due to a two-year lock-up period beginning on October 15, 2018. The remaining consideration payable for the acquisition consists of up to $100 million in cash based on the achievement of certain sales milestones through 2022 which the Company has determined the fair value of to be $48.0 million as of the acquisition date. The fair value of the RSDL contingent purchase consideration obligations decreased as a result of management'sis based on management’s assessment of the assumed and actual achievementpotential future realization of future net sales, which arethe contingent purchase consideration payments. This assessment is based on inputs that have no observable market (Level 3). These changes are classified inThe obligation is measured using a discounted cash flow model.
This transaction was accounted for by the Company's statementCompany under the acquisition method of operationsaccounting, with the Company as costthe acquirer. Under the acquisition method of product sales and contract manufacturing.
The following table is a reconciliation ofaccounting, the beginning and ending balance of the liabilities measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2016 and 2015.
(in thousands) | | | |
Balance at December 31, 2014 | | $ | 40,037 | |
(Income) expense included in earnings | | | (10,884 | ) |
Settlements | | | (4,803 | ) |
Purchases, sales and issuances | | | 805 | |
Transfers in/(out) of Level 3 | | | - | |
Balance at December 31, 2015 | | $ | 25,155 | |
(Income) expense included in earnings | | | (10,857 | ) |
Settlements | | | (1,113 | ) |
Purchases, sales and issuances | | | - | |
Transfers in/(out) of Level 3 | | | - | |
Balance at December 31, 2016 | | $ | 13,185 | |
Separate disclosure is required for assets and liabilities measured at fair value on a recurring basis from those measured at fair value on a non-recurring basis. As of December 31, 2016, thereAdapt were no assets or liabilities measured at fair value on a non-recurring basis. As of December 31, 2015, the in-process research and development asset for the EV-035 series of molecules was measured at fair value on a non-recurring basis.
5.Accounts receivable
Accounts receivable consist of the following:
| December 31, | |
(in thousands) | 2016 | | 2015 | |
Billed | | $ | 90,439 | | | $ | 95,735 | |
Unbilled | | | 48,039 | | | | 18,171 | |
Total | | $ | 138,478 | | | $ | 113,906 | |
Unbilled accounts receivable has increased by $29.9 million due to the timing of billings to under our contract with the U.S. government related to construction activities at our Bayview site and development work associated with Ebola.
6.Inventories
Inventories consist of the following:
| | December 31, | |
(in thousands) | | 2016 | | | 2015 | |
Raw materials and supplies | | $ | 30,687 | | | $ | 21,275 | |
Work-in-process | | | 19,821 | | | | 32,709 | |
Finished goods | | | 23,494 | | | | 6,903 | |
Total inventories | | $ | 74,002 | | | $ | 60,887 | |
7.Property, plant and equipment
Property, plant and equipment consist of the following:
| | December 31, | |
(in thousands) | | 2016 | | | 2015 | |
Land and improvements | | $ | 20,340 | | | $ | 16,520 | |
Buildings, building improvements and leasehold improvements | | | 147,130 | | | | 108,908 | |
Furniture and equipment | | | 190,157 | | | | 129,933 | |
Software | | | 52,564 | | | | 39,683 | |
Construction-in-progress | | | 77,813 | | | | 126,531 | |
| | | 488,004 | | | | 421,575 | |
Less: Accumulated depreciation and amortization | | | (111,556 | ) | | | (93,767 | ) |
Total property, plant and equipment, net | | $ | 376,448 | | | $ | 327,808 | |
For the year ended December 31, 2016, construction-in-progress primarily includes costs related to the build out of the Company's CIADM manufacturing facility. For the year ended December 31, 2015, construction-in-progress primarily included costs related to Building 55, the Company's large-scale manufacturing facility which was placed in service in June 2016.
Depreciation and amortization expense was $28.0 million, $23.7 million and $22.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
8. Intangible assets, in-process research and development and goodwill
As of October 1, 2016, the Company performed a qualitative assessment of goodwill associated with the Therapeutics and Vaccines reporting unit, Contract Manufacturing reporting unit, and the Medical Devices reporting unit. The Company completed its annual impairment assessments for its IPR&D assets and goodwillrecorded as of October 1, 201515, 2018, the acquisition date, at their respective fair values, and combined with those of the Company. The
Company reflects measurement period adjustments in the period in which the adjustments occur. The adjustments during the measurement period resulted from receipt of additional financial information associated with certain acquired contract assets and the value of associated contingent purchase consideration. These adjustments did not impact the Company's statements of operations.
The table below summarizes the final allocation of the purchase price based upon fair values of assets acquired and liabilities assumed at October 15, 2018.
|
| | | | | | | | | |
(in millions) | October 15, 2018 | Measurement Period Adjustments | Updated October 15, 2018 |
Fair value of tangible assets acquired and liabilities assumed: | | | |
Cash | $ | 17.7 |
| $ | — |
| $ | 17.7 |
|
Accounts receivable | 21.3 |
| — |
| 21.3 |
|
Inventory | 41.4 |
| — |
| 41.4 |
|
Prepaid expenses and other assets | 7.8 |
| 3.0 |
| 10.8 |
|
Accounts payable | (32.2 | ) | — |
| (32.2 | ) |
Accrued expenses and other liabilities | (50.4 | ) | — |
| (50.4 | ) |
Deferred tax liability, net | (62.4 | ) | (0.5 | ) | (62.9 | ) |
Total fair value of tangible assets acquired and liabilities assumed | (56.8 | ) | 2.5 |
| (54.3 | ) |
| | | |
Acquired in-process research and development | 41.0 |
| — |
| 41.0 |
|
Acquired intangible asset | 534.0 |
| — |
| 534.0 |
|
Goodwill | 149.0 |
| (1.0 | ) | 148.0 |
|
Total purchase price | $ | 667.2 |
| $ | 1.5 |
| $ | 668.7 |
|
The Company determined that the fair value of the Company's IPR&D assets and reporting units was significantly in excessintangible asset using the income approach, which is based on the present value of carrying value. As of October 1, 2015,future cash flows. The fair value measurements are based on significant unobservable inputs that are developed by the Company performed a qualitative assessment of goodwill associated with the Therapeuticsusing estimates and Vaccines reporting unit, Contract Manufacturing reporting unit, and the Medical Devices reporting unit.
Intangible assets consistedassumptions of the following:
| | | |
(in thousands) | | Total | |
Cost basis | | | |
Balance at December 31, 2015 | | $ | 57,099 | |
Additions | | | - | |
Balance at December 31, 2016 | | $ | 57,099 | |
| | | | |
Accumulated amortization | | | | |
Balance at December 31, 2015 | | $ | (16,341 | ) |
Amortization | | | (6,893 | ) |
Balance at December 31, 2016 | | $ | (23,234 | ) |
| | | | |
Net book value at December 31, 2016 | | $ | 33,865 | |
Forrespective market and market penetration of the years ended December 31, 2016, 2015 and 2014, the Company recorded amortization expense of $6.9 million, $7.4 million and $7.0 million, respectively, for intangible assets, which has been recorded in operating expenses, specifically selling, general and administrative and cost of product sales and contract manufacturing. As of December 31, 2016, the weighted average amortization period remaining for intangible assets is 75 months.
Future amortization expense as of December 31, 2016 is as follows:
(in thousands) | | | |
2017 | | $ | 6,217 | |
2018 | | | 6,217 | |
2019 | | | 5,738 | |
2020 | | | 5,657 | |
2021 and beyond | | | 10,036 | |
Total remaining amortization | | $ | 33,865 | |
Company's products.
The following table is a summary of changes in goodwill by reporting unit:
(in thousands) | | Therapeutics and vaccines | | | Contract manufacturing | | | Medical devices | | | Total | |
Cost Basis | | | | | | | | | | | | |
Balance at December 31, 2015 | | $ | 24,349 | | | $ | 6,736 | | | $ | 9,916 | | | $ | 41,001 | |
Additions | | | - | | | | - | | | | - | | | | - | |
Balance at December 31, 2016 | | $ | 24,349 | | | $ | 6,736 | | | $ | 9,916 | | | $ | 41,001 | |
In September 2015, the Company received data for the leading molecule in the EV-035 series of molecules, GC-072, that indicated a potential toxicity issue. The Company considered this information an indicator of impairment of the related EV-035 series of molecules IPR&D asset, and completed an impairment assessment of this asset. Based on this assessment, the Company recorded a non-cash impairment charge of $9.8 million, which is included in the Company's statement of operations as research and development expense. The remaining carryingfair value of the EV-035 seriesintangible asset acquired for Adapt's marketed product NARCAN® Nasal Spray was valued at $534.0 million. The Company has determined the useful life of moleculesthe NARCAN® Nasal Spray intangible asset to be 15 years. The Company calculated the fair value of the NARCAN® Nasal Spray intangible asset using the income approach with a present value discount rate of 10.5%, which is based on the weighted-average cost of capital for companies with profiles substantially similar to that of Adapt. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from the NARCAN® Nasal Spray intangible asset were based on key assumptions including: estimates of revenues and operating profits; and risks related to the viability of and potential alternative treatments in any future target markets.
The intangible asset associated with IPR&D assetacquired from Adapt is related to a product candidate. Management determined that the acquisition-date fair value of intangible assets related to IPR&D was $0.7 million as of December 31, 2015. This remaining amount$41.0 million. The fair value was impaired during the year ended December 31, 2016 based upon delays in the development time line. The impairment assessment was performeddetermined using the income approach, which discounts expected future cash flows to present value. The Company calculated the fair value using a present value discount rate of 11%, which is based on the weighted-average cost of capital for companies with that profiles substantially similar to that of Adapt and IPR&D assets at a similar stage of development as the product candidate. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value the IPR&D. The projected cash flows for the EV-035 series of moleculesproduct candidate were based on key assumptions including: estimates of revenues and operating profits, considering its stage of development on the acquisition date; the time and resources needed to complete the development and approval of the product candidate,candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a product candidate, such as obtaining marketing approval from the FDA and other regulatory agencies,agencies; and risks related to the viability of and potential for alternative treatments in any future target markets. Non-amortizing IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development effort and are evaluated for impairment annually. During the year ended December 31, 2019, the Company recorded an impairment charge of $12.0 million to the IPR&D asset. The fair value of the IPR&D intangible asset is $29.0 million at December 31, 2019 (see Note 8).
As
The Company determined the fair value of the inventory using the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
The Company recorded approximately $148.0 million in goodwill related to the Adapt acquisition, which is calculated as the purchase price paid in excess of the fair value of the tangible and intangible assets acquired representing the future economic benefits the Company expects to receive as a result of the impairmentacquisition. The goodwill created from the Adapt acquisition is associated with early stage pipeline products. The goodwill generated from the Adapt acquisition is not expected to be deductible for tax purposes.
PaxVax
On October 4, 2018, the Company completed the acquisition of PaxVax Holding Company Ltd. ("PaxVax"), a company focused on developing, manufacturing, and commercializing specialty vaccines that protect against existing and emerging infectious diseases. This acquisition includes Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral vaccine licensed by the FDA for the prevention of typhoid fever, Vaxchora® (Cholera Vaccine, Live, Oral), the only FDA-licensed vaccine for the prevention of cholera, adenovirus 4/7 and additional clinical-stage vaccine candidates targeting chikungunya and other emerging infectious diseases, European-based current good manufacturing practices ("cGMP") biologics manufacturing facilities, and approximately 250 employees including those in research and development, manufacturing, and commercial operations with a specialty vaccines sales force in the U.S. and in select European countries. The products and product candidates within PaxVax's portfolio are consistent with the Company’s mission and will expand the Company’s core business of addressing PHTs. In addition, the acquisition expands the Company's manufacturing capabilities.
At the closing, the Company paid a cash consideration of $273.1 million (inclusive of closing adjustments). This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of PaxVax were recorded as of October 4, 2018, the acquisition date, at their respective fair values, and combined with those of the EV-035 seriesCompany.
The table below summarizes the final allocation of moleculesthe purchase consideration based upon the fair values of assets acquired and liabilities assumed at October 4, 2018.
|
| | | | | | | | | |
(in millions) | October 4, 2018 | Measurement Period Adjustments | Updated October 4, 2018 |
Fair value of tangible assets acquired and liabilities assumed: | | | |
| | | |
Cash | $ | 9.0 |
| $ | — |
| $ | 9.0 |
|
Accounts receivable | 4.1 |
| — |
| 4.1 |
|
Inventory | 19.7 |
| — |
| 19.7 |
|
Prepaid expenses and other assets | 12.2 |
| (0.3 | ) | 11.9 |
|
Property, plant and equipment | 57.8 |
| — |
| 57.8 |
|
Deferred tax assets, net | 3.8 |
| 1.8 |
| 5.6 |
|
Accounts payable | (3.5 | ) | — |
| (3.5 | ) |
Accrued expenses and other liabilities | (33.6 | ) | (0.4 | ) | (34.0 | ) |
Total fair value of tangible assets acquired and liabilities assumed | 69.5 |
| 1.1 |
| 70.6 |
|
| | | |
Acquired in-process research and development | 9.0 |
| (9.0 | ) | — |
|
Acquired intangible assets | 133.0 |
| — |
| 133.0 |
|
Goodwill | 61.6 |
| 7.9 |
| 69.5 |
|
Total purchase consideration | $ | 273.1 |
| $ | — |
| $ | 273.1 |
|
The fair value of the intangible assets acquired for PaxVax's marketed products are valued at a total of $133.0 million. The Company has determined that the weighted average useful lives of the intangible assets to be 19 years.
The Company determined the fair value of the intangible assets using the income approach, which is based on the present value of future cash flows. The fair value measurements are based on significant unobservable inputs that are
developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products.
The Company calculated the fair value of the Vivotif and Vaxchora intangible assets using the income approach with a present value discount rate of 14.5% and 15%, respectively, which is based on the weighted-average cost of capital for companies with profiles substantially similar to that of PaxVax. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from these intangible assets were based on key assumptions including: estimates of revenues and operating profits; and risks related to the viability of and potential alternative treatments in any future target markets.
The intangible asset associated with IPR&D acquired from PaxVax is related to a product candidate. The Company has adjusted the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. The Company estimates the fair value based on the income approach.
The Company determined the fair value of the inventory using the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
The Company determined the fair value of the property, plant and equipment utilizing either the cost approach or the sales comparison approach. The cost approach is determined by establishing replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.
The Company recorded approximately $69.5 million in goodwill related to the PaxVax acquisition, calculated as the purchase price paid in the acquisition that was in excess of the fair value of the tangible and intangible assets acquired representing the future economic benefits the Company expects to receive as a result of the acquisition. The goodwill created from the PaxVax acquisition is associated with early stage pipeline products along with potential contract development and manufacturing services. The majority of the goodwill generated from the PaxVax acquisition is expected to be deductible for tax purposes.
The Company has incurred transaction costs related to the PaxVax acquisition of approximately $4.5 million for the year ended December 31, 2018, which have been recorded in selling, general and administrative expenses.
Acquisition of ACAM2000 business
On October 6, 2017, the Company completed the acquisition of the ACAM2000® (Smallpox (Vaccinia) Vaccine, Live) business of Sanofi Pasteur Biologics, LLC ("Sanofi"). This acquisition includes ACAM2000, the only smallpox vaccine licensed by the FDA, a current good manufacturing practices ("cGMP") live viral manufacturing facility and office and warehouse space, both in Canton, Massachusetts, and a cGMP viral fill/finish facility in Rockville, Maryland. With this acquisition, the Company also performedacquired an interim goodwill qualitative impairment assessmentexisting 10-year contract with the CDC, which expired in March 2018. This contract had a stated value up to $425 million, with a remaining contract value of up to approximately $160 million as of the Vaccinesacquisition date, for the delivery of ACAM2000 to the SNS and Therapeutics reporting unit, which contained $22.0establishing U.S.-based manufacturing of ACAM2000. This acquisition added to the Company's product portfolio and expanded the Company's manufacturing capabilities.
At the closing, the Company paid $97.5 million in an upfront payment and $20 million in milestone payments earned as of the goodwill reported onclosing date tied to the Company'sachievement of certain regulatory and manufacturing-related milestones, for a total payment in cash of $117.5 million. The agreement includes an additional milestone payment of up to $7.5 million upon achievement of a regulatory milestone, which was achieved in November 2017. The $7.5 million milestone payment was made during the fourth quarter of 2018 and is reflected as a component of financing activities in the consolidated balance sheets asstatement of September 30, 2015. Based on the assessment, the Company concluded that the goodwillcash flows. This transaction was not impaired.
9.Long-term debt
On January 29, 2014, the Company issued $250.0 million aggregate principal amount of 2.875% Convertible Senior Notes due 2021 (the "Notes"). The Notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears on January 15 and July 15 of each year. The Notes mature on January 15, 2021, unless earlier purchasedaccounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of the ACAM2000 business were recorded as of October 6, 2017, the acquisition date, at their respective fair values, and combined with those of the Company.
The contingent purchase consideration obligation is based on a regulatory milestone. At October 6, 2017, the contingent purchase consideration obligation related to the regulatory milestone was recorded at a fair value of $2.2 million. The Level 3 fair value of this obligation was based on a present value model of management's assessment of
the probability of achievement of the regulatory milestone as of the acquisition date. This assessment is based on inputs that have no observable market.
The total purchase price is summarized below:
|
| | | |
(in millions) | Purchase Price |
Amount of cash paid | $ | 117.5 |
|
Fair value of contingent purchase consideration | 2.2 |
|
Total purchase price | $ | 119.7 |
|
The table below summarizes the allocation of the purchase price based upon the fair values of assets acquired at October 6, 2017. The Company did not assume any liabilities in the acquisition. The Company has finalized the purchase price allocation related to this acquisition.
|
| | | |
(in millions) | Purchase Price |
Fair value of tangible assets acquired: | |
Inventory | $ | 74.9 |
|
Property, plant and equipment | 20.0 |
|
Total fair value of tangible assets acquired | 94.9 |
|
| |
Acquired intangible asset | 16.7 |
|
Goodwill | 8.1 |
|
Total purchase price | $ | 119.7 |
|
The fair value measurements are based on significant unobservable inputs that are developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products. The Company determined the fair value of the ACAM2000 intangible asset using the income approach, which is based on the present value of future cash flows, with a present value discount rate of 15.50%, based on the weighted-average cost of capital for substantially similar companies. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from ACAM2000 intangible asset were based on key assumptions, including: estimates of revenues and operating profits, the life of the potential commercialized product and associated risks, and risks related to the viability of and potential alternative treatments in any future target markets. The Company has determined the ACAM2000 intangible asset will be amortized over 10 years.
The Company determined the fair value of the inventory using the probability adjusted comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.
The Company determined the fair value of the property, plant and equipment utilizing either the cost approach or converted.the sales comparison approach. The original conversion ratecost approach is determined based on the replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to 30.8821 shares of common stock per $1,000 principal amount of notes (which is equivalent to a conversionthe market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.
The Company recorded approximately $32.38 per share$8.1 million in goodwill related to the ACAM2000 acquisition, calculated as the purchase price paid in the acquisition that was in excess of common stock)the fair value of the tangible and intangible assets acquired and represents the future economic benefits the Company expects to receive as a result of the acquisition. Goodwill generated from the ACAM2000 acquisition is not expected to be deductible for tax purposes.
Acquisition of raxibacumab asset
On October 2, 2017, the Company completed the acquisition of raxibacumab, a fully human monoclonal antibody therapeutic product approved by the U.S. Food and Drug Administration ("FDA") for the treatment and prophylaxis of inhalational anthrax, from Human Genome Sciences, Inc. and GlaxoSmithKline LLC (collectively referred to as "GSK"). The conversionall-cash transaction consists of a $76 million upfront payment and up to $20 million in product sale and
manufacturing-related milestone payments. The Company recorded an asset (including transaction costs) of $77.6 million, at date of acquisition, which is recorded within intangible assets, net line item of the consolidated balance sheets. The Company has determined that substantially all of the value of raxibacumab is attributed to the raxibacumab asset and therefore the raxibacumab acquisition is considered an asset acquisition. During the twelve months ended December 31, 2019, a contingent milestone was achieved which resulted in a payment of $10.0 million with a corresponding increase in intangible assets.
5. Fair value measurements
The Company’s recurring fair value measurement items recorded on a recurring basis primarily consist of contingent consideration liabilities, interest rate swaps and investments in money market funds.
Contingent consideration
The contingent consideration liabilities have been generated from our acquisitions. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders if future events occur or conditions are met. The Company’s contingent consideration is subjectmeasured initially and subsequently at each reporting date at fair value. The changes in the fair value of contingent consideration obligations are primarily due to adjustment upon the occurrenceexpected amount and timing of certain specified events but willfuture net sales and achieving regulatory milestones, which are inputs that have no observable market (Level 3). Any changes in expectations for the Company’s products are classified in the Company's statement of operations as cost of product sales and contract development and manufacturing. Any changes in expectations for the Company’s product candidates are recorded in research and development expense for regulatory and development milestones.
The following table is a reconciliation of the beginning and ending balance of the contingent consideration liabilities measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2019 and 2018.
|
| | | |
(in millions) | |
Balance at December 31, 2017 | $ | 12.3 |
|
Expense included in earnings | 3.1 |
|
Settlements | (3.4 | ) |
Additions due to acquisition | 48.0 |
|
Balance at December 31, 2018 | $ | 60.0 |
|
Expense included in earnings | 24.8 |
|
Milestone achievement - asset acquisition | 10.0 |
|
Measurement period adjustment | 1.5 |
|
Settlements | (67.1 | ) |
Balance at December 31, 2019 | $ | 29.2 |
|
Interest rate swaps
The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be adjustedsignificant inputs for accruedthe 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 unpaid interest.any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swaps fall into Level 2 in the fair value hierarchy. See note 10 "Derivative Instruments " for further details on the interest rate swaps.
Money market funds
The fair values of the Company's money market funds are based on quoted prices in active markets for identical assets (level 1). As of December 31, 2019 and 2018, the Company incurred approximately $8.3held cash in money market accounts of $52.2 million and $0 million, respectively. These amounts are included in debt issuancecash and cash equivalents in the consolidated balance sheets.
Non-recurring fair value measurements
Separate disclosure is required for assets and liabilities measured at fair value on a recurring basis from those measured at fair value on a non-recurring basis. As of December 31, 2019 and 2018, there were no assets or liabilities measured at fair value on a non-recurring basis, except for the IPR&D assets acquired with the Adapt acquisition and the assets acquired from PaxVax, Adapt. See Note 4. "Acquisitions" and Note 8. "Intangible assets and goodwill" for further details on the IPR&D assets.
6. Inventories
Inventories consist of the following: |
| | | | | | | |
| December 31, |
(in millions) | 2019 | | 2018 |
Raw materials and supplies | $ | 70.5 |
| | $ | 51.8 |
|
Work-in-process | 89.7 |
| | 103.2 |
|
Finished goods | 62.3 |
| | 50.8 |
|
Total inventories | $ | 222.5 |
| | $ | 205.8 |
|
7. Property, plant and equipment
Property, plant and equipment consist of the following:
|
| | | | | | | |
| December 31, |
(in millions) | 2019 | | 2018 |
Land and improvements | $ | 46.5 |
| | $ | 44.6 |
|
Buildings, building improvements and leasehold improvements | 234.8 |
| | 216.2 |
|
Furniture and equipment | 334.2 |
| | 293.9 |
|
Software | 55.7 |
| | 55.2 |
|
Construction-in-progress | 81.5 |
| | 71.8 |
|
| 752.7 |
| | 681.7 |
|
Less: Accumulated depreciation and amortization | (210.4 | ) | | (171.5 | ) |
Total property, plant and equipment, net | $ | 542.3 |
| | $ | 510.2 |
|
For the years ended December 31, 2019 and 2018, construction-in-progress primarily includes costs related to construction of manufacturing capabilities.
Depreciation and amortization expense associated with property, plant and equipment was $49.5 million, $36.3 million and $32.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
8. Intangible assets and goodwill
The Company's intangible assets were acquired via business combinations or asset acquisitions. Changes in the Company’s intangible assets, excluding IPR&D and goodwill, consisted of the following:
|
| | | | | | | | | | | | | | |
| | | December 31, 2019 |
(in millions) | Estimated Life | | Cost | Additions | Accumulated Amortization | Net |
Products | 9-22 years | | $ | 778.0 |
| $ | 10.0 |
| $ | 82.2 |
| $ | 705.8 |
|
Corporate trade name | 5 years | | 2.8 |
| — |
| 2.8 |
| — |
|
Customer relationships | 8 years | | 28.6 |
| — |
| 23.0 |
| 5.7 |
|
Contract development and manufacturing | 8 years | | 5.5 |
| — |
| 4.0 |
| 1.5 |
|
Total intangible assets | | | $ | 814.9 |
| $ | 10.0 |
| $ | 112.0 |
| $ | 712.9 |
|
|
| | | | | | | | | | | | | | |
| | | December 31, 2018 |
(in millions) | Estimated Life | | Cost | Additions | Accumulated Amortization | Net |
Products | 9-22 years | | $ | 111.0 |
| $ | 667.0 |
| $ | 27.9 |
| $ | 750.1 |
|
Corporate trade name | 5 years | | 2.8 |
| — |
| 2.7 |
| 0.1 |
|
Customer relationships | 8 years | | 28.6 |
| — |
| 19.4 |
| 9.2 |
|
Contract development and manufacturing | 8 years | | 5.5 |
| — |
| 3.3 |
| 2.2 |
|
Total intangible assets | | | $ | 147.9 |
| $ | 667.0 |
| $ | 53.3 |
| $ | 761.6 |
|
For the years ended December 31, 2019, 2018, and 2017, the Company recorded amortization expense for intangible assets of $58.7 million, $25.0 million and $8.6 million, respectively, which is included in the amortization of intangible assets line item of the consolidated statements of operations. As of December 31, 2019, the weighted average amortization period remaining for intangible assets is 13.6 years.
Future amortization expense as of December 31, 2019 is as follows:
|
| | | |
(in millions) | |
2020 | $ | 58.7 |
|
2021 | 57.3 |
|
2022 | 54.6 |
|
2023 | 54.4 |
|
2024 and beyond | 487.9 |
|
Total remaining amortization | $ | 712.9 |
|
During the year ended December 31, 2019, the Company recorded the impact of an impairment charge of $12.0 million related to our intangible assets associated with the Notes, which has been capitalizedIPR&D acquired as part of our acquisition of Adapt. The $12.0 million impairment charge is reflected as a component of research and development expense on the consolidated statement of operations. The IPR&D intangible asset balance on the consolidated balance sheets andsheet at December 31, 2019 was $29.0 million.
The following table is being amortized over seven years. Asa summary of August 1, 2016, certain conversion features were triggered due to the completionchanges in goodwill:
|
| | | | | | | |
| Year ended December 31, |
(in millions) | 2019 | | 2018 |
Balance at beginning of the year | $ | 259.7 |
| | $ | 49.1 |
|
Measurement period adjustments | 6.9 |
| | — |
|
Additions | — |
| | 210.6 |
|
Balance at end of the year | $ | 266.6 |
| | $ | 259.7 |
|
9. Long-term debt
The components of the Aptevo spin-off. The conversion rate under the Notes was adjusted in accordance with the terms of the indenture. Effective August 12, 2016, the conversion rate was adjusted to 32.3860 shares of common stock per $1,000 principal amount of notes (which is equivalent to a conversion price of approximately $30.88 per share of common stock).debt are as follows:
|
| | | | | | | |
| December 31, |
(in millions) | 2019 | | 2018 |
Senior secured credit agreement - Term loan due 2023 | $ | 435.9 |
| | $ | 447.2 |
|
Senior secured credit agreement - Revolver loan due 2023 | 373.0 |
| | 348.0 |
|
2.875% Convertible Senior Notes due 2021 | 10.6 |
| | 10.6 |
|
Other | 3.0 |
| | 3.0 |
|
Total debt | $ | 822.5 |
| | $ | 808.8 |
|
Current portion of debt, net of debt issuance costs | (12.9 | ) | | (10.1 | ) |
Unamortized debt issuance costs | (11.2 | ) | | (14.2 | ) |
Debt, net of current portion | $ | 798.4 |
| | $ | 784.5 |
|
Senior secured credit agreement
On December 11, 2013,September 29, 2017, the Company entered into a senior secured credit agreement (the "Credit Agreement"“2017 Credit Agreement”) with three4 lending financial institutions.institutions, which replaced the Company's prior senior secured credit agreement (the "2013 Credit Agreement").
On October 15, 2018, the Company entered into an Amended and Restated Credit Agreement (the "Amended Credit Agreement"), which modified the 2018 Credit Agreement. The Amended Credit Agreement (i) increased the revolving credit facility (the "Revolving Credit Facility") from $200 million to $600 million, (ii) extended the maturity of the Revolving Credit Facility from September 29, 2022 to October 13, 2023, (iii) provided for a revolvingterm loan in the original principal amount of $450 million (the "Term Loan Facility," and together with the Revolving Credit Facility, the "Senior Secured Credit Facilities"), (iv) added several additional lenders, (v) amended the applicable margin such that borrowings with respect to the Revolving Credit Facility will bear interest at the annual rate described below, (vi) amended the provision relating to incremental credit facility offacilities such that the Company may request one or more incremental term loan facilities, or one or more increases in the commitments under the Revolving Credit Facility (each an "Incremental Loan"), in any amount if, on a pro forma basis, the Company's consolidated secured net leverage ratio does not exceed 2.50 to 1.00 after such incurrence, plus $200 million and (vii) amended the maximum consolidated net leverage ratio financial covenant from 3.50 to 1.0 (subject to 0.50% step up in connection with material acquisitions) to $100.0the maximum consolidated net leverage ratio described below.
In October 2018, the Company borrowed $318.0 million through December 11, 2018 (or such earlier date required byunder the termsRevolving Credit Facility and $450 million under the Term Loan Facility to finance a portion of the consideration for the PaxVax and Adapt acquisitions and related expenses.
For the year ended December 31, 2019, we did 0t capitalize debt issuance costs. For the year ended December 31, 2018 we capitalized $13.4 million, as a direct reduction to the Term Loan and the revolver.
Borrowings under the Revolving Credit Agreement). UnderFacility and the revolving credit facility,Term Loan Facility will bear interest at a rate per annum equal to (a) a eurocurrency rate plus a margin ranging from 1.25% to 2.00% per annum, depending on the Company's consolidated net leverage ratio or (b) a base rate (which is the highest of the prime rate, the federal funds rate plus 0.50%, and a eurocurrency rate for an interest period of one month plus 1%) plus a margin ranging from 0.25% to 1.00%, depending on the Company's consolidated net leverage ratio. The Company is required to make quarterly payments under the Amended Credit Agreement for accrued and unpaid interest on the outstanding principal balance, based on the above interest rates. In addition, the Company is required to pay commitment fees ranging from 0.15% to 0.30% per annum, depending on the Company's consolidated net leverage ratio, in respect of the average daily unused commitments under the Revolving Credit Facility. The Company is to repay the outstanding principal amount of the Term Loan Facility in quarterly installments based on an unused feeannual percentage equal to 2.5% of approximately 0.5% annually, on a quarterly basis. In addition,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 ended December 31, 2014,of the Company expensed $1.8 millionTerm Loan Facility and 7.5% of debt issuance cost associated withthe original principal amount of the Term Loan Facility during each year of the remainder of the term loan facility. As of December 31, 2016the 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 2015, no amounts were drawn underpayable. The Company has the revolving credit facility.right to prepay the Term Loan Facility without premium or penalty. The Revolving Credit Facility and the Term Loan Facility mature (unless earlier terminated) on October 13, 2023.
The Company's payment obligations under the Credit Agreement are secured by a lien on substantially all of the Company's assets, including the stock of all of the Company's subsidiaries, and the assets of the subsidiary guarantors, including mortgages over certain of their real properties, including the Company's large-scale vaccine manufacturing facility in Lansing, Michigan and the Company's product development and manufacturing facility in Baltimore, Maryland.
The Credit Agreement, as amended, contains affirmative and negative covenants customary for financings of this type. Negative covenants in the Credit Agreement limit the Company's ability to, among other things: incur indebtedness (other than the issuance of the Notes) and liens; dispose of assets; make investments including loans, advances or guarantees; and enter into certain mergers or similar transactions. TheAmended Credit Agreement also requires mandatory prepayments of the Term Loan Facility in the event the Company or its Subsidiaries (a) incur indebtedness not otherwise permitted under the Amended Credit Agreement or (b) receive cash proceeds in excess of $100 million during the term of the Amended Credit Agreement from certain dispositions of property or from casualty events involving their property, subject to certain reinvestment rights.
The Amended Credit Agreement contains financial covenants, testedwhich were then further amended in June 2019. The financial covenants require the quarterly and in connection with any triggering events under the Credit Agreement that include the maintenance of: (1)presentation of a minimum consolidated 12-month rolling debt service coverage ratio of 2.50 to 1.00, (2) aand an amended maximum consolidated net leverage ratio of 4.95 to 1.00 for the period ending on or priorquarter ended June 30, 2019, 4.75 to 1.00 for the quarter ended September 30, 2014 of2019, and 3.75 to 1.00, thereafter, which may be adjusted to 4.00 to 1.00 for a four quarter period in connection with a material permitted acquisition. The Amended Credit Agreement also contains affirmative and negative covenants, which were also amended in June 2019 to limit the measurement period endingamount of restricted payments as defined in the Amended Credit agreement to $25 million until the filing of the Company's December 31, 20142019 Form 10-K. Negative covenants in the Amended Credit Agreement, among other things, limit the ability of 3.75the Company to 1.00,incur indebtedness and thereafterliens, dispose of 3.50assets, make investments and enter into certain merger or consolidation transactions. As of the date of these financial statements, the Company is in compliance with affirmative and negative covenants.
2.875% Convertible senior notes due 2021
On November 14, 2017, the Company issued a notice of termination of conversion rights for its outstanding Notes, of which $250.0 million was outstanding as of the notice date. In connection with the notice of termination, bondholders were given the option to 1.00, and (3)convert their notes into the Company’s stock at a minimum liquidity requirementrate of $50.0 million. Upon the occurrence and continuance32.386 per $1,000 of principal outstanding, plus a make-whole of an event of default underadditional 3.1556 shares per $1,000 principal outstanding, in accordance with the Credit Agreement, the commitmentsterms of the lenders to make loans under the Credit Agreement may be terminated and the Company's payment obligations under the Credit Agreement may be accelerated. The events of default under the Credit Agreement include, among others, subject in some cases to specified cure periods: payment defaults; inaccuracy of representations and warranties in any material respect; defaults in the observance or performance of covenants; bankruptcy and insolvency related defaults; the entry of a final judgment in excess of a threshold amount; change of control; and the invalidity of loan documents relating to the Credit Agreement.indenture. The Company was not obligated to pay accrued or unpaid interest on converted notes, and bondholders who did not convert by the deadline of December 28, 2017 would retain their bonds but lose the conversion rights associated with the Notes and be paid interest of 2.875% until the earlier of maturity of the Notes in compliance2021 or the bonds being called and repaid in full by the Company. Between July 15, 2017 and the notification of termination of conversion rights, the Company accrued interest on the converted Notes of $2.4 million which was recorded as an increase in additional paid-in-capital on the balance sheet. Between November 14, 2017 and December 28, 2017 (the “conversion period”), approximately $239.4 million of bonds were converted into 8.5 million shares of the Company’s common stock, inclusive of shares issued as part of the make-whole provision. In addition, the Company recorded a reduction in additional paid-in-capital on the Company’s balance sheet of $3.6 million associated with these covenantsdebt issuance costs attributable to the converted notes. After giving effect to the converted bonds, the outstanding principal balance of the Notes as of December 31, 20162019 was $10.6 million.
Future debt payments of long-term indebtedness are as follows:
|
| | | |
(in millions) | December 31, 2019 |
2020 | $ | 14.1 |
|
2021 | 35.9 |
|
2022 | 33.7 |
|
2023 | 735.8 |
|
2024 and thereafter | 3.0 |
|
Total debt | $ | 822.5 |
|
10.Derivative Instruments
The Company is exposed to certain risk arising from both its business operations and 2015.economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company has entered into interest rate swaps to manage exposures that arise from the Company's senior secured credit agreement's payments of variable interest rate debt. All outstanding cash flow hedges mature in October 2023.
As of December 31, 2015,2019, the Company reclassified debt issuance costshad the following outstanding interest rate swap derivatives that were designated as cash flow hedges of $1.2 million and $4.9 million from prepaid expenses and other current assets and other assets, respectively, as a reduction to long-term debt as a resultinterest rate risk:
|
| | | |
| Number of Instruments | | Notional amount (in millions) |
Interest Rate Swaps | 7 | | 350.0 |
The table below presents the fair value of the adoptionCompany’s derivative financial instruments designated as hedges as well as their classification on the balance sheet. If current fair values of ASU No. 2015-03.designated interest rate swaps remained static over the next twelve months, the Company would reclassify $0.5 million of net deferred losses from accumulated other comprehensive loss to the statement of operations over the next twelve months.
|
| | | | | | | | | | | | | | | |
Asset Derivatives | Liability Derivatives |
| December 31, 2019 | December 31, 2018 | December 31, 2019 | | December 31, 2018 |
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value |
Interest Rate Swaps | Other Assets | $ | — |
| Other Assets | — |
| Other Liabilities | $ | 2.0 |
| | Other Liabilities | — |
|
10.The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income.
|
| | | | | | | | | | | | |
Hedging derivatives | Amount of Gain/(Loss) Recognized in OCI on Derivative | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income |
| December 31, 2019 | December 31, 2018 | | December 31, 2019 | December 31, 2018 |
Interest Rate Swaps | $ | 2.0 |
| — |
| Interest expense | $ | 0.6 |
| $ | — |
|
11. Stockholders' equity
Preferred stock
The Company is authorized to issue up to 15.0 million shares of preferred stock, $0.001 par value per share ("Preferred Stock"). Any Preferred Stock issued may have dividend rights, voting rights, conversion privileges, redemption characteristics, and sinking fund requirements as approved by the Company's board of directors.
Common stock
The Company currently has one class of common stock, $0.001 par value per share common stock ("Common Stock"), authorized and outstanding. The Company is authorized to issue up to 200.0 million shares of Common Stock. Holders of Common Stock are entitled to one1 vote for each share of Common Stock held on all matters, except as may be provided by law.
Accounting for stock-based compensation
Stock options and restricted stock units
As of December 31, 2016, theThe Company has twoone stock-based employee compensation plans,plan, the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan (the "2006"Emergent Plan"), which includes both stock options and the Emergent BioSolutions Employee Stock Option Plan (the "2004 Plan"). The Company refers to both plans together as the "Emergent Plans." On May 19, 2016, the Company's shareholders approved the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan, and the issuancerestricted stock units.
As of 3.8December 31, 2019, an aggregate of 21.9 million shares thereunder. In addition, the Company's shareholders approved an increase in the number of authorized shares of common stock to 200.0were authorized for issuance under the Emergent Plan, of which a total of approximately 5.8 million shares from 100.0 million shares.of common stock remain available for future awards to be made to plan participants. The exercise price of each option must be not less than 100% of the fair market value of the shares underlying such option on the date of grant. Awards granted under the Emergent Plan have a contractual life of no more than 10 years.
In connection with
The Company utilizes the Separation on August 1, 2016Black-Scholes valuation model for estimating the fair value of all stock options granted. Set forth below are the assumptions used in valuing the stock options granted:
|
| | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
Expected volatility | 37-39% |
| | 38-39% |
| | 37-40% |
|
Risk-free interest rate | 1.57-2.48% |
| | 2.54-3.03% |
| | 1.66-1.88% |
|
Expected average life of options | 4.5 years |
| | 4.5 years |
| | 4.3 years |
|
Stock options, restricted and in accordance with the employee matters agreement and the Emergent Plans, the Company made certain adjustments to the exercise price and number of equity awards. Continuing Emergent employees with equity awards issued prior to Distribution received an equitable adjustment reflecting a revised exercise price and number of equity awards granted. Continuing Aptevo employees who had been granted Emergent equity awards had their grants canceled and reissued as Aptevo equity awards with an adjusted exercise price.
performance stock units
The following is a summary of stock option award activity under the Emergent Plans:
| | 2006 Plan | | | 2004 Plan | | | | |
| | Number of Shares | | | Weighted-Average Exercise Price | | | Number of Shares | | | Weighted-Average Exercise Price | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2015 | | | 2,964,237 | | | $ | 22.73 | | | | 29,699 | | | $ | 10.28 | | | $ | 52,119,607 | |
Granted | | | 411,698 | | | | 33.61 | | | | - | | | | - | | | | | |
Exercised | | | (809,638 | ) | | | 19.41 | | | | (29,699 | ) | | | 10.28 | | | | | |
Forfeited | | | (96,293 | ) | | | 26.67 | | | | - | | | | - | | | | | |
Cancelled | | | (146,986 | ) | | | 28.33 | | | | - | | | | - | | | | | |
Equitable adjustment | | | 236,313 | | | | 22.90 | | | | - | | | | - | | | | | |
Outstanding at December 31, 2016 | | | 2,559,331 | | | $ | 22.94 | | | | - | | | $ | - | | | $ | 25,348,245 | |
Exercisable at December 31, 2016 | | | 1,504,855 | | | $ | 19.59 | | | | - | | | $ | - | | | $ | 19,938,451 | |
Options expected to vest at December 31, 2016 | | | 849,184 | | | $ | 27.46 | | | | - | | | $ | - | | | $ | 4,565,548 | |
The following is a summary of restricted stock unit award activity under the 2006 Plan:
|
| | | | | | | | | | |
| Emergent Plan |
(in millions, except share and per share data) | Number of Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value |
Outstanding at December 31, 2018 | 1,871,468 |
| | $ | 32.59 |
| | $ | 50.1 |
|
Granted | 295,770 |
| | 60.16 |
| | |
Exercised | (199,352 | ) | | 25.98 |
| | |
Forfeited | (84,011 | ) | | 52.26 |
| | |
Outstanding at December 31, 2019 | 1,883,875 |
| | $ | 36.74 |
| | $ | 34.5 |
|
Exercisable at December 31, 2019 | 1,253,658 |
| | $ | 29.46 |
| | $ | 30.8 |
|
| | Number of Shares | | | Weighted-Average Grant Price | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2015 | | | 889,004 | | | $ | 26.86 | | | $ | 35,569,048 | |
Granted | | | 515,782 | | | | 34.00 | | | | | |
Vested | | | (420,599 | ) | | | 24.68 | | | | | |
Forfeited | | | (80,428 | ) | | | 29.40 | | | | | |
Cancelled | | | (107,514 | ) | | | 30.90 | | | | | |
Equitable adjustment | | | 79,339 | | | | 28.86 | | | | | |
Outstanding at December 31, 2016 | | | 875,584 | | | $ | 28.94 | | | $ | 28,754,179 | |
The weighted average remaining contractual term of options outstanding as of December 31, 20162019 and 20152018 was 4.03.3 years and 4.44.0 years, respectively. The weighted average remaining contractual term of options exercisable as of December 31, 20162019 and 20152018 was 3.22.3 years and 3.43.0 years, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2016, 20152019, 2018, and 20142017 was $9.24, $8.66$21.13, $18.48 and $8.84,$10.53 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 20152019, 2018, and 20142017 was $15.6$5.3 million, $20.2$24.4 million and $7.5$13.9 million, respectively. The total fair value of awards vested during 2016, 20152019, 2018 and 20142017 was $16.9 million, $14.4$16.9 million and $12.3$17.9 million, respectively. As of the year ended December 31, 2016,2019, the total compensation cost and weighted average period over which total compensation is expected to be recognized related to unvested equity awards was $18.0$37.0 million and 1.861.5 years, respectively.
The following is a summary of performance stock and restricted stock unit award activity under the Emergent Plan. Performance stock units of approximately 0.1 million shares were granted and remain outstanding the year ended December 31, 2019, and are included in the table below.
|
| | | | | | | | | | |
(in millions, except share and per share data) | Number of Shares | | Weighted-Average Grant Price | | Aggregate Intrinsic Value |
Outstanding at December 31, 2018 | 921,093 |
| | $ | 42.82 |
| | $ | 54.6 |
|
Granted | 594,752 |
| | 57.94 |
| | |
Vested | (434,629 | ) | | 38.81 |
| | |
Forfeited | (128,364 | ) | | 53.17 |
| | |
Outstanding at December 31, 2019 | 952,852 |
| | $ | 52.77 |
| | $ | 51.5 |
|
On July 14, 2016, the Company's board of directors authorized management to repurchase, from time to time, up to an aggregate of $50 million of the Company's common stock under a board-approved share repurchase program. The timing, amount, and price of any repurchases will be made pursuant to one or more 10b5-1 plans. The term of the board authorization of the repurchase program is until December 31, 2017. The program will permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with the Company's stock plans and for other corporate purposes. As of December 31, 2016, the Company has neither implemented a repurchase plan nor repurchased any shares under this program.
Stock-based compensation expense was recorded in the following financial statement line items:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2019 | | 2018 | | 2017 |
Cost of product sales | | $ | 3.1 |
| | $ | 1.7 |
| | $ | 1.1 |
|
Research and development | | 4.0 |
| | 3.1 |
| | 2.5 |
|
Selling, general and administrative | | 19.6 |
| | 18.4 |
| | 11.6 |
|
Total stock-based compensation expense | | $ | 26.7 |
| | $ | 23.2 |
| | $ | 15.2 |
|
| | Years ended December 31, | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
Cost of product sales | | $ | 997 | | | $ | 1,183 | | | $ | 1,145 | |
Research and development | | | 2,297 | | | | 2,324 | | | | 2,779 | |
Selling, general and administrative | | | 14,062 | | | | 11,234 | | | | 7,830 | |
Continuing operations | | | 17,356 | | | | 14,741 | | | | 11,754 | |
Discontinued operations | | | 1,121 | | | | 1,107 | | | | 1,075 | |
Total stock-based compensation expense | | $ | 18,477 | | | $ | 15,848 | | | $ | 12,829 | |
11.Accumulated Other Comprehensive Loss
The following table includes changes in accumulated other comprehensive loss by component, net of tax:
|
| | | | | | | | | | | | | | | | |
| | Defined Benefit Pension Plan | | Derivative Instruments | | Foreign Currency Translation Losses | | Total |
(in millions) | |
Balance, January 1, 2018 | | $ | — |
| | $ | — |
| | $ | (3.7 | ) | | $ | (3.7 | ) |
Other comprehensive loss | | (0.2 | ) | | — |
| | (1.6 | ) | | (1.8 | ) |
Balance, December 31, 2018 | | $ | (0.2 | ) | | $ | — |
| | $ | (5.3 | ) | | (5.5 | ) |
Other comprehensive (loss) income before reclassifications | | $ | (3.2 | ) | | $ | (2.2 | ) | | $ | 0.4 |
| | $ | (5.0 | ) |
Amounts reclassified from accumulated other comprehensive income | | — |
| | 0.6 |
| | — |
| | 0.6 |
|
Net current period other comprehensive loss | | $ | (3.2 | ) | | $ | (1.6 | ) | | $ | 0.4 |
| | $ | (4.4 | ) |
Balance, December 31, 2019 | | $ | (3.4 | ) | | $ | (1.6 | ) | | $ | (4.9 | ) | | $ | (9.9 | ) |
12. Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities in the United States at December 31, 2017 and recognized a provisional $13.4 million tax benefit in the Company’s consolidated statement of income for the year ended December 31, 2017. During 2018, we adjusted the provisional estimate by approximately $4.5 million, bringing the total tax benefit recorded to date to $17.9 million related to the revaluation of our deferred tax assets and liabilities.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $95.4 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional transition tax of $13.6 million of income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. During 2018 we reduced the provisional transition tax by $0.3 million, bringing the total transition tax to $13.3 million.
While the Tax Reform Act provides for a territorial tax system and it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company is subject to incremental U.S. tax on GILTI income. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2019.
Significant components of the provisions for income taxes attributable to operations consist of the following:
| | Year ended December 31, | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
Current | | | | | | | | | |
Federal | | $ | 29,244 | | | $ | 38,957 | | | $ | 22,988 | |
State | | | 2,331 | | | | 2,221 | | | | 959 | |
International | | | 1,002 | | | | 2,029 | | | | 828 | |
Total current | | | 32,577 | | | | 43,207 | | | | 24,775 | |
Deferred | | | | | | | | | | | | |
Federal | | | 9,979 | | | | (119 | ) | | | 3,332 | |
State | | | (272 | ) | | | (111 | ) | | | 209 | |
International | | | (5,587 | ) | | | 1,323 | | | | 1,612 | |
Total deferred | | | 4,120 | | | | 1,093 | | | | 5,153 | |
Total provision for income taxes | | $ | 36,697 | | | $ | 44,300 | | | $ | 29,928 | |
|
| | | | | | | | | | | |
| December 31, |
(in millions) | 2019 | | 2018 | | 2017 |
Current | |
| | | | |
Federal | $ | 1.4 |
| | $ | 1.8 |
| | $ | 29.4 |
|
State | 11.6 |
| | 2.4 |
| | 3.0 |
|
International | 11.0 |
| | 6.0 |
| | 0.3 |
|
Total current | 24.0 |
| | 10.2 |
| | 32.7 |
|
Deferred | | | | | |
Federal | 1.9 |
| | 7.5 |
| | (6.0 | ) |
State | 1.1 |
| | 3.0 |
| | (0.6 | ) |
International | (4.1 | ) | | (1.9 | ) | | 9.9 |
|
Total deferred | (1.1 | ) | | 8.6 |
| | 3.3 |
|
Total provision for income taxes | $ | 22.9 |
| | $ | 18.8 |
| | $ | 36.0 |
|
The Company's net deferred tax asset (liability) consists of the following:
|
| | | | | | | |
| December 31, |
(in millions) | 2019 | | 2018 |
Federal losses carryforward | $ | 8.5 |
| | $ | 10.7 |
|
State losses carryforward | 17.4 |
| | 18.1 |
|
Research and development carryforward | 9.0 |
| | 10.1 |
|
State research and development carryforward | 5.0 |
| | 5.0 |
|
Scientific research and experimental development credit carryforward | 11.0 |
| | 13.1 |
|
Stock compensation | 7.6 |
| | 7.5 |
|
Foreign NOLs | 36.9 |
| | 35.4 |
|
Deferred revenue | 18.1 |
| | 11.6 |
|
Inventory reserves | 1.8 |
| | 3.4 |
|
Lease liability | 6.0 |
| | — |
|
Other | 7.5 |
| | 4.9 |
|
Deferred tax asset | 128.8 |
| | 119.8 |
|
Fixed assets | (51.2 | ) | | (46.4 | ) |
Intangible assets | (54.5 | ) | | (60.4 | ) |
Right-of-use asset | (5.9 | ) | | — |
|
Other | (3.2 | ) | | (0.7 | ) |
Deferred tax liability | (114.8 | ) | | (107.5 | ) |
Valuation allowance | (64.5 | ) | | (66.4 | ) |
Net deferred tax asset (liability) | $ | (50.5 | ) | | $ | (54.1 | ) |
| | December 31, | |
(in thousands) | | 2016 | | | 2015 | |
Federal losses carryforward | | $ | 4,130 | | | $ | 5,394 | |
State losses carryforward | | | 13,682 | | | | 12,751 | |
Research and development carryforward | | | 3,647 | | | | 3,545 | |
Scientific research and experimental development credit carryforward | | | 16,594 | | | | 25,771 | |
Intangible assets | | | - | | | | 5,792 | |
Stock compensation | | | 8,389 | | | | 9,391 | |
Foreign deferrals | | | 58,647 | | | | 80,920 | |
Inventory reserves | | | 2,273 | | | | 3,754 | |
Other | | | 5,569 | | | | 8,484 | |
Deferred tax asset | | | 112,931 | | | | 155,802 | |
Fixed assets | | | (30,728 | ) | | | (31,925 | ) |
Intangible assets | | | (5,882 | ) | | | (4,760 | ) |
Other | | | (16,047 | ) | | | (17,192 | ) |
Deferred tax liability | | | (52,657 | ) | | | (53,877 | ) |
Valuation allowance | | | (54,178 | ) | | | (90,639 | ) |
Net deferred tax (liabilities)/ asset | | $ | 6,096 | | | $ | 11,286 | |
As of December 31, 2016,2019, the Company has a net U.S. deferred tax liability in the amount of $7.7 million and a foreign net deferred tax liability in the amount of $42.8 million. The Company had a net U.S. deferred tax liability in the amount of $4.8 million and a foreign net deferred tax asset in the amount of $49.3 million as of December 31, 2018.
As of December 31, 2019, the Company currently has approximately $11.8$40.5 million ($4.18.5 million tax effected) in U.S. federal net operating loss carryforwards along with $3.7$14.0 million in research and development tax credit carryforwards for U.S. federal and state tax purposes that will begin to expire in 20262027 and 2023,2024, respectively. The U.S. federal taxnet operating loss carryforwards are recorded with noa $4.7 million valuation allowance. The research and development tax credit carryforwards have a valuation allowance in the amount of $9.1 million. The Company has $255.1$280.7 million ($13.717.4 million tax effected) in state net operating loss carryforwards, primarily in Maryland and California, that will begin to expire in 2018.2025. The U.S. state tax loss carryforwards are recorded with a valuation allowance of $191.7$245.0 million ($10.316.4 million tax effected). The Company has approximately $170.3$199.0 million ($43.937.0 million tax effected) in net operating losses from foreign jurisdictions, (excluding Canada) that willsome of which have an indefinite life unless(unless the foreign entities have a change in the nature or conduct of the business in the three years following a change in ownership.ownership), and some of which begin to expire in 2022. A valuation allowance in respect to these foreign losses has been recorded in the tax effected
amount of $43.9$34.3 million. The Company has approximately $43.6 million ($11.7 million tax effected) in Canadian loss carryforwards which are recorded with no valuation allowance. The Company currently has approximately $0.5 million of Canadian federal scientific research and experimental development credit carryforwards that will begin to expire in 2027. In addition, the Company has approximately $16.1$11.0 million in Manitoba scientific research and experimental development credit carryforwards that will begin to expire in 2024.2027. The use of any of these net operating losses and research and development tax credit carryforwards may be restricted due to future changes in the Company's ownership.
The provision for income taxes differs from the amount of taxes determined by applying the U.S. federal statutory rate to lossincome before the provision for income taxes as a result of the following:
|
| | | | | | | | | | | |
| December 31, |
(in millions) | 2019 | | 2018 | | 2017 |
US | $ | 63.9 |
| | $ | 71.0 |
| | $ | 80.7 |
|
International | 13.5 |
| | 10.5 |
| | 37.9 |
|
Earnings before taxes on income | 77.4 |
| | 81.5 |
| | 118.6 |
|
Federal tax at statutory rates | $ | 16.3 |
| | $ | 17.1 |
| | $ | 41.5 |
|
State taxes, net of federal benefit | 10.3 |
| | 4.3 |
| | 1.3 |
|
Impact of foreign operations | (6.9 | ) | | 2.8 |
| | (2.2 | ) |
Change in valuation allowance | (1.0 | ) | | (0.1 | ) | | 0.3 |
|
Tax credits | (3.6 | ) | | (1.8 | ) | | (1.9 | ) |
Transition tax | — |
| | (0.2 | ) | | 13.6 |
|
Change in U.S. tax rate | — |
| | (4.5 | ) | | (13.4 | ) |
Stock compensation | (2.4 | ) | | (5.8 | ) | | (4.0 | ) |
Other differences | — |
| | (1.3 | ) | | (0.7 | ) |
Return to provision true-ups | (2.3 | ) | | 1.1 |
| | — |
|
Transaction costs | — |
| | 5.4 |
| | — |
|
Contingent consideration | 4.7 |
|
| — |
|
| — |
|
Compensation limitation | 1.3 |
| | 1.1 |
| | 1.3 |
|
FIN 48 | 1.1 |
| | 0.3 |
| | 0.5 |
|
GILTI, net | 3.6 |
| | 0.4 |
| | — |
|
Permanent differences | 1.8 |
| | — |
| | (0.3 | ) |
Provision for income taxes | $ | 22.9 |
| | $ | 18.8 |
| | $ | 36.0 |
|
| | Year ended December 31, | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
US | | $ | 63,330 | | | $ | 117,385 | | | $ | 76,909 | |
International | | | 35,891 | | | | 18,331 | | | | 7,285 | |
Earnings before taxes on income | | | 99,221 | | | | 135,716 | | | | 84,194 | |
| | | | | | | | | | | | |
Federal tax at statutory rates | | $ | 34,738 | | | $ | 47,475 | | | $ | 29,468 | |
State taxes, net of federal benefit | | | 529 | | | | 852 | | | | 650 | |
Impact of foreign operations | | | (9,937 | ) | | | (1,640 | ) | | | (1,176 | ) |
Change in valuation allowance | | | 10,458 | | | | (950 | ) | | | 1,091 | |
Effect of foreign rates | | | (720 | ) | | | - | | | | - | |
Tax credits | | | (1,572 | ) | | | (2,088 | ) | | | (1,743 | ) |
Other differences | | | 1,823 | | | | 733 | | | | 126 | |
Permanent differences | | | 1,378 | | | | (82 | ) | | | 1,512 | |
Provision for income taxes | | $ | 36,697 | | | $ | 44,300 | | | $ | 29,928 | |
The effective annual tax rate for the years ended December 31, 2016, 20152019, 2018, and 20142017 was 37%30%, 33%23% and 36%30%, respectively.
The increase in the effective annual tax rate of 30% in 20162019 is higher than the statutory rate primarily related to tax on the sale, within the Company's consolidated group, of assets from Canadian subsidiaries to U.S. subsidiaries in preparation of the spin-off of Aptevo, and a valuation allowance charge recorded in its continuing operations related to Aptevo deferred tax assets priordue to the distribution. The Company determined that upon spin-off, the deferredimpact of state taxes, GILTI, contingent consideration and other non-deductible items. This is partially offset by stock option deduction benefits, tax assets of Aptevo would be unrealizable. The increasecredits, and favorable rates in theforeign jurisdictions.
The effective annual tax rate of 23% in 2018 is higher than the statutory rate primarily due to the impact of state taxes, GILTI, acquisition transaction costs and other non-deductible items, and the jurisdictional mix of earnings. This is partially offset by the impact of the SAB 118 benefit and the stock option deduction benefit.
The effective annual tax rate of 30% in 2017 differs from statutory rate primarily due to the jurisdictional mix of earnings. Due to the impact of the Tax Reform Act enacted on December 22, 2017, the Company recognized a $13.4 million tax benefit as a result of revaluing the aboveU.S. ending net deferred tax liabilities from 35% to the newly enacted U.S. corporate income tax rate of 21%. The tax benefit was partiallyfully offset by a releasetax expense of valuation allowances associated with Canadian Scientific Research and Experimental Development$13.6 million for the transition tax credits. Finally,on the Company had a shift in the jurisdictional mixdeemed mandatory repatriation of earnings in the current year which contributed to the change in the effective annual tax rate.
undistributed earnings.
The Company recognizes interest in interest expense and recognizes potential penalties related to unrecognized tax benefits in selling, general and administrative expense. Of the total unrecognized tax benefits recorded at December 31, 20162019 and 2015, $0.52018, $0.0 million and $0.3$0.4 million, respectively, is classified as a current liability and $1.3$10.4 million and $1.1$8.4 million, respectively, is classified as a non-current liability on the balance sheet.
The table below presents the gross unrecognized tax benefits activity for 2016, 20152019, 2018 and 2014:2017:
|
| | | |
(in millions) | |
Gross unrecognized tax benefits at December 31, 2016 | $ | 1.8 |
|
Increases for tax positions for prior years | — |
|
Decreases for tax positions for prior years | — |
|
Increases for tax positions for current year | 0.5 |
|
Settlements | (0.3 | ) |
Lapse of statute of limitations | — |
|
Gross unrecognized tax benefits at December 31, 2017 | $ | 2.0 |
|
Unrecognized tax benefits acquired in business combinations | 6.5 |
|
Increases for tax positions for prior years | — |
|
Decreases for tax positions for prior years | — |
|
Increases for tax positions for current year | 0.3 |
|
Settlements | — |
|
Lapse of statute of limitations | — |
|
Gross unrecognized tax benefits at December 31, 2018 | $ | 8.8 |
|
Increases for tax positions for prior years | 0.5 |
|
Unrecognized tax benefits acquired in business combinations | — |
|
Decreases for tax positions for prior years | — |
|
Increases for tax positions for current year | 1.5 |
|
Settlements | (0.4 | ) |
Lapse of statute of limitations | — |
|
Gross unrecognized tax benefits at December 31, 2019 | $ | 10.4 |
|
(in thousands) | | | |
Gross unrecognized tax benefits at December 31, 2013 | | $ | 1,121 | |
Increases for tax positions for prior years | | | 150 | |
Decreases for tax positions for prior years | | | - | |
Increases for tax positions for current year | | | 102 | |
Settlements | | | - | |
Lapse of statute of limitations | | | (125 | ) |
Gross unrecognized tax benefits at December 31, 2014 | | | 1,248 | |
Increases for tax positions for prior years | | | 150 | |
Decreases for tax positions for prior years | | | - | |
Increases for tax positions for current year | | | 59 | |
Settlements | | | - | |
Lapse of statute of limitations | | | - | |
Gross unrecognized tax benefits at December 31, 2015 | | | 1,457 | |
Increases for tax positions for prior years | | | 5 | |
Decreases for tax positions for prior years | | | - | |
Increases for tax positions for current year | | | 299 | |
Settlements | | | - | |
Lapse of statute of limitations | | | - | |
Gross unrecognized tax benefits at December 31, 2016 | | $ | 1,761 | |
The total gross unrecognized tax benefit of $10.4 million of which $7.0 million relates to the acquisition of PaxVax is entirely offset by a receivable pursuant to a Tax Indemnity Agreement that became effective as at the close of the acquisition.
When resolved, substantially all of these reserves would impact the effective tax rate.
The Company's federal and state income tax returns for the tax years 20112016 to 20152018 remain open to examination. The Company's tax returns in the United Kingdom remain open to examination for the tax years 20072012 to 2015,2018, and tax returns in Germany remain open indefinitely. The Company's tax returns for Canada remainsremain open to examination for the tax years 20092012 to 2015.
2018. The Company's Swiss tax returns remain open to federal examination for 2018. The Company's Irish tax returns remain open to examination for the tax years 2013 to 2018.
As of December 31, 2016,2019, the Company’s Canadian 2017 Scientific Research and Experimental Development Claim is under audit. As of December 31, 2019, the Company's 20112017 Canadian and 2012US federal income tax returns for the Adapt entities prior to acquisition are under audit.
12. Purchase commitment13. Defined benefit and 401(k) savings plan
During 2014The Company sponsors a defined benefit pension plan covering eligible employees in Switzerland (the "Swiss Plan"). Under the Swiss Plan, the Company enteredand certain of its employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. Employer contributions must be in an amount at least equal to the employee’s contribution. The Swiss Plan assets are comprised of an insurance contract that has a fair value consistent with Norwood Laboratories Inc. ("Norwood") to purchase $15.2 millionits contract value based on the practicability exception using level 3 inputs. The entire liability is listed as non-current, because plan assets are greater than the expected benefit payments over the next year. The Company recognizes pension expense as a component of raw materialsselling, general and administrative expense. The Company recognized pension expense related to the Company's RSDL product. ForSwiss Plan of $1.0 million reflected as a component of selling, general and administrative for the yearsyear ended December 31, 2016, 2015 and 2014, the Company purchased $4.5 million, $6.2 million and $1.5 million, respectively, of materials under this commitment.2019.
13.
The funded status of the Swiss Plan is as follows:
|
| | | | | | | |
(in millions) | December 31, 2019 | | December 31, 2018 |
Fair value of plan assets, beginning of year | $ | 18.2 |
| | $ | — |
|
Acquisitions | — |
| | 18.2 |
|
Employer contributions | 1.0 |
| | 0.2 |
|
Employee contributions | 0.7 |
| | 0.1 |
|
Net benefits received (paid) | 1.7 |
| | 0.3 |
|
Actual return on plan assets | 1.7 |
| | — |
|
Settlements | (3.0 | ) | | (0.6 | ) |
Currency impact | 0.3 |
| | — |
|
Fair value of plan assets, end of year | $ | 20.6 |
| | $ | 18.2 |
|
Projected benefit obligation, beginning of year | $ | 28.6 |
| | $ | — |
|
Acquisitions | — |
| | 28.3 |
|
Service cost | 1.3 |
| | 0.3 |
|
Interest Cost | 0.2 |
| | 0.1 |
|
Employee contributions | 0.7 |
| | 0.1 |
|
Actuarial loss | 7.0 |
| | 0.3 |
|
Net benefits received (paid) | 1.7 |
| | (0.1 | ) |
Plan amendment | (1.7 | ) | | 0.1 |
|
Settlements | (3.0 | ) | | (0.6 | ) |
Currency impact | 0.4 |
| | 0.1 |
|
Projected benefit obligation, end of year | $ | 35.3 |
| | $ | 28.6 |
|
Funded status, end of year | $ | (14.7 | ) | | $ | (10.4 | ) |
Accumulated benefit obligation, end of year | $ | 31.0 |
| | $ | 25.6 |
|
Since assets exceed the present value of expected benefit payments for the next twelve months, all of the liability is classified as non-current.
Components of net periodic pension cost incurred during the year are as follows:
|
| | | | | | | |
(in millions) | December 31, 2019 | | December 31, 2018 |
Service cost | $ | 1.3 |
| | $ | 0.3 |
|
Interest cost | 0.2 |
| | 0.1 |
|
Expected return on plan assets | (0.5 | ) | | (0.1 | ) |
Net periodic benefit cost | $ | 1.0 |
| | $ | 0.3 |
|
The weighted average assumptions used to calculate the projected benefit obligations are as follows:
|
| | | | | |
| December 31, 2019 | | December 31, 2018 |
Discount rate | 0.2 | % | | 0.9 | % |
Expected rate of return | 3.0 | % | | 3.0 | % |
Rate of future compensation increases | 1.5 | % | | 1.5 | % |
The overall expected long-term rate of return on assets assumption considers historical returns, as well as expected future returns based on the fact that investment returns are insured, and the legal minimum interest crediting rate as applicable. Total contributions expected to be made into the plan for the year-ended December 31, 2020 is $1.1 million.
The following table presents losses recognized in accumulated other comprehensive loss before income tax related to the Company’s defined benefit pension plans:
|
| | | | | | | |
(in millions) | Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
Net actuarial loss | $ | 5.4 |
| | $ | 0.1 |
|
Prior service cost | (1.7 | ) | | 0.1 |
|
Total recognized in accumulated other comprehensive loss | $ | 3.7 |
| | $ | 0.2 |
|
Actuarial losses in accumulated other comprehensive loss related to the Company’s defined benefit pension plans expected to be recognized as components of net periodic benefit cost over the year ending December 31, 2020 are de minimis.
Future benefits expected to be paid as of December 31, 2019 are as follows:
|
| | | |
(In millions) | December 31, 2019 |
2020 | $ | 1.0 |
|
2021 | 1.0 |
|
2022 | 1.5 |
|
2023 | 1.0 |
|
2024 | 1.0 |
|
Thereafter | 6.6 |
|
Total | $ | 12.1 |
|
401(k) savings plan
The Company has established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. The 401(k) Plan covers substantially all U.S. employees. Under the 401(k) Plan, employees may make elective salary deferrals. The Company currently provides for matching of qualified deferrals up to 50% of the first 6% of the employee's salary. During the years ended December 31, 2016, 2015,2019, 2018 and 2014,2017, the Company made matching contributions of approximately $2.5$5.1 million, $2.2$3.1 million and $2.1$2.7 million, respectively.
14.Related party transactions Leases
The Company has operating leases for corporate offices, research and development facilities and manufacturing facilities. We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use ("ROU") assets and liabilities.
In November 2015,
ROU assets represent the Company entered into a consulting arrangement with a memberCompany's right to use an underlying asset for the lease term and lease liabilities
represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's Boardleases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of Directors, amended in July 2016,lease payments. The Company uses an implicit rate when readily determinable. At the beginning of a lease, the operating lease ROU asset also includes any concentrated lease payments expected to provide assistance in connectionbe paid and excludes lease incentives. The Company's lease ROU asset may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's leases have remaining lease terms of 1 year to 14 years, some of which include options to extend the planned spin-offleases for up to 5 years, and some of Aptevo. The total compensation underwhich include options to terminate the agreement was approximately $0.2 million perleases within 1 year. The consulting agreement terminated on August 1, 2016.
The Company entered into an agreement in February 2009 with an entity controlled by family memberscomponents of lease expense were as follows:
|
| | | |
| December 31, 2019 |
Operating lease cost: | |
Amortization of right-of-use assets | $ | 2.7 |
|
Interest on lease liabilities | 0.6 |
|
Total operating lease cost | $ | 3.3 |
|
For the Company's Executive Chairmanyears ended December 31, 2018 and 2017 total lease expense was $3.3 million and $1.6 million, respectively.
Supplemental balance sheet information related to market and sell BioThrax. The agreementleases was effectiveas follows as of November 2008 and requires payment based on a percentage of net sales of biodefense products of 17.5% in Saudi Arabia and 15% in Qatar and United Arab Emirates, and reimbursement of certain expenses. No expenses were incurred under this agreement during 2016, 2015 and 2014.December 31, 2019:
|
| | | | |
(In millions, except lease term and discount rate) | Balance Sheet Location | December 31, 2019 |
Operating lease right-of-use assets | Other assets | $ | 24.7 |
|
| | |
Operating lease liabilities, current portion | Other current liabilities | 3.6 |
|
Operating lease liabilities | Other liabilities | 22.1 |
|
Total operating lease liabilities | | 25.7 |
|
| | |
Operating leases: | | |
Weighted average remaining lease term (years) | | 8.0 |
|
Weighted average discount rate | | 4.2 | % |
15.Earnings per share
The following table presents the calculation of basic and diluted net income per share:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions, except per share data) | 2019 | | 2018 | | 2017 |
Numerator: | | | | | |
Net earnings | $ | 54.5 |
| | $ | 62.7 |
| | $ | 82.6 |
|
Interest expense, net of tax | — |
| | — |
| | 2.6 |
|
Amortization of debt issuance costs, net of tax | — |
| | — |
| | 0.7 |
|
Net income, adjusted | $ | 54.5 |
| | $ | 62.7 |
| | $ | 85.9 |
|
Denominator: | | | | | |
Weighted-average number of shares-basic | 51.5 |
| | 50.1 |
| | 41.8 |
|
Dilutive securities-equity awards | 0.9 |
| | 1.3 |
| | 1.1 |
|
Dilutive securities-convertible debt | — |
| | — |
| | 7.4 |
|
Weighted-average number of shares-diluted | 52.4 |
| | 51.4 |
| | 50.3 |
|
Net income per share-basic | $ | 1.06 |
| | $ | 1.25 |
| | $ | 1.98 |
|
Net income per share-diluted | $ | 1.04 |
| | $ | 1.22 |
| | $ | 1.71 |
|
| | Years ended December 31, | |
(in thousands, except share and per share data) | | 2016 | | | 2015 | | | 2014 | |
Numerator: | | | | | | | | | |
Net income from continuing operations | | $ | 62,524 | | | $ | 91,416 | | | $ | 54,266 | |
Interest expense, net of tax | | | 3,255 | | | | 3,019 | | | | 2,879 | |
Amortization of debt issuance costs, net of tax | | | 781 | | | | 868 | | | | 735 | |
Net income, adjusted from continuing operations | | | 66,560 | | | | 95,303 | | | | 57,880 | |
Net loss from discontinued operations | | | (10,748 | ) | | | (28,546 | ) | | | (17,525 | ) |
Net income, adjusted | | $ | 55,812 | | | $ | 66,757 | | | $ | 40,355 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted-average number of shares-basic | | | 40,184,159 | | | | 38,595,435 | | | | 37,344,891 | |
Dilutive securities-equity awards | | | 1,054,453 | | | | 939,882 | | | | 737,391 | |
Dilutive securities-convertible debt | | | 8,096,500 | | | | 7,720,525 | | | | 7,720,525 | |
Weighted-average number of shares-diluted | | | 49,335,112 | | | | 47,255,842 | | | | 45,802,807 | |
| | | | | | | | | | | | |
Net income per share-basic from continuing operations | | $ | 1.56 | | | $ | 2.37 | | | $ | 1.45 | |
Net loss per share-basic from discontinued operations | | | (0.27 | ) | | | (0.74 | ) | | | (0.47 | ) |
Net income per share-basic | | $ | 1.29 | | | $ | 1.63 | | | $ | 0.98 | |
| | | | | | | | | | | | |
Net income per share-diluted from continuing operations | | $ | 1.35 | | | $ | 2.02 | | | $ | 1.26 | |
Net loss per share-diluted from discontinued operations | | | (0.22 | ) | | | (0.61 | ) | | | (0.38 | ) |
Net income per share-diluted | | $ | 1.13 | | | $ | 1.41 | | | $ | 0.88 | |
For the year ending December 31, 2016 and 2015, substantially all of the outstanding stock options to purchase shares of common stock were included in the calculation of diluted earnings per share. For the years ending December 31, 2014, outstanding stock options to purchase2019 approximately 1.40.9 million shares of common stock respectively, are not considered in the diluted earnings per share calculation because the exercise price of these options is greater than the average per share closing price during the year and their effect would be anti-dilutive.
16. Restructuring
In August 2016, For the Company adopted a plan to restructureyears ending December 31, 2018, and reprioritize the operations of one of our facilities at the Emergent BioDefense Operations Lansing LLC ("EBOL") site due to the Company's large-scale manufacturing facility at EBOL commencing manufacturing operations. Severance and other related costs and asset-related charges are reflected within the Company's consolidated statement of income as a component of selling, general and administrative expense.
The Company has completed this restructuring. The costs2017, substantially all of the restructuring asoutstanding stock options to purchase shares of common stock were included in the calculation of diluted earnings per share.
16. Purchase commitments
As of December 31, 2016 are detailed below:
| | Incurred in | | | Inception to Date | | | Total Expected | |
(in thousands) | | 2016 | | | Costs Incurred | | | to be Incurred | |
Termination benefits | | $ | 5,246 | | | $ | 5,246 | | | $ | 5,287 | |
Abandonment of equipment | | | 3,749 | | | | 3,749 | | | | 3,749 | |
Other costs | | | 691 | | | | 691 | | | | 691 | |
Total | | $ | 9,686 | | | $ | 9,686 | | | $ | 9,727 | |
During the years ended December 31, 2016,2019 the Company abandoned certain equipmenthas approximately $59.7 million of purchase commitments associated with raw materials and associated assets at its EBOL facility related to thecontract development and manufacturing process at Building 12 ("manufacturing process") asset group. The Company recorded a charge for the manufacturing process asset group of $3.7 million. The additional expense is classifiedservices that will be purchased in the Company's statements of operations as selling, general and administrative expense.next three years.
The following is a summary of the activity for the liabilities related to the EBOL restructuring:
| | Termination | |
(in thousands) | | Benefits | |
Balance at December 31, 2015 | | $ | - | |
Expenses incurred | | | 5,246 | |
Amount paid | | | (889 | ) |
Other adjustments | | | - | |
Balance at December 31, 2016 | | $ | 4,357 | |
In addition to the above restructuring costs, the Company also recorded a charge of $2.0 million during the year ended December 31, 2016 related to retention payments for certain employees at the EBOL site.
17. Segment information
On August 6, 2015, the Company announced its plan to separate into two independent publicly-traded companies. In anticipation of the spin-off, the Company realigned certain components of its biosciences business to the new Aptevo segment to be consistent with how the CODM allocates resources and makes decisions about the operations of the Company. Effective January 1, 2016, the Company changed its segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation. On August 1, 2016, the Company completed the spin-off of Aptevo. The results of operations and financial position of Aptevo are reflected as discontinued operations for all periods presented through the date of the spin-off.
For financial reporting purposes, in the periods following the spin-off of Aptevo, the Company reports financial information for one business segment.
For the years ended December 31, 2016, 20152019, 2018, and 2014,2017, the Company'sCompany purchased $51.3 million, $12.1 million and $3.0 million, respectively, of materials under this commitment.
17. Segment information
For financial reporting purposes, the Company reports financial information for 1 reportable segment. This reportable segment engages in business activities based on financial information that is provided to and resources which are allocated by the Chief Operating Decision Maker. The accounting policies of the reportable segment is the same as those described in the summary of significant accounting policies.
For the years ended December 31, 2019, 2018, and 2017, the Company’s revenues fromwithin the United States comprised 96%90%, 98%91% and 96%89%, respectively, of total revenues. For the years ended December 31, 2016, 20152019, 2018, and 2014,2017, product revenuessales from BioThraxACAM 2000 and Anthrax Vaccines to the USG comprised approximately 80%43%, 89%65% and 87%68%, respectively, of total product revenues. sales.
The Company's product sales from Anthrax Vaccines, ACAM2000, NARCAN Nasal Spray and Other comprised approximately:
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
% of product sales: | |
| | | | |
Anthrax Vaccines | 19 | % | | 46 | % | | 68 | % |
ACAM2000 | 27 | % | | 19 | % | | — | % |
NARCAN Nasal Spray | 31 | % | | 7 | % | | — | % |
Other | 23 | % | | 28 | % | | 32 | % |
As of December 31, 2016, 20152019, 2018 and 2014,2017, aside from Anthrax Vaccines and ACAM2000, there were no other product sales to an individual customer or for an individual product in excess of 10% of total product sales revenues.
For years ended December 31, 20162019 and 2015,2018, the Company had long-lived assets outside of the United States of approximately $28.4$90.6 million and $25.8$82.9 million, respectively, which are primarily located within Canada.Canada and Switzerland.
18.Quarterly financial data (unaudited)
Quarterly financial information for the years ended December 31, 20162019 and 20152018 is presented in the following tables:
|
| | | | | | | | | | | | | | | |
| Quarter Ended |
(in millions, except per share data) | March 31, | | June 30, | | September 30, | | December 31, |
2019: | |
| | |
| | |
| | |
|
Revenue | $ | 190.6 |
| | $ | 243.2 |
| | $ | 311.8 |
| | $ | 360.4 |
|
Income (loss) from operations | (27.4 | ) | | (7.0 | ) | | 70.7 |
| | 77.8 |
|
Net income (loss) | (26.1 | ) | | (9.5 | ) | | 43.2 |
| | 46.9 |
|
| | | | | | | |
Net income (loss) per share-basic | $ | (0.51 | ) | | $ | (0.18 | ) | | $ | 0.84 |
| | $ | 0.91 |
|
Net income (loss) per share-diluted | $ | (0.51 | ) | | $ | (0.18 | ) | | $ | 0.83 |
| | $ | 0.90 |
|
| | | | | | | |
2018: | | | | | | | |
Revenue | $ | 117.8 |
| | $ | 220.2 |
| | $ | 173.7 |
| | $ | 270.7 |
|
Income (loss) from operations | (9.5 | ) | | 66.8 |
| | 21.3 |
| | 11.2 |
|
Net income (loss) | (4.9 | ) | | 50.1 |
| | 20.9 |
| | (3.4 | ) |
| | | | | | | |
Net income (loss) per share-basic | $ | (0.10 | ) | | $ | 1.00 |
| | $ | 0.42 |
| | $ | (0.07 | ) |
Net income (loss) per share-diluted | $ | (0.10 | ) | | $ | 0.98 |
| | $ | 0.41 |
| | $ | (0.07 | ) |
| | Quarter Ended | |
(in thousands, except per share data) | | March 31, | | | June 30, | | | September 30, | | | December 31, | |
2016: | | | | | | | | | | | | |
Revenue | | $ | 102,964 | | | $ | 91,241 | | | $ | 142,914 | | | $ | 151,663 | |
Income (loss) from operations | | | 21,157 | | | | (2,042 | ) | | | 35,478 | | | | 50,929 | |
Net income (loss) from continuing operations | | | 11,889 | | | | (2,042 | ) | | | 20,388 | | | | 32,289 | |
Net income (loss) from discontinued operations (1) | | | (7,898 | ) | | | (8,905 | ) | | | 952 | | | | 5,103 | |
Net income (loss) | | | 3,991 | | | | (10,947 | ) | | | 21,340 | | | | 37,392 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per share from continuing operations-basic | | $ | 0.30 | | | $ | (0.05 | ) | | $ | 0.50 | | | $ | 0.80 | |
Net income (loss) per share from discontinued operations-basic | | | (0.20 | ) | | | (0.22 | ) | | | 0.02 | | | | 0.13 | |
Net income (loss) per share-basic | | $ | 0.10 | | | $ | (0.27 | ) | | $ | 0.52 | | | $ | 0.93 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per share from continuing operations-diluted | | $ | 0.26 | | | $ | (0.05 | ) | | $ | 0.43 | | | $ | 0.67 | |
Net income (loss) per share from discontinued operations-diluted | | | (0.16 | ) | | | (0.22 | ) | | | 0.02 | | | | 0.10 | |
Net income (loss) per share-diluted | | $ | 0.10 | | | $ | (0.27 | ) | | $ | 0.45 | | | $ | 0.77 | |
| | | | | | | | | | | | | | | | |
2015 | | | | | | | | | | | | | | | | |
Revenue | | $ | 52,147 | | | $ | 119,022 | | | $ | 158,378 | | | $ | 159,784 | |
Income (loss) from operations | | | (21,895 | ) | | | 35,104 | | | | 63,159 | | | | 65,146 | |
Net income (loss) from continuing operations | | | (15,728 | ) | | | 22,565 | | | | 42,088 | | | | 42,491 | |
Net loss from discontinued operations | | | (5,792 | ) | | | (8,465 | ) | | | (5,145 | ) | | | (9,144 | ) |
Net income (loss) | | | (21,520 | ) | | | 14,100 | | | | 36,943 | | | | 33,347 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per share from continuing operations-basic | | $ | (0.42 | ) | | $ | 0.59 | | | $ | 1.08 | | | $ | 1.08 | |
Net loss per share from discontinued operations-basic | | | (0.15 | ) | | | (0.22 | ) | | | (0.14 | ) | | | (0.23 | ) |
Net income (loss) per share-basic | | $ | (0.57 | ) | | $ | 0.37 | | | $ | 0.94 | | | $ | 0.85 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per share from continuing operations-diluted | | $ | (0.42 | ) | | $ | 0.50 | | | $ | 0.90 | | | $ | 0.90 | |
Net loss per share from discontinued operations-diluted | | | (0.15 | ) | | | (0.18 | ) | | | (0.11 | ) | | | (0.19 | ) |
Net income (loss) per share-diluted | | $ | (0.57 | ) | | $ | 0.32 | | | $ | 0.79 | | | $ | 0.71 | |
| | | | | | | | | | | | | | | | |
(1) Reflects a change in estimate attributed to higher pretax income within continuing operations. According to the ordering rules of intraperiod tax allocation, the residual amount of change after determining the effective rate for continuing operations is allocated to discontinued operations.
19. Litigation
ANDA Litigation
On July 19, 2016, Plaintiff William Sponn,September 14, 2018, Adapt Pharma Inc., Adapt Pharma Operations Limited and Adapt Pharma Ltd. (collectively, "Adapt Pharma"), and Opiant Pharmaceuticals, Inc. ("Opiant"), received notice from Perrigo UK FINCO Limited Partnership ("Perrigo"), that Perrigo had filed an Abbreviated New Drug Application ("ANDA"), with the United States Food and Drug Administration seeking regulatory approval to market a generic version of NARCAN®(naloxone hydrochloride) Nasal Spray 4mg/spray before the expiration of U.S. Patent Nos. 9,211,253, (the "‘253 Patent"), 9,468,747 (the "‘747 Patent"), 9,561,177, (the "‘177 Patent"), 9,629,965, (the "‘965 Patent") and 9,775,838 (the "‘838 Patent"). On or Sponn,about October 25, 2018, Perrigo sent a subsequent notice letter relating to U.S. Patent No. 10,085,937 (the "937 Patent"). Perrigo’s notice letters assert that its generic product will not infringe any valid and enforceable claim of these patents.
On October 25, 2018, Emergent BioSolutions’ Adapt Pharma subsidiaries and Opiant, (collectively, the "Plaintiffs"), filed a putative class action complaint for patent infringement of the ‘253, ‘747, ‘177, ‘965, and the ‘838 Patents against Perrigo in the United States District Court for the District of MarylandNew Jersey arising from Perrigo’s ANDA filing with the FDA. Plaintiffs filed a second complaint against Perrigo on behalf of purchasersDecember 7, 2018, for the infringement of the Company's common stock between‘937 Patent. On February 12, 2020, Adapt Pharma and Perrigo entered into a settlement agreement to resolve the ongoing litigation. Under the terms of the settlement, Perrigo has received a non-exclusive license under Adapt’s patents to make, have made and market its generic naloxone hydrochloride nasal spray under its own ANDA. Perrigo’s license will be effective as of January 11, 20165, 2033 or earlier under certain circumstances including circumstances related to the outcome of the current litigation against Teva (as defined below) or litigation against future ANDA filers. The Perrigo settlement agreement is subject to review by the U.S. Department of Justice and June 21, 2016, inclusive,the Federal Trade Commission, and entry of an order dismissing the litigation by the U.S. District Court for the District of New Jersey.
On or about February 27, 2018, Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received notice from Teva Pharmaceuticals Industries Ltd. and Teva Pharmaceuticals USA, Inc. (collectively "Teva"), that Teva had filed an ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 2 mg/spray before the expiration of U.S. Patent No. 9,480,644, (the "‘644 Patent"), and U.S. Patent No. 9,707,226, (the "'226 Patent"). Teva's notice letter asserts that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the '644 Patent or the Class Period,'226 Patent, or that the '644 Patent and '226 Patent are invalid or unenforceable. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant filed a complaint for patent infringement against Teva in the United States District Court for the District of New Jersey.
On or about September 13, 2016, Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received notice from Teva that Teva had filed an ANDA with the FDA seeking regulatory approval to pursue remedies undermarket a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 4 mg/spray before the Securities Exchange Actexpiration of 1934 againstU.S. Patent No. 9,211,253 (the "'253 Patent"). Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received additional notices from Teva relating to the Company'747, the '177, the '965, the '838, and certainthe ‘937 Patents. Teva's notice letters assert that the commercial manufacture, use or sale of its senior officers and directors, collectively,generic drug product described in its ANDA will not infringe the Defendants. The complaint alleges, among other things,'253, the '747, the '177, the '965, the '838, or the ‘937 Patent, or that the Company made materially false'253, the '747, the '177, the '965, the '838, and misleading statements about the government's demand‘937 Patents are invalid or unenforceable. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant filed a complaint for BioThrax and expectations thatpatent infringement against Teva in the Company's five-year exclusive procurement contractUnited States District Court for the District of New Jersey with HHS would be renewed and omitted certain material facts. Sponn is seeking unspecified damages, including legal costs. On October 25, 2016 the Court added City of Cape Coral Municipal Firefighters' Retirement Plan and City of Sunrise Police Officers' Retirement Plan as plaintiffs and appointed them Lead Plaintiffs and Robins Geller Rudman & Dowd LLP as Lead Counsel. On December 27, 2016 the plaintiffs filed an amended complaint that cites the same class period, names the same defendants and makes similar allegationsrespect to the original complaint. The Company'253 Patent. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant also filed a Motion to Dismiss on February 27, 2017. The Defendants believe that the allegationscomplaints for patent infringement against Teva in the complaint are without meritUnited States District Court for the District of New Jersey with respect to the '747, the '177, the '965, and intend to defend themselves vigorously against those claims.the '838 Patents. All five proceedings have been consolidated. As of the date of this filing, Adapt Pharma Inc., Adapt Pharma Operations Limited, and Opiant, have not filed a complaint related to the range‘937 Patent. Closing arguments are scheduled for February 26, 2020.
In the complaints described in the paragraphs above, the Plaintiffs seek, among other relief, orders that the effective date of potential loss cannotFDA approvals of the Teva ANDA products and the Perrigo ANDA product be determineda date not earlier than the expiration of the patents listed for each product, equitable relief enjoining Teva and Perrigo from making, using, offering to sell, selling, or estimated.importing the products that are the subject of Teva and Perrigo’s respective ANDAs, until after the expiration of the patents listed for each product, and monetary relief or other relief as deemed just and proper by the court.
Nalox-1 Pharmaceuticals, a non-practicing entity, filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (the "PTAB") requesting inter parties review ("IPR") of five of the six patents listed in the Orange Book related to NARCAN® Nasal Spray 4mg/spray. In a series of decisions, the PTAB agreed to institute a review
of the '253 Patent, the '747 Patent and the '965 Patent but denied review of the '177 Patent and the '838 Patent. Nalox-1 did not request review of the '937 Patent.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.9 A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016.2019. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2016,2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework(2013 (2013 Framework).Based on this assessment, our management concluded that, as of December 31, 2016,2019, our internal control over financial reporting was effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that has audited our consolidated financial statements included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2016,2019, a copy of which is included in this annual report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During 2016, we completed the implementation of an enterprise resource planning ("ERP") system. In connection with the implementation, we updated the processes that constitute our internal control over financial reporting, as necessary, to accommodate related changes to our business processes and accounting procedures.
Although the processes that constitute our internal control over financial reportingThere have been materially affected by the implementation of this system and will require testing for effectiveness as the implementation progresses, we do not believe that the implementation has had or will have a material adverse effect on our internal control over financial reporting.
Except as otherwise described above, there have been no other changes in our internal control over financial reporting (as defined in RulesRule 13a-15(f) and 15d-15(f) under) identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act)Act that occurred during the year ended December 31, 2016,period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. These changes pertained to the integration of the acquired companies in 2018, Adapt and PaxVax, onto the Company's information technology platforms during the fourth quarter of 2019.
Report of Ernst & Young LLP,
Independent Registered Public Accounting Firm
Regarding Internal Control Over Financial Reporting
TheTo the Stockholders and the Board of Directors and Stockholders of Emergent BioSolutions Inc. and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Emergent BioSolutions Inc. and subsidiaries'subsidiaries’ internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control—Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Emergent BioSolutions Inc. and subsidiaries'subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15 and our report dated February 24, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management'sManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company'sCompany’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Emergent BioSolutions Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Emergent BioSolutions Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016 of Emergent BioSolutions Inc. and subsidiaries and our report dated February 27, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Baltimore, Maryland
McLean, VirginiaFebruary 24, 2020
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Ethics
We have adopted a code of business conduct and ethics that applies to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), as well as our other employees. A copy of our code of business conduct and ethics is available on our website at www.emergentbiosolutions.com. We intend to post on our website all disclosures that are required by applicable law, the rules of the Securities and Exchange Commission or the New York Stock Exchange concerning any amendment to, or waiver of, our code of business conduct and ethics.
The remaining information required by Item 10 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20172020 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20172020 annual meeting of stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20172020 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference from our Definitive Proxy Statement relating to our 20172020 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference from our Definitive Proxy
Statement relating to our 20172020 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
The following financial statements and supplementary data are filed as a part of this annual report on Form 10-K in Part I, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 20162019 and 20152018
Consolidated Statements of Operations for the years ended December 31, 2016, 20152019, 2018 and 20142017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 20152019, 2018 and 20142017
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 20152019, 2018 and 20142017
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2016, 20152019, 2018 and 20142017
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2016, 20152019, 2018 and 20142017 has been filed as part of this annual report on Form 10-K. All other financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits hereto and such listing is incorporated herein by reference.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Beginning Balance | | Additions from Acquisition | | Charged to costs and expenses | | Deductions | | Ending Balance |
Year Ended December 31, 2019 | | | | | | | | | | |
Inventory allowance | | $ | 14.0 |
| | $ | — |
| | $ | 23.0 |
| | $ | (19.1 | ) | | $ | 17.9 |
|
Prepaid expenses and other current assets allowance | | 4.3 |
| | — |
| | — |
| | (0.3 | ) | | 4.0 |
|
| | | | | | | | | | |
Year Ended December 31, 2018 | | |
| | | | |
| | |
| | |
|
Inventory allowance | | $ | 3.8 |
| | $ | 4.4 |
| | $ | 14.6 |
| | $ | (8.8 | ) | | $ | 14.0 |
|
Prepaid expenses and other current assets allowance | | 5.3 |
| | — |
| | — |
| | (1.0 | ) | | 4.3 |
|
| | | | | | | | | | |
Year Ended December 31, 2017 | | |
| | | | |
| | |
| | |
|
Inventory allowance | | $ | 3.5 |
| | $ | — |
| | $ | 8.8 |
| | $ | (8.5 | ) | | $ | 3.8 |
|
Prepaid expenses and other current assets allowance | | 4.9 |
| | — |
| | 0.4 |
| | — |
| | 5.3 |
|
(in thousands) | | Beginning Balance | | | Charged to costs and expenses | | | Deductions | | | Ending Balance | |
Year ended December 31, 2016 | | | | | | | | | | | | |
Inventory allowance | | $ | 1,637 | | | $ | 9,950 | | | $ | (8,052 | ) | | $ | 3,535 | |
Prepaid expenses and other current assets allowance | | | 1,981 | | | | 2,887 | | | | - | | | | 4,868 | |
| | | | | | | | | | | | | | | | |
Year ended December 31, 2015 | | | | | | | | | | | | | | | | |
Inventory allowance | | $ | 1,314 | | | $ | 6,258 | | | $ | (5,935 | ) | | $ | 1,637 | |
Prepaid expenses and other current assets allowance | | | 1,885 | | | | 96 | | | | - | | | | 1,981 | |
| | | | | | | | | | | | | | | | |
Year ended December 31, 2014 | | | | | | | | | | | | | | | | |
Inventory allowance | | $ | 963 | | | $ | 3,185 | | | $ | (2,834 | ) | | $ | 1,314 | |
Prepaid expenses and other current assets allowance | | | 1,446 | | | | 439 | | | | - | | | | 1,885 | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EMERGENT BIOSOLUTIONS INC. |
| |
| By: /s/ Daniel J. Abdun-Nabi
|
| Daniel J. Abdun-Nabi |
| President and Chief Executive Officer |
| Date: February 27, 2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| | | | |
| | | | |
/s/Daniel J. Abdun-Nabi
Daniel J. Abdun-Nabi
| | President, Chief Executive Officer and Director
(Principal Executive Officer)
| | February 27, 2017 |
| | | | |
/s/Robert G. Kramer
Robert G. Kramer
| | Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
| | February 27, 2017 |
| | | | |
/s/Fuad El-Hibri
Fuad El-Hibri
| | Executive Chairman of the Board of Directors | | February 27, 2017 |
| | | | |
/s/Zsolt Harsanyi
Zsolt Harsanyi, Ph.D.
| | Director | | February 27, 2017 |
| | | | |
/s/Dr. Kathryn Zoon
| | | | |
Dr. Kathryn Zoon | | Director | | February 27, 2017 |
| | | | |
/s/Ronald B. Richard
Ronald B. Richard
| | Director | | February 27, 2017 |
| | | | |
/s/Louis W. Sullivan, M.D.
Louis W. Sullivan, M.D.
| | Director | | February 27, 2017 |
| | | | |
/s/Dr. Sue Bailey
Dr. Sue Bailey
| | Director | | February 27, 2017 |
| | | | |
/s/George Joulwan
George Joulwan
| | Director | | February 27, 2017 |
| | | | |
/s/Jerome Hauer
Jerome Hauer, Ph.D.
| | Director | | February 27, 2017 |
All documents referenced below were filed pursuant to the Securities Exchange Act of 1934 by the Company, (File No. 001-33137), unless otherwise indicated.
Exhibit | | |
| | |
Exhibit Number | | Description |
2.1 | † | ContributionMerger Agreement, dated July 29, 2016,August 8, 2018, by and among Emergent BioSolutions Inc., Aptevo Therapeutics Inc.PaxVax Holding Company Ltd., Aptevo ResearchPanama Merger Sub Ltd., and DevelopmentPaxVax SH Representative LLC and Aptevo BioTherapeutics LLC (incorporated by reference to Exhibit 2.12 to the Company's Current Report on Form 8-K, filed on August 4, 2016)October 5, 2018). |
2.2 | † | Separation and DistributionShare Purchase Agreement, dated July 29, 2016,August 28, 2018, by and betweenamong Emergent BioSolutions Inc., the Sellers identified therein, Seamus Mulligan and Aptevo Therapeutics Inc.Adapt Pharma Limited (incorporated by reference to Exhibit 2.22 to the Company's Current Report on Form 8-K, filed on August 4, 2016)October 15, 2018). |
3.1 | | |
3.2 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
9.1 | | |
10.1 | | Amended and Restated Credit Agreement, dated as of December 11, 2013,October 15, 2018, by and among Emergent BioSolutions Inc., the Company, as borrower, certain of its subsidiarieslenders party thereto from time to time, and Wells Fargo Bank, National Association, as guarantors, Bank of America, N.A., as administrative agent, and certain financial institutions party thereto as lendersthe Administrative Agent (incorporated by reference to Exhibit 10.110 to the Company's Current Report on Form 8-K, filed on December 12, 2013)October 15, 2018). |
10.2 | | First Amendment to Credit Agreement, dated as of January 17, 2014, among the Company, as borrower, certain of its subsidiaries party thereto, as guarantors, Bank of America, N.A., as administrative agent, and certain financial institutions party thereto as lenders (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K filed on March 10, 2014). |
10.3 | | Second Amendment to Credit Agreement, dated as of March 21, 2014, among the Company, as borrower, certain of its subsidiaries party thereto, as guarantors, Bank of America, N.A., as administrative agent, and certain financial institutions party thereto as lenders (incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q filed on May 12, 2014). |
10.4 | | Third Amendment to Credit Agreement, dated as of September 3, 2015, among the Company, as borrower, certain of its subsidiaries party thereto, as guarantors, Bank of America, N.A., as administrative agent, and certain financial institutions party thereto as lenders (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 6, 2015). |
10.5 | # | Fourth Amendment to Credit Agreement, dated as of August 5, 2016, among the Company, as borrower, certain of its subsidiaries party thereto, as guarantors, Bank of America, N.A., as administrative agent, and certain financial institutions party thereto as lenders. |
10.6 | # | Fifth Amendment to Credit Agreement, dated as of November 30, 2016, among the Company, as borrower, certain of its subsidiaries party thereto, as guarantors, Bank of America, N.A., as administrative agent, and certain financial institutions party thereto as lenders. |
10.7 | * | Emergent BioSolutions Inc. Employee Stock Option Plan, as amended and restated on January 26, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 filed on August 14, 2006) (Registration No. 333-136622). |
10.8 | * | |
|
10.9 | | |
10.3 | * | |
10.1010.4 | * | |
10.1110.5 | * | |
10.1210.6 | * | |
10.1310.7 | * | |
10.8 | * | |
10.1410.9 | * | |
10.1510.10 | *#* | |
10.11 | #* | |
10.1610.12 | * | |
10.17 | * | Form of2017-2019 Performance-Based Stock Unit Award Agreement (incorporated by reference to Exhibit 10 to the Company'sCompany’s Current Report on Form 8-K filed on February 21, 2017). |
10.1810.13 | * | |
10.14 | * | |
10.15 | #* | |
10.16 | * | |
10.1910.17 | * | |
10.2010.18 | * | |
10.2110.19 | * | |
10.2210.20 | * | |
10.2310.21 | | Amended and Restated Marketing Agreement, dated as of November 5, 2008, between Emergent Biodefense Operations Lansing LLC (formerly known as Emergent Biodefense Operations Lansing Inc.) and Intergen N.V. (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K filed on March 6, 2009). |
10.24 | #†† | |
10.22 | † | |
10.23 | † | |
10.24 | | |
10.25 | † | |
10.26 | † | |
|
| | |
10.27 | † | |
10.28 | † | |
10.29 | | |
10.30 | † | |
10.31 | † | |
10.32 | † | |
10.33 | † | |
10.34 | † | |
10.35 | † | |
10.36 | † | |
10.37 | | |
10.38 | ††† | |
10.39 | #††† | |
10.40 | #††† | |
10.41 | #††† | |
10.42 | † | |
10.43 | † | |
1210.44 | #† | Ratio |
10.45 | ††† | |
10.46 | #†† | |
10.47 | #†† | |
|
| | |
10.48 | #††† | |
21 | # | |
23 | # | |
31.1 | # | |
31.2 | # | |
32.1 | # | |
32.2 | # | |
101.INS101 | # | XBRL Instance DocumentThe following financial information related to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statement of Changes in Stockholders' Equity; and (vi) the related Notes to Consolidated Financial Statements.
|
101.SCH104 | # | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Calculation Linksbase Document |
101.DEF | | XBRL Taxonomy Definition Linksbase Document |
101.LAB | | XBRL Taxonomy Label Linksbase Document |
101.PRE | | XBRL Taxonomy Presentation Linksbase DocumentCover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
| # | Filed herewith |
| † | Confidential treatment granted by the Securities and Exchange Commission as to certain portions. Confidential materials omitted and filed separately with the Securities and Exchange Commission. |
| †† | Confidential treatment requested by the Securities and Exchange Commission as to certain portions. Confidential materials omitted and filed separately with the Securities and Exchange Commission. |
| ††† | Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed. |
| * | Management contract or compensatory plan or arrangement filed herewith in response to Item 15(a) of Form 10-K. |
Attached as Exhibit 101 to this Annual Report on Form 10-K are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 20162019 and 2015,2018, (ii) Consolidated Statements of Operations for the Years Ended December 31, 2016, 20152019, 2018 and 2014,2017, (iii) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 20152019, 2018 and 20142017 (iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 20152019, 2018 and 2014,2017, (v) Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 2016, 20152019, 2018 and 2014,2017, and (vi) Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| |
| EMERGENT BIOSOLUTIONS INC. |
| |
| By: /s/RICHARD S. LINDAHL |
| Richard S. Lindahl |
| Executive Vice President, Chief Financial Officer and Treasurer |
| Date: February 24, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
Signature | | Title | | Date |
| | | | |
| | | | |
/s/Robert G. Kramer Sr. Robert G. Kramer Sr. | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 24, 2020 |
| | | | |
/s/Richard S. Lindahl Richard S. Lindahl | | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | | February 24, 2020 |
| | | | |
/s/Fuad El-Hibri Fuad El-Hibri | | Executive Chairman of the Board of Directors | | February 24, 2020 |
| | | | |
/s/Zsolt Harsanyi, Ph.D. Zsolt Harsanyi, Ph.D. | | Director | | February 24, 2020 |
| | | | |
/s/Kathryn Zoon, Ph.D. Kathryn Zoon, Ph.D. | | Director | | February 24, 2020 |
| | | | |
/s/Ronald B. Richard Ronald B. Richard | | Director | | February 24, 2020 |
| | | | |
/s/Louis W. Sullivan, M.D. Louis W. Sullivan, M.D. | | Director | | February 24, 2020 |
| | | | |
/s/Dr. Sue Bailey Dr. Sue Bailey | | Director | | February 24, 2020 |
| | | | |
/s/George Joulwan George Joulwan | | Director | | February 24, 2020 |
| | | | |
/s/Jerome Hauer, Ph.D. Jerome Hauer, Ph.D. | | Director | | February 24, 2020 |
| | | | |
/s/Seamus Mulligan Seamus Mulligan | | Director | | February 24, 2020 |