EMERGENT BIOSOLUTIONS INC.
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Delaware | 14-1902018 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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400 Professional Drive, Suite 400 | |
Gaithersburg, Maryland | 20879 |
(Address of Principal Executive Offices) | (Zip Code) |
(240) 631-3200
(Registrant's Telephone Number, Including Area Code) |
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Securities registered pursuant to Section 12(b) of the Act |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, Par Value $0.001 per share | EBS | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☑Accelerated filer ☐
Non-accelerated filer Smaller reporting company ☐
Emerging growth company ☐
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Large accelerated filer x | | Accelerated filer ☐ |
Non-accelerated filer ☐ | | Smaller reporting company ☐ |
Emerging growth company ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No Yes x No
As of OctoberApril 26, 2018,2019, the registrant had 50,945,05651.4 million shares of common stock outstanding.
Emergent BioSolutions Inc.
Index to Form 10-Q
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Part II. Other Information |
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BioThrax® (Anthrax Vaccine Adsorbed), RSDL® (Reactive Skin Decontamination Lotion Kit), BAT® [Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)], Anthrasil® (Anthrax Immune Globulin Intravenous [human]), NuThrax™ (anthrax vaccine adsorbed with CPG 7909 adjuvant), VIGIV [Vaccinia Immune Globulin Intravenous (Human)], Trobigard™ (atropine sulfate, obidoxime chloride), ACAM2000®, (Smallpox (Vaccinia) Vaccine, Live), Raxibacumab (Anthrax Monoclonal), Vivotif® (Typhoid Vaccine Live Oral Ty21a), Vaxchora® (Cholera Vaccine, Live, Oral), NARCAN® (naloxone HCI) Nasal Spray and any and all Emergent BioSolutions Inc. brands, products, services and feature names, logos and slogans are trademarks or registered trademarks of Emergent BioSolutions Inc. or its subsidiaries in the United States or other countries. All other brands, products, services and feature names or trademarks are the property of their respective owners.
PART I.FINANCIAL INFORMATIONSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q and the documents we incorporate by reference include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding the future earnings and performance of Emergent BioSolutions Inc. or any of our businesses, our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. We generally identify forward-looking statements by using words like "will," "believes," "expects," "anticipates," "intends," "plans," "forecasts," "estimates" and similar expressions in conjunction with, among other things, discussions of financial performance or financial condition, growth strategy, product sales, manufacturing capabilities, product development, regulatory approvals or expenditures. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. You should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. You are, therefore, cautioned not to place undue reliance on any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we do not undertake to update any forward-looking statement to reflect new information, events or circumstances.
There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements, including, among others:
appropriations for the procurement of BioThrax® (Anthrax Vaccine Adsorbed) and our other products addressing public health threats (PHTs);
our ability to perform under our contracts with the U.S. government (USG) related to BioThrax, our AV7909 product candidate, and our other public health threat products, including the timing of and specifications relating to deliveries;
our ability to commence deliveries based on BARDA’s procurement of AV7909 (anthrax vaccine adsorbed with CPG 7909 adjuvant) for the Strategic National Stockpile (SNS), to receive Emergency Use Authorization (EUA) and eventual licensure of AV7909 from the U.S. Food and Drug Administration (FDA);
the availability of funding for our U.S. government grants and contracts;
our ability to secure follow-on procurement contracts for our PHTs that are under procurement contracts that have expired or will be expiring;
our ability and the ability of our collaborators to defend underlying patents from infringement by generic naloxone entrants;
our ability to identify and acquire companies, businesses, products or product candidates that satisfy our selection criteria;
our ability to successfully integrate and realize the benefits of our acquisitions of PaxVax Holding Company Ltd. (PaxVax) and Adapt Pharma Limited (Adapt), both of which were acquired in October 2018;
our ability to successfully identify and respond to new development contracts with the USG, as well as successfully maintain, through achievement of development milestones, current development contracts with the USG;
our ability and the ability of our contractors and suppliers to maintain compliance with current good manufacturing practices and other regulatory obligations;
the results of regulatory inspections;
the operating and financial restrictions placed on us and our subsidiaries under our senior secured credit facilities;
our ability to obtain and maintain regulatory approvals for our product candidates and the timing of any such approvals;
| § | appropriations for the procurement of BioThrax® (Anthrax Vaccine Adsorbed) and our other products addressing public health threats;
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the procurement of products by USG entities under regulatory exemptions prior to approval by the FDA and corresponding procurement by government entities outside of the United States under regulatory exemptions prior to approval by the corresponding regulatory authorities in the applicable country; | § | our ability to perform under our contracts with the U.S. government related to BioThrax, our NuThrax™ product candidate,the success of our commercialization, marketing and manufacturing capabilities and strategy; and our other public health threat products, including the timing of and specifications relating to deliveries; |
| § | our ability to obtain Emergency Use Authorization pre-approval for NuThrax (anthrax vaccine adsorbed with CPG 7909 adjuvant) from the U.S. Food and Drug Administration, or FDA; |
| § | the availability of funding for our U.S. government grants and contracts; |
| § | our ability to secure follow-on procurement contracts for our public health threat products that are under procurement contracts that have expired or will be expiring; |
| § | our ability and the ability of our collaborations to protect our intellectual property rights; |
| § | our ability to identify and acquire companies, businesses, products or product candidates that satisfy our selection criteria; |
| § | our ability to successfully integrate our acquisitions of PaxVax Holding Company Ltd. and Adapt Pharma Limited, both of which were acquired in October 2018, and realize the benefits of these acquisitions; |
| § | our ability to successfully identify and respond to new development contracts with the U.S. government, as well as successfully maintain, through achievement of development milestones, current development contracts with the U.S. government; |
| § | our ability and the ability of our contractors and suppliers to maintain compliance with current good manufacturing practices and other regulatory obligations; |
| § | the results of regulatory inspections; |
| § | the operating and financial restrictions placed on us and our subsidiaries under our senior secured credit facilities; |
| § | our ability to obtain and maintain regulatory approvals for our product candidates and the timing of any such approvals; |
| § | the procurement of products by U.S. government entities under regulatory exemptions prior to approval by the FDA and corresponding procurement by government entities outside of the United States under regulatory exemptions prior to approval by the corresponding regulatory authorities in the applicable country; |
| § | the success of our commercialization, marketing and manufacturing capabilities and strategy; and |
| § | the accuracy of our estimates regarding future revenues, expenses, capital requirements and needs for additional financing. |
The foregoing sets forth many, but not all, of the factors that could cause actual results to differ from our expectations in any forward-looking statement. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. You should consider this cautionary statement, the risk factors identified in the section entitled "Risk Factors" in this quarterly report on Form 10-Q and the risk factors identified in our other periodic reports filed with the Securities and Exchange Commission (SEC) when evaluating our forward-looking statements.
NOTE REGARDING COMPANY REFERENCES
PART I. FINANCIAL INFORMATIONReferences in this report to “Emergent,” the “Company,” “we,” “us,” and “our” refer to Emergent BioSolutions Inc. and its consolidated subsidiaries.
NOTE REGARDING TRADENAMES
BioThrax® (Anthrax Vaccine Adsorbed), RSDL® (Reactive Skin Decontamination Lotion Kit), BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), Anthrasil® (Anthrax Immune Globulin Intravenous (Human)), VIGIV (Vaccinia Immune Globulin Intravenous (Human)), Trobigard® (atropine sulfate, obidoxime chloride), ACAM2000® (Smallpox (Vaccinia) Vaccine, Live), Vivotif® (Typhoid Vaccine Live Oral Ty21a), Vaxchora® (Cholera Vaccine, Live, Oral), NARCAN® (naloxone HCI) Nasal Spray and any and all Emergent BioSolutions Inc. brands, products, services and feature names, logos and slogans are trademarks or registered trademarks of Emergent BioSolutions Inc. or its subsidiaries in the United States or other countries. All other brands, products, services and feature names or trademarks are the property of their respective owners.
ITEM 1.FINANCIAL STATEMENTS
ITEM 1.FINANCIAL STATEMENTS
Emergent BioSolutions Inc.
Condensed Consolidated Balance Sheets
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Balance Sheets | |
(in thousands, except share and per share data) | |
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| | September 30, 2018 | | | December 31, 2017 | |
ASSETS | | (unaudited) | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 339,358 | | | $ | 178,292 | |
Restricted cash | | | 1,043 | | | | 1,043 | |
Accounts receivable | | | 76,955 | | | | 143,653 | |
Inventories | | | 125,745 | | | | 142,812 | |
Income tax receivable, net | | | - | | | | 2,432 | |
Prepaid expenses and other current assets | | | 20,047 | | | | 17,157 | |
Total current assets | | | 563,148 | | | | 485,389 | |
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Property, plant and equipment, net | | | 435,075 | | | | 407,210 | |
Intangible assets, net | | | 107,861 | | | | 119,597 | |
Goodwill | | | 49,130 | | | | 49,130 | |
Deferred tax assets, net | | | 12,652 | | | | 2,834 | |
Other assets | | | 5,757 | | | | 6,046 | |
Total assets | | $ | 1,173,623 | | | $ | 1,070,206 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 38,874 | | | $ | 41,751 | |
Accrued expenses and other current liabilities | | | 7,425 | | | | 4,831 | |
Accrued compensation | | | 41,807 | | | | 37,882 | |
Contingent consideration, current portion | | | 2,954 | | | | 2,372 | |
Income taxes payable, net | | | 164 | | | | - | |
Deferred revenue, current portion | | | 10,790 | | | | 13,232 | |
Total current liabilities | | | 102,014 | | | | 100,068 | |
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Contingent consideration, net of current portion | | | 9,003 | | | | 9,902 | |
Long-term indebtedness | | | 13,495 | | | | 13,457 | |
Income taxes payable | | | 12,500 | | | | 12,500 | |
Deferred revenue, net of current portion | | | 65,343 | | | | 17,259 | |
Other liabilities | | | 4,619 | | | | 4,675 | |
Total liabilities | | | 206,974 | | | | 157,861 | |
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Stockholders' equity: | | | | | | | | |
Preferred stock, $0.001 par value; 15,000,000 shares authorized, 0 shares issued and outstanding at both September 30, 2018 and December 31, 2017 | | | - | | | | - | |
Common stock, $0.001 par value; 200,000,000 shares authorized, 51,403,585 shares issued and 50,186,299 shares outstanding at September 30, 2018; 50,619,808 shares issued and 49,405,365 shares outstanding at December 31, 2017 | | | 51 | | | | 50 | |
Treasury stock, at cost, 1,217,286 and 1,214,443 common shares at September 30, 2018 and December 31, 2017, respectively | | | (39,642 | ) | | | (39,497 | ) |
Additional paid-in capital | | | 640,178 | | | | 618,416 | |
Accumulated other comprehensive loss | | | (4,666 | ) | | | (3,698 | ) |
Retained earnings | | | 370,728 | | | | 337,074 | |
Total stockholders' equity | | | 966,649 | | | | 912,345 | |
Total liabilities and stockholders' equity | | $ | 1,173,623 | | | $ | 1,070,206 | |
(unaudited, in millions, except per share amounts)
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| March 31, 2019 | | December 31, 2018 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 137.2 |
| | $ | 112.2 |
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Restricted cash | 0.2 |
| | 0.2 |
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Accounts receivable, net | 121.5 |
| | 262.5 |
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Inventories | 211.0 |
| | 205.8 |
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Prepaid expenses and other current assets | 58.6 |
| | 40.1 |
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Total current assets | 528.5 |
| | 620.8 |
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Property, plant and equipment, net | 513.4 |
| | 510.2 |
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Intangible assets, net | 757.1 |
| | 761.6 |
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In-process research and development | 41.0 |
| | 50.0 |
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Goodwill | 267.7 |
| | 259.7 |
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Other assets | 46.0 |
| | 27.1 |
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Total assets | $ | 2,153.7 |
| | $ | 2,229.4 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 78.6 |
| | $ | 80.7 |
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Accrued expenses | 49.6 |
| | 30.7 |
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Contingent consideration, current portion | 62.7 |
| | 5.6 |
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Accrued compensation | 36.9 |
| | 58.2 |
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Long-term indebtedness, current portion | 10.1 |
| | 10.1 |
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Other current liabilities | 10.5 |
| | 15.1 |
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Total current liabilities | 248.4 |
| | 200.4 |
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Contingent consideration | 10.0 |
| | 54.4 |
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Long-term indebtedness | 732.4 |
| | 784.5 |
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Deferred tax liability | 66.4 |
| | 67.5 |
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Deferred revenue, net of current portion | 64.7 |
| | 62.5 |
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Other liabilities | 44.3 |
| | 49.2 |
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Total liabilities | $ | 1,166.2 |
| | $ | 1,218.5 |
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Commitments and contingencies (Notes 8 & 14) |
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Stockholders' equity: | | | |
Preferred stock, $0.001 par value; 15.0 shares authorized, no shares issued or outstanding at both 2019 and 2018 | — |
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Common stock, $0.001 par value; 200.0 shares authorized, 52.6 shares issued and 51.4 shares outstanding at 2019; 52.4 shares issued and 51.2 shares outstanding at 2018 | 0.1 |
| | 0.1 |
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Treasury stock, at cost, 1.2 common shares at both 2019 and 2018 | (39.6 | ) | | (39.6 | ) |
Additional paid-in capital | 690.2 |
| | 688.6 |
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Accumulated other comprehensive loss | (4.5 | ) | | (5.5 | ) |
Retained earnings | 341.3 |
| | 367.3 |
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Total stockholders' equity | 987.5 |
| | 1,010.9 |
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Total liabilities and stockholders' equity | $ | 2,153.7 |
| | $ | 2,229.4 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Statements of Operations | |
(in thousands, except share and per share data) | |
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| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| | (Unaudited) | | | (Unaudited) | |
Revenues: | | | | | | | | | | | | |
Product sales | | $ | 133,269 | | | $ | 114,296 | | | $ | 389,115 | | | $ | 259,875 | |
Contract manufacturing | | | 22,172 | | | | 18,912 | | | | 71,963 | | | | 52,700 | |
Contracts and grants | | | 18,212 | | | | 16,226 | | | | 50,589 | | | | 54,489 | |
Total revenues | | | 173,653 | | | | 149,434 | | | | 511,667 | | | | 367,064 | |
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Operating expenses: | | | | | | | | | | | | | | | | |
Cost of product sales and contract manufacturing | | | 73,232 | | | | 44,503 | | | | 220,449 | | | | 125,449 | |
Research and development | | | 37,006 | | | | 22,659 | | | | 90,802 | | | | 68,886 | |
Selling, general and administrative | | | 42,105 | | | | 34,503 | | | | 121,815 | | | | 101,521 | |
Income from operations | | | 21,310 | | | | 47,769 | | | | 78,601 | | | | 71,208 | |
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Other income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | 701 | | | | 637 | | | | 1,229 | | | | 1,593 | |
Interest expense | | | (642 | ) | | | (1,991 | ) | | | (1,884 | ) | | | (5,734 | ) |
Other income (expense), net | | | 190 | | | | (101 | ) | | | 11 | | | | (387 | ) |
Total other income (expense), net | | | 249 | | | | (1,455 | ) | | | (644 | ) | | | (4,528 | ) |
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Income before provision for income taxes | | | 21,559 | | | | 46,314 | | | | 77,957 | | | | 66,680 | |
Provision for income taxes | | | 614 | | | | 12,763 | | | | 11,776 | | | | 18,028 | |
Net income | | $ | 20,945 | | | $ | 33,551 | | | $ | 66,181 | | | $ | 48,652 | |
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Net income per share - basic | | $ | 0.42 | | | $ | 0.81 | | | $ | 1.33 | | | $ | 1.19 | |
Net income per share - diluted (1) | | $ | 0.41 | | | $ | 0.68 | | | $ | 1.29 | | | $ | 1.03 | |
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Weighted-average number of shares - basic | | | 50,071,632 | | | | 41,222,504 | | | | 49,851,082 | | | | 40,989,813 | |
Weighted-average number of shares - diluted | | | 51,486,996 | | | | 50,467,829 | | | | 51,189,680 | | | | 50,090,088 | |
(1) See "EarningsEmergent BioSolutions Inc.
Condensed Consolidated Statements of Operations
(unaudited, in millions, except per share" footnote for details on calculation.share amounts)
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| Three Months Ended March 31, |
| 2019 | | 2018 |
Revenues: | |
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Product sales, net | $ | 153.0 |
| | $ | 75.8 |
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Contract manufacturing | 15.9 |
| | 26.1 |
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Contracts and grants | 21.7 |
| | 15.9 |
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Total revenues | 190.6 |
| | 117.8 |
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Operating expenses: | | | |
Cost of product sales and contract manufacturing | 91.8 |
| | 54.3 |
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Research and development | 46.1 |
| | 29.1 |
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Selling, general and administrative | 65.4 |
| | 40.0 |
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Amortization of intangible assets | 14.5 |
| | 3.9 |
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Total operating expenses | 217.8 |
| | 127.3 |
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Loss from operations | (27.2 | ) | | (9.5 | ) |
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Other income (expense): | | | |
Interest expense | (9.6 | ) | | (0.2 | ) |
Other income (expense), net | (1.0 | ) | | 0.3 |
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Total other income (expense), net | (10.6 | ) | | 0.1 |
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Loss before benefit from income taxes | (37.8 | ) | | (9.4 | ) |
Income tax benefit | (11.8 | ) | | (4.5 | ) |
Net loss | $ | (26.0 | ) | | $ | (4.9 | ) |
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Net loss per common share | | | |
Basic | $ | (0.51 | ) | | $ | (0.10 | ) |
Diluted | $ | (0.51 | ) | | $ | (0.10 | ) |
Shares used in computing loss per share | | | |
Basic | 51.2 |
| | 49.6 |
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Diluted | 51.2 |
| | 49.6 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in millions)
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Statements of Comprehensive Income | |
(in thousands) | |
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| Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2018 | | | 2017 | | | 2018 | | | 2017 | |
| (Unaudited) | | (Unaudited) | |
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Net income | | $ | 20,945 | | | $ | 33,551 | | | $ | 66,181 | | | $ | 48,652 | |
Foreign currency translations, net of tax | | | (250 | ) | | | (296 | ) | | | (968 | ) | | | 516 | |
Comprehensive income | | $ | 20,695 | | | $ | 33,255 | | | $ | 65,213 | | | $ | 49,168 | |
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| Three Months Ended March 31, |
| 2019 | | 2018 |
Net loss | $ | (26.0 | ) | | $ | (4.9 | ) |
Other comprehensive income (loss), net of tax: |
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Foreign currency translations, net of tax | 1.2 |
| | 0.4 |
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Unrealized losses on pension benefit obligation | (0.2 | ) | | — |
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Total other comprehensive income, net of tax | 1.0 |
| | 0.4 |
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Comprehensive loss | $ | (25.0 | ) | | $ | (4.5 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries | |
Condensed Consolidated Statements of Cash Flows | |
(in thousands) | |
| | Nine Months Ended September 30, | |
| | 2018 | | | 2017 | |
Cash flows from operating activities: | | (Unaudited) | |
Net income | | $ | 66,181 | | | $ | 48,652 | |
Adjustments to reconcile to net cash provided by (used in) operating activities: | | | | | | | | |
Stock-based compensation expense | | | 16,664 | | | | 11,805 | |
Depreciation and amortization | | | 37,106 | | | | 29,899 | |
Income taxes | | | 12,761 | | | | 18,618 | |
Change in fair value of contingent consideration | | | 1,917 | | | | 1,350 | |
Other | | | 1,515 | | | | 703 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | 66,455 | | | | 9,411 | |
Inventories | | | 17,067 | | | | 5,113 | |
Income taxes payable | | | (10,130 | ) | | | (5,515 | ) |
Prepaid expenses and other assets | | | (5,921 | ) | | | (2,157 | ) |
Accounts payable | | | (5,695 | ) | | | 2,965 | |
Accrued expenses and other liabilities | | | 2,457 | | | | (2,334 | ) |
Accrued compensation | | | 3,925 | | | | (1,902 | ) |
Deferred revenue | | | 3,262 | | | | 14,006 | |
Net cash provided by operating activities | | | 207,564 | | | | 130,614 | |
Cash flows from investing activities: | | | | | | | | |
Purchases of property, plant and equipment and other | | | (51,275 | ) | | | (42,381 | ) |
Proceeds from sale of assets | | | 2,624 | | | | - | |
Net cash used in investing activities | | | (48,651 | ) | | | (42,381 | ) |
Cash flows from financing activities: | | | | | | | | |
Issuance of common stock upon exercise of stock options | | | 11,402 | | | | 10,799 | |
Debt issuance costs | | | - | | | | (1,426 | ) |
Taxes paid on behalf of employees for equity activity | | | (6,303 | ) | | | (4,184 | ) |
Payments of notes payable to Aptevo | | | - | | | | (20,000 | ) |
Contingent consideration payments | | | (2,234 | ) | | | (2,744 | ) |
Restricted cash | | | - | | | | (1,043 | ) |
Purchase of treasury stock | | | (145 | ) | | | (83 | ) |
Net cash provided by (used in) financing activities | | | 2,720 | | | | (18,681 | ) |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | (567 | ) | | | (74 | ) |
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Net increase in cash, cash equivalents and restricted cash | | | 161,066 | | | | 69,478 | |
Cash, cash equivalents and restricted cash at beginning of period (1) | | | 179,335 | | | | 271,513 | |
Cash, cash equivalents and restricted cash at end of period (1) | | $ | 340,401 | | | $ | 340,991 | |
(1) AsEmergent BioSolutions Inc.
Condensed Consolidated Statements of December 31, 2017 and September 30, 2018, the balance includes $1,043 of restricted cash.Cash Flows
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| Three Months Ended March 31, |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net Loss | $ | (26.0 | ) | | $ | (4.9 | ) |
Adjustments to reconcile to net cash provided by (used in) operating activities: | | | |
Share-based compensation expense | 6.8 |
| | 7.3 |
|
Depreciation and amortization | 26.6 |
| | 12.3 |
|
Amortization of deferred financing costs | 0.7 |
| | 0.1 |
|
Deferred income taxes | (11.4 | ) | | (4.5 | ) |
Change in fair value of contingent consideration | 1.7 |
| | 1.0 |
|
Other | (0.1 | ) | | 0.1 |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable | 141.6 |
| | 21.8 |
|
Inventories | (5.2 | ) | | (12.4 | ) |
Prepaid expenses and other assets | (16.6 | ) | | (7.7 | ) |
Accounts payable | 4.2 |
| | 3.6 |
|
Accrued expenses | 1.7 |
| | 2.2 |
|
Accrued compensation | (21.3 | ) | | (13.4 | ) |
Deferred revenue | 2.1 |
| | (6.5 | ) |
Net cash provided by (used in) operating activities: | 104.8 |
| | (1.0 | ) |
Cash flows from investing activities: | | | |
Purchases of property, plant and equipment and other | (21.4 | ) | | (11.6 | ) |
Net cash used in investing activities: | (21.4 | ) | | (11.6 | ) |
Cash flows from financing activities: | | | |
Proceeds from revolving credit facility | 30.0 |
| | — |
|
Principal payments on revolving credit facility | (80.0 | ) | | — |
|
Principal payments on term loan facility | (2.8 | ) | | — |
|
Issuances of stock under share-based benefit plans | 0.9 |
| | 4.7 |
|
Taxes paid on behalf of employees for equity activity | (6.0 | ) | | (5.9 | ) |
Contingent consideration payments | (0.5 | ) | | (0.8 | ) |
Purchase of treasury stock | — |
| | (0.1 | ) |
Net cash used in financing activities: | (58.4 | ) | | (2.1 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 25.0 |
| | (14.7 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 112.4 |
| | 179.3 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 137.4 |
| | $ | 164.6 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Emergent BioSolutions Inc. and Subsidiaries
Condensed Consolidated
StatementStatements of Changes in Stockholders' Equity
(unaudited, in thousands, except share and per share data)millions)
| | $0.001 Par Value Common Stock | | | Additional Paid-In | | | Treasury Stock | | | Accumulated Other Comprehensive | | | Retained | | | Total Stockholders' | |
| | Shares | | | Amount | | | Capital | | | Shares | | | Amount | | | Loss | | | Earnings | | | Equity | |
Balance at December 31, 2017 | | | 50,619,808 | | | $ | 50 | | | $ | 618,416 | | | | (1,214,443 | ) | | $ | (39,497 | ) | | $ | (3,698 | ) | | $ | 337,074 | | | $ | 912,345 | |
Adoption of new accounting standard (ASC 606), net of tax | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (32,527 | ) | | | (32,527 | ) |
Balance at January 1, 2018 | | | 50,619,808 | | | | 50 | | | | 618,416 | | | | (1,214,443 | ) | | | (39,497 | ) | | | (3,698 | ) | | | 304,547 | | | | 879,818 | |
Employee equity plans activity | | | 783,777 | | | | 1 | | | | 21,762 | | | | - | | | | - | | | | - | | | | - | | | | 21,763 | |
Treasury stock | | | - | | | | - | | | | - | | | | (2,843 | ) | | | (145 | ) | | | - | | | | - | | | | (145 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 66,181 | | | | 66,181 | |
Foreign currency translation, net of tax | | | - | | | | - | | | | - | | | | - | | | | - | | | | (968 | ) | | | - | | | | (968 | ) |
Balance at September 30, 2018 | | | 51,403,585 | | | $ | 51 | | | $ | 640,178 | | | | (1,217,286 | ) | | $ | (39,642 | ) | | $ | (4,666 | ) | | $ | 370,728 | | | $ | 966,649 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $0.001 Par Value Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders' Equity |
| | Shares | | Amount | | | Shares | | Amount | | | |
Three Months Ended March 31, 2019 | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | 52.4 |
| | $ | 0.1 |
| | $ | 688.6 |
| | (1.2 | ) | | $ | (39.6 | ) | | $ | (5.5 | ) | | $ | 367.3 |
| | $ | 1,010.9 |
|
Employee equity plans activity | | 0.2 |
| | — |
| | 1.6 |
| | — |
| | — |
| | — |
| | — |
| | 1.6 |
|
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (26.0 | ) | | (26.0 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 1.0 |
| | — |
| | 1.0 |
|
Balance at March 31, 2019 | | 52.6 |
| | $ | 0.1 |
| | $ | 690.2 |
| | (1.2 | ) | | $ | (39.6 | ) | | $ | (4.5 | ) | | $ | 341.3 |
| | $ | 987.5 |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | 50.6 |
| | $ | 0.1 |
| | $ | 618.3 |
| | (1.2 | ) | | $ | (39.5 | ) | | $ | (3.7 | ) | | $ | 337.1 |
| | $ | 912.3 |
|
Adoption of new revenue accounting standard (ASC 606), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32.5 | ) | | (32.5 | ) |
Balance at January 1, 2018 | | 50.6 |
| | 0.1 |
| | 618.3 |
| | (1.2 | ) | | (39.5 | ) | | (3.7 | ) | | 304.6 |
| | 879.8 |
|
Employee equity plans activity | | 0.4 |
| | — |
| | 6.1 |
| | — |
| | — |
| | — |
| | — |
| | 6.1 |
|
Treasury stock | | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4.9 | ) | | (4.9 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 0.4 |
| | — |
| | 0.4 |
|
| | | | | | | | | | | | | | | | |
Balance at March 31, 2018 | | 51.0 |
| | $ | 0.1 |
| | $ | 624.4 |
| | (1.2 | ) | | $ | (39.6 | ) | | $ | (3.3 | ) | | $ | 299.7 |
| | $ | 881.3 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
EMERGENT BIOSOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(unaudited, in millions, except share and per share amounts)
1. Business
Emergent BioSolutions Inc. is a global life sciences company focused on providing specialty products for civilian and military populations that address accidental, deliberate and naturally occurring PHTs.
The Company is focused on innovative preparedness and response products and solutions addressing the following four distinct PHT categories: Chemical, Biological, Radiological, Nuclear and Explosives (CBRNE); emerging infectious diseases (EID); travelers’ diseases; and opioids. The U.S. Government (USG) is the Company's largest customer and provides the Company with substantial funding for the development of a number of the Company's product candidates.
The majority of the Company's revenue comes from a product portfolio that includes:
1.Vaccines and Anti-Infectives - BioThrax® (Anthrax Vaccine Adsorbed), ACAM2000® (Smallpox (Vaccinia) Vaccine, Live), Vaxchora® (Cholera Vaccine, Live, Oral), and Vivotif® (Typhoid Vaccine, Live, Oral Ty21a).
Devices - NARCAN® (naloxone HCl) Nasal Spray for opioid overdose, RSDL® (Reactive Skin Decontamination Lotion Kit), and the Trobigard® (atropine sulfate, obidoxime chloride a nerve agent countermeasure) auto-injector.
Antibody Therapeutics - raxibacumab (Anthrax Monoclonal antibody therapeutic for anthrax), SummaryAnthrasil®( Anthrax Immune Globulin Intravenous (Human)), BAT®(Botulism Antitoxin Heptavalent), and VIGIV (Vaccinia Immune Globulin Intravenous (Human) therapeutic) for complications from smallpox vaccinations.
The Company also generates revenue from contract development and manufacturing services including pharmaceutical product process development, manufacturing and filling services for injectable and other sterile products, inclusive of significant accounting policiesprocess design, technical transfer, manufacturing validations, laboratory analytical development support, aseptic filling, lyophilization, final packaging and accelerated and ongoing stability studies, as well as manufacturing of vial and pre-filled syringe formats, bulk drug products and finished units of clinical and commercial drugs.
We operate as one operating segment.
2. Basis of Presentation and Principles of Consolidation
Basis of presentation and consolidation
Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Emergent BioSolutions Inc. ("Emergent" or the "Company") and its wholly owned and majority ownedwholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC").SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principlesGAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the SEC.
In the opinion of the Company's management, anyAll adjustments contained in the accompanying unaudited condensed consolidated financial statements are of a normal recurring nature and are necessary to present fairly the financial position of the Company as of September 30, 2018.March 31, 2019. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.
Significant accounting policies
Accounting Policies
During the ninethree months ended September 30, 2018,March 31, 2019, there have been no significant changes to the Company's summary of significant accounting policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the SEC, except for recently adopted accounting standards.
Fair Value Measurements
Separate disclosure is required for assets and liabilities measured at fair value on a recurring basis from those measured at fair value on a non-recurring basis. The Company has contingent consideration liabilities that are measured at fair value on a recurring basis (Note 8). The Company also records the new revenue recognition standardassets and liabilities of acquitions at fair value (Note 3). As of March 31, 2019 and 2018, the Company adopted effective January 1, 2018. See Note 2. "Revenue recognition" for further details.
had no other significant assets or liabilities that were measured at fair value on a non-recurring basis.
Recently issued accounting standardsAdopted Accounting Pronouncements
Leases
Recently Adopted
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
In AugustFebruary 2016, the Financial Accounting Standards Board ("FASB")(FASB) issued Accounting Standard Update ("ASU") 2016-15, (ASU) Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments 2016-02("ASU 2016-15"). ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayments or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The Company adopted the new standard effective January 1, 2018 and has determined the impact of ASU No. 2016-15 on its condensed consolidated financial statements will be related to the settlement of contingent liabilities arising from a business combination.
ASU 2016-18, Restricted Cash (Topic 230): Statement of Cash Flows
In November 2016, the FASB issued ASU 2016-18, Restricted Cash (Topic 230): Statement of Cash Flows ("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances on the statement of cash flows upon adoption of this standard. The Company adopted the new standard effective January 1, 2018. Restricted cash primarily consists of collateralized cash for a standby letter of credit and guarantee arrangement with a bank.
ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies, which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted the new standard effective January 1, 2018, which did not have a material impact on its condensed consolidated financial statements.
ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting ("ASU 2018-07"). ASU 2018-07 expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods and services. ASU No. 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees (for example, service providers, external legal counsel, suppliers, etc.). The standard will be effective after December 15, 2018 for the Company, with early adoption permitted, but no earlier than the Company's adoption date of Topic 606. The Company early adopted the new standard effective April 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
Not Yet Adopted
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors. The Company adopted the new standard will be effective January 1, 2019 with early adoption permitted. The standard will be applied using athe modified retrospective approach toapproach. As a result, the Company recorded the transition provisions at the beginning of the earliest period presentedof adoption. Total right of use assets increased $13.4 million, while total operating lease liabilities increased 14.0 million as of January 1, 2019. There was no adjustment to the opening balance of retained earnings as of January 1, 2019. The standard will not materially affect the Company's consolidated net earnings. The Company continues to apply the legacy guidance from the old lease accounting standard, including its disclosure requirements, in the financial statements.comparative periods presented. The Company's adoption efforts are primarily focusedCompany did not reassess existing contracts for lease classification or the classification of existing leases or associated costs. The Company will not reflect leases with an initial term of 12 months or less as a right of use asset or liability, but it will recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. In addition, the Company will account for non-lease components of the arrangement separate from lease components.
SEC Simplification
In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which makes a number of changes meant to simplify interim disclosures. The new rule requires a presentation of changes in stockholders’ equity and noncontrolling interest in the form of a reconciliation, for the current and comparative year-to-date interim periods. The Company adopted the new disclosure requirements in its Form 10-Q for the period ended March 31, 2019 and included these disclosures in the condensed consolidated statements of changes in stockholders equity. The additional elements of this release did not have a material impact on the review of its existing lease contracts, identification of other contracts that may fall under the scope of the new guidance and performing a gap analysis on the current state of lease-related activities compared with the future state of lease-related activities. The Company has identified the lease agreements that will be impacted by the new standard and is currently evaluating theCompany's overall impact on its condensed consolidated financial statements and related disclosures.
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than InventoryConsolidated Financial Statements.
Tax Effects from Accumulated Other Comprehensive Income
In October 2016,February 2018, the FASB issued ASU 2016-16, 2018-02, Income TaxesStatement—Reporting Comprehensive Income (Topic 740)220): Intra-Entity TransfersReclassification of AssetsCertain Tax Effects from Accumulated Other Than InventoryComprehensive Income ("ASU 2016-16") (ASU 2018-02). ASU 2016-16 improves2018-02 provides the accounting for theoption to reclassify certain income tax consequenceseffects related to the Tax Cuts and Jobs Act passed in December of intra-entity transfers of assets2017 between accumulated other than inventory. The new standard will require entities to recognize thecomprehensive income tax consequences of an intra-entity transfer of a non-inventory asset when the transfer occurs. The guidanceand retained earnings and also requires additional disclosures. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2017,2018, and interim periods within those fiscal years, with early adoption permitted. There was no impact for the adoption of ASU 2018-02 on the Company's condensed consolidated financial statements.
New Accounting Pronouncements
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13. ASU 2016-13 provides guidance on measurement of credit losses on financial instruments that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and that requires entities to use a new, forward-looking “expected loss” model that is expected to result in the earlier recognition of allowances for losses. The guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, but early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2016-16effect that the pronouncement will have on its condensedthe Company's consolidated financial statements butstatements.
Goodwill
In January 2017, the adoption is not expected to have a significant impact as of the filing of this report.
FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04") (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual and interim goodwill tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company is currently evaluating the impact that the adoption of this standard will have on its condensed consolidated financial statements.
ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Fair Value Measurements
In FebruaryAugust 2018 the FASB issued ASU 2018-02,No. 2018-13, Income Statement—Reporting Comprehensive IncomeFair Value Measurement (Topic 220)820): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 provides the option to reclassify certain income tax effects relatedDisclosure Framework - Changes to the Tax CutsDisclosure Requirements for Fair Value Measurement. This new standard modifies certain disclosure requirements on fair value measurements. This new standard will be effective for the Company on January 1, 2020. The Company does not expect that the adoption of this new standard will have a material impact on the Company's disclosures.
Compensation - Retirement Benefits - Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14. ASU 2018-14 modifies the disclosure requirements for defined benefit pension plans and Jobs Act passed in December of 2017 between accumulated other comprehensive income and retained earnings and also requires additional disclosures.postretirement plans. ASU 2018-022018-14 is effective for all entities for fiscal years beginningending after December 15, 2018,2020, and interim periods within those fiscal years, with earlyearlier adoption permitted. Adoption of ASU 2018-02 is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized.permitted. The Company is currently evaluating the impact of adopting ASU 2018-022018-14 on its condensed consolidated financial statements.
ASU 2018-11, Leases (Topic 842): Targeted Improvements
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"). In issuing ASU 2018-11, the FASB decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact that ASU 2016-02 and ASU 2018-11 will have on its condensed consolidated financial statements.
There are no other recently issued accounting pronouncements that are expected to have a material impact on the Company's financial position, results of operations or cash flows.
3. Acquisitions
Adapt
2.Revenue recognition
In May 2014,On October 15, 2018, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 (known as ASC 606) supersedesCompany acquired Adapt, a company focused on developing new treatment options and commercializing products addressing opioid overdose and addiction. Adapt's NARCAN® (naloxone HCl) Nasal Spray marketed product is the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance,first needle-free formulation of naloxone approved by the FDA and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchangeHealth Canada for the promised goodsemergency treatment of known or services, the provider should apply the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligationssuspected opioid overdose as manifested by respiratory and/or central nervous system depression. This acquisition includes approximately 50 employees, located in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract;U.S., Canada, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accountingIreland, including those responsible for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The Company adopted the requirements of the new standard as of January 1, 2018 using the modified retrospective method. The modified retrospective method requires companies to recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings.
A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606. For contracts with multiple performance obligations, the Company allocates the contract's transaction price to each performance obligation on a relative standalone selling price basis using the Company's best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers, however when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price. Allocation of the transaction price is determined at the contracts' inception.
Once the performance obligations in the contract have been identified, the Company estimates the transaction price of the contract. The estimate includes amounts that are fixed as well as those that can vary based on expected outcomes of the activities or contractual terms. The Company's variable consideration primarily includes consideration transferred under its development contracts with the U.S. government as consideration received can vary based on developmental progression of the product candidate(s). When a contract's transaction price includes variable consideration, the Company evaluates the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, the Company includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration estimates are updated at each reporting date. There were no constraints or material changes to the Company's variable consideration estimates as of or during the nine months ended September 30, 2018.
To indicate the transfer of control for the Company's product sales and contract manufacturing services, it must have a present right to payment, legal title must have passed to the customer, and the customer must have the significant risks and rewards of ownership. Revenue for long-term development contracts is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with transferring control of the good or service over time.
The Company derives revenues primarily from the sale of its marketed medical countermeasures ("MCMs") products and contract revenues associated with development of its MCMs. The primary customer for the Company's MCM products and the primary source of funding for the development of the Company's MCM product candidate portfolio is the U.S. government. The Company's contracts for the sale of its MCM products generally have single performance obligation. Certain product sales contracts with the U.S. government include multiple performance obligations, which generally include the marketed product, stability testing associated with that product, expiry extensions and plasma collection. The Company's development contracts for its MCM product candidates generally are cost plus fixed fee arrangements, which the Company treats a single performance obligation with variable consideration. The U.S. government contracts for the salesupply chain management, research and development, of the Company's MCMgovernment affairs, and commercial operations. The products and product candidates within Adapt's portfolio are normally multi-year contracts.
In addition, the Company performs contract manufacturing services for third parties, which includes pharmaceutical product process development, manufacturing and filling services for injectable and other sterile products, inclusive of process design, technical transfer, manufacturing validations, laboratory analytical development support, aseptic filling, lyophilization, final packaging and accelerated and ongoing stability studies. These contracts generally include a single performance obligationconsistent with a duration that is less than one-year.
The Company finalized the review of its portfolio of revenue contracts that were not complete as of the adoption date and made its determination of its revenue streams as well as completed extensive contract specific reviews to determine the impact of the new standard on its historical and prospective revenue recognition. Because many of the Company's contracts with customers have unique contract terms, the Company reviewed all of its non-standard agreements in order to determine the effect of adoption.
The Company determined its Centers for Innovation in Advanced Developmentmission and Manufacturing ("CIADM") contract with the Biomedical Advanced Research and Development Authority ("BARDA") will have a material change in revenue recognition under the new guidance. Under ASC 606 at January 1, 2018, the Company determined that there was one performance obligation to provide ongoing manufacturing capability to the U.S. government and would recognize the consideration received in the base period on a straight-line basis over a 24-year period as the capability being created during the base period of the contract is being provided to the customer over both the base period contract term as well as 17 additional option periods. In addition, the Company determined the CIADM contract includes a significant financing component which is included in the transaction price. The Company calculated the financing component using an interest rate the Company had on its other debt obligations at inception of the contract. Prior to the adoption of ASC 606, the Company recognized revenue under the CIADM contract on a straight-line basis, based upon its estimate of the total payments to be received under the contract. The Company analyzed the estimated payments to be received on a quarterly basis to determine if an adjustment to revenue was required. As a result of the adoption of ASC 606, as of January 1, 2018, there was an increase in the deferred revenue liability of $42.4 million and an increase in deferred tax assets of $9.9 million with an offsetting reduction to retained earnings of $32.5 million.
In September 2018, the Company modified the CIADM contract under which one of the modifications reduced the 17 additional option periods to seven with the contract now scheduled to expire in June 2027. The Company determined the modification will be accounted for prospectively as a termination of the existing contract and the creation of a new contract.
The Company considers accounts receivables and deferred costs associated with revenue generating contracts, that are not included in inventory or property, plant and equipment, as contract assets. As of September 30, 2018 and December 31, 2017, the Company had $77.0 million and $143.7 million, respectively, in contract assets associated with accounts receivable, which is included in accounts receivable onexpands the Company's
condensed consolidated balance sheets. As of September 30, 2018 and December 31, 2017, the Company had contract assets associated with deferred costs of $4.0 million and $2.9 million, respectively, which is included in prepaid expenses and other current assets on the Company's condensed consolidated balance sheets.
When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations are deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of the contract liabilities, which is included in the Company's current and long-term deferred revenue line items in the condensed consolidated balance sheets:
(in thousands) | | | |
Balance at December 31, 2017 | | $ | 30,491 | |
Adoption of new accounting standard (ASC 606) | | | 42,379 | |
Balance at January 1, 2018 | | | 72,870 | |
Deferral of revenue | | | 18,384 | |
Recognition of revenue included in beginning of year contract liability | | | (15,121 | ) |
Balance at September 30, 2018 | | $ | 76,133 | |
We operate in one business segment. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. For the three and nine months ended September 30, 2018, there was a nominal difference between revenues recognized under ASC 606 and revenues recognized based on the prior revenue recognition guidance for the same period. For the three and nine months ended September 30, 2018, the Company's revenues disaggregated by the major sources was as follows:
(in thousands) | | Three Months Ended September 30, 2018 | | | Nine Months Ended September 30, 2018 | |
| | U.S | | | Non-U.S. | | | | | | U.S | | | Non-U.S. | | | | |
| | Government | | | Government | | | Total | | | Government | | | Government | | | Total | |
| | | | | | | | | | | | | | | | | | |
Product sales | | $ | 127,332 | | | $ | 5,937 | | | $ | 133,269 | | | $ | 363,254 | | | $ | 25,861 | | | $ | 389,115 | |
Contract manufacturing | | | - | | | | 22,172 | | | | 22,172 | | | | - | | | | 71,963 | | | | 71,963 | |
Contracts and grants | | | 16,656 | | | | 1,556 | | | | 18,212 | | | | 46,711 | | | | 3,878 | | | | 50,589 | |
Total revenues | | $ | 143,988 | | | $ | 29,665 | | | $ | 173,653 | | | $ | 409,965 | | | $ | 101,702 | | | $ | 511,667 | |
As of September 30, 2018, the Company had expected future revenues associated with performance obligations that have not been satisfied of approximately $599 million. The Company expects to recognize a majority of these revenues within the next 24 months, with the remainder recognized thereafter. However, the amount and timing of revenue recognition for unsatisfied performance obligations can materially change due to timing of funding appropriations from the U.S. government and the overall success of the Company's development activities associated with its MCM product candidates that are then receiving development funding support from the government 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 September 30, 2018).
3. Acquisitions
Acquisition of ACAM2000 business
On October 6, 2017, the Company completed the acquisition of the ACAM2000® (Smallpox (Vaccinia) Vaccine, Live)core business of Sanofi Pasteur Biologics, LLC ("Sanofi")addressing public health threats. This acquisition included ACAM2000, the only smallpox vaccine licensed by the FDA, a current good manufacturing practices ("cGMP") live viral manufacturing facility and office and warehouse space, both in Canton, Massachusetts, and a cGMP viral fill/finish facility in Rockville, Maryland. With this acquisition, the Company also acquired an existing 10-year contract with the Centers for Disease Control and Prevention ("CDC"), which under the terms expired in March 2018. This contract had a stated value of up to $425 million, with a remaining contract value of up to approximately $160 million as of the acquisition date, for the delivery of ACAM2000 to the U.S. Strategic National Stockpile ("SNS") and the establishment of U.S.-based manufacturing of ACAM2000. This acquisition added to the Company's product portfolio and expanded the Company's manufacturing capabilities.
At the closing, the Company paid $97.5 million in an upfront payment and $20 million in milestone payments earned as of the closing date tied to the achievement of certain regulatory and manufacturing-related milestones, for a total payment in cash of $117.5 million. The agreement included an additional milestone payment of up to $7.5 million upon achievement of a regulatory milestone, which was achieved in November 2017. The $7.5 million milestone payment was made during the fourth quarter of 2017. This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of the ACAM2000 business were preliminarilyAdapt have been recorded as of October 6, 2017,15, 2018, the acquisition date, at their respective fair values, and combined with those of the Company.
As the Company continues to finalize the fair value of assets acquired and liabilities assumed, purchase price adjustments have been recorded and additional purchase price adjustments may be recorded during the measurement period. The Company reflects measurement period adjustments in the period in which the adjustments occur. The adjustments for the three months ended March 31, 2019 resulted from the receipt of additional financial information associated with certain acquired contract assets and the value of associated contingent purchase consideration obligation. These adjustments did not impact the Company's statements of operations. As of March 31, 2019, certain fair value estimates relating to intangible assets (including acquired in-process research and development (IPR&D)) acquired and income taxes are subject to further adjustment.
The total purchase price, revised for adjustments is summarized below:
|
| | | | |
| | October 15, 2018 |
Cash | | $ | 581.5 |
|
Equity | | 37.7 |
|
Fair value of contingent purchase consideration | | 48.0 |
|
Preliminary purchase consideration | | 667.2 |
|
Adjustments | | 1.5 |
|
Updated purchase consideration | | $ | 668.7 |
|
The Company issued 733,309 shares of common stock at $60.44 per share, the closing price of Emergent's common stock on October 15, 2018, with a total value of $44.3 million. The $44.3 million value of the common shares issued has been adjusted to a fair value of $37.7 million considering a discount for lack of marketability due to a two-year lock-up period beginning on October 15, 2018. The remaining contingent consideration payable for the acquisition consists of up to $100 million in cash based on the achievement of certain sales milestones through 2022, which the Company has determined had a regulatory milestone. At October 6, 2017,fair value of $48.0 million as of March 31, 2019 and for the payment of additional consideration based on the collectibility of identified acquired contract assets. The fair value of the contingent purchase consideration obligation related to the regulatory milestone was recorded at a fair value of $2.2 million. The fair value of this obligation is based on a present value model of management'smanagement’s assessment of the probability of achievementpotential future realization of the regulatory milestone as of the acquisition date.contingent purchase consideration
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
payments. This assessment is based on inputs that have no observable market (Level 3).
The total purchase priceobligation is summarized below:
(in thousands) | | | |
Amount of cash paid to Sanofi | | $ | 117,500 | |
Fair value of contingent purchase consideration | | | 2,200 | |
Total purchase price | | $ | 119,700 | |
measured using a discounted cash flow model.
The table below summarizes the preliminary allocation of the purchase price based upon the estimated fair values of assets acquired and liabilities assumed 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.15, 2018 updated for measurement period adjustments recorded through March 31, 2019.
(in thousands) | | | |
Fair value of tangible assets acquired: | | | |
Inventory | | $ | 74,876 | |
Property, plant and equipment | | | 19,995 | |
Total fair value of tangible assets acquired | | | 94,871 | |
| | | | |
Acquired intangible asset | | | 16,700 | |
Goodwill | | | 8,129 | |
Total purchase price | | $ | 119,700 | |
|
| | | | | | | | | | | |
| October 15, 2018 | | Measurement Period Adjustments | | Updated October 15, 2018 |
Estimated fair value of tangible assets acquired and liabilities assumed: | | | | | |
Cash | $ | 17.7 |
| | $ | — |
| | $ | 17.7 |
|
Accounts receivable | 21.3 |
| | — |
| | 21.3 |
|
Inventory | 41.4 |
| | — |
| | 41.4 |
|
Prepaid expenses and other assets | 7.8 |
| | 3.0 |
| | 10.8 |
|
Accounts payable | (32.2 | ) | | — |
| | (32.2 | ) |
Accrued expenses and other liabilities | (50.4 | ) | | — |
| | (50.4 | ) |
Deferred tax liability, net | (62.4 | ) | | (0.5 | ) | | (62.9 | ) |
Total estimated fair value of tangible assets acquired and liabilities assumed | (56.8 | ) | | 2.5 |
| | (54.3 | ) |
| | | | | |
Acquired in-process research and development | 41.0 |
| | — |
| | 41.0 |
|
Acquired intangible assets | 534.0 |
| | — |
| | 534.0 |
|
Goodwill | 149.0 |
| | (1.0 | ) | | 148.0 |
|
Total purchase price | $ | 667.2 |
| | $ | 1.5 |
| | $ | 668.7 |
|
The Company determined the estimated fair value of the intangible asset using the income approach. The preliminary estimated fair value of the intangible asset acquired for Adapt's marketed product NARCAN® Nasal Spray is valued at $534.0 million. The Company has determined the useful life of the NARCAN® Nasal Spray intangible asset to be 15 years. The Company estimated the fair value of the NARCAN® Nasal Spray intangible asset using the income approach which is based 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 determined the fair value of the ACAM2000 intangible asset using the income approachflows with a present value discount rate of 15.5%; this discount rate10.5%, which is derived frombased on the estimated weighted-average cost of capital for companies with profiles substantially similar companies and assets.to that of Adapt. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from the ACAM2000NARCAN® Nasal Spray 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 fair value measurements are based on significant unobservable inputs that are developed by the Company has determinedusing estimates and assumptions of the ACAM2000respective market and market penetration of the acquired company's products.
The intangible asset willassociated with the IPR&D acquired from Adapt is related to a product candidate. Management determined that the estimated acquisition-date fair value of intangible assets related to IPR&D was $41.0 million. The estimated fair value was determined using the income approach, which discounts expected future cash flows to present value. The Company estimated the fair value using a present value discount rate of 11.0%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Adapt and IPR&D assets at a similar stage of development as the product candidate. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value the IPR&D. The projected cash flows for the product candidate were based on key assumptions including: estimates of revenues and operating profits, the stage of development of pipeline programs on the acquisition date; the time and resources needed to complete the development and approval of the product candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a product candidate, such as obtaining marketing approval from the FDA and other regulatory agencies; and risks related to the viability of and potential for alternative treatments in any future target markets. IPR&D assets are considered to be amortized over 10 years.indefinite-lived until the completion or abandonment of the associated research and development efforts (see Note 7).
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
The Company determined the fair value of the inventory using the probability adjusted comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete and complete/dispose of the inventory with a profit on those costs.
The Company determined the fair value of the property, plant and equipment utilizing either the cost approach or the sales comparison approach. The cost approach is derived by determining replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach is derived by the determination that an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.
The Company recorded approximately $8.1$148.0 million in goodwill related to the ACAM2000Adapt acquisition, representing the amount ofwhich is calculated as the purchase price paid in the acquisition in excess of the fair value of the tangible and intangible assets acquired. Thereacquired representing the future economic benefits the Company expects to receive as a result of the acquisition. The goodwill created from the Adapt acquisition is noassociated with early stage pipeline products. Substantially all of the goodwill generated from the Adapt acquisition is not expected to be deductible for tax purposes.
4.Fair value measurements
Contingent consideration includes liabilities measured at fair value on a recurring basis. For the three and nine months ended September 30, 2018, the contingent purchase consideration obligations associated with RSDL increased by $0.2 million and $1.8 million, respectively. During the three and nine months ended September 30, 2017, the contingent purchase consideration obligations associated with RSDL increased by $0.9 million and $1.4 million, respectively. The changes in the fair value of the RSDL contingent consideration obligations are primarilypurposes due to the expected amount and timing of future net sales, which are inputs that have no observable market (Level 3). These changes are classified in the Company's statement of operations as cost of product sales and contract manufacturing.
The following table is a reconciliationlegal structure of the beginning and ending balance of the liabilities, consisting only of contingent consideration, measured at fair value, using significant unobservable inputs (Level 3) during the nine months ended September 30, 2018.transaction.
(in thousands) | | | |
Balance at December 31, 2017 | | $ | 12,274 | |
Expense included in earnings | | | 1,917 | |
Settlements | | | (2,234 | ) |
Balance at September 30, 2018 | | $ | 11,957 | |
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 September 30, 2018 and 2017 and for the quarters then ended, the Company had no significant assets or liabilities that were measured at fair value on a non-recurring basis.
5.Inventories
Inventories consisted of the following:
| | September 30, | | | December 31, | |
(in thousands) | | 2018 | | | 2017 | |
Raw materials and supplies | | $ | 33,845 | | | $ | 36,069 | |
Work-in-process | | | 64,825 | | | | 76,610 | |
Finished goods | | | 27,075 | | | | 30,133 | |
Total inventories | | $ | 125,745 | | | $ | 142,812 | |
6. Property, plant and equipment
Property, plant and equipment consisted of the following:
| | September 30, | | | December 31, | |
(in thousands) | | 2018 | | | 2017 | |
Land and improvements | | $ | 21,848 | | | $ | 21,843 | |
Buildings, building improvements and leasehold improvements | | | 161,175 | | | | 160,005 | |
Furniture and equipment | | | 217,908 | | | | 206,819 | |
Software | | | 53,180 | | | | 50,829 | |
Construction-in-progress | | | 141,348 | | | | 100,088 | |
Property, plant and equipment, gross | | | 595,459 | | | | 539,584 | |
Less: Accumulated depreciation and amortization | | | (160,384 | ) | | | (132,374 | ) |
Total property, plant and equipment, net | | $ | 435,075 | | | $ | 407,210 | |
In the table presented above, as of September 30, 2018 and December 31, 2017, construction-in-progress primarily includes costs related to construction of the Company's CIADM facility.
7.Intangible assets
During the three months ended September 30, 2018 and 2017, the Company recorded amortization expense for intangible assets of $3.9 million and $1.6 million, respectively. During the nine months ended September 30, 2018 and 2017, the Company recorded amortization expense for intangible assets of $11.7 million and $4.7 million, respectively. Amortization expense has been recorded in operating expenses, specifically selling, general and administrative and cost of product sales and contract manufacturing. As of September 30, 2018, the weighted average amortization period remaining for intangible assets was 8.2 years.
8. Equity
During the nine months ended September 30, 2018, the Company granted 0.4 million shares of stock options and 0.4 million shares of restricted stock units under the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan (the "Plan"). The grants vest over three equal annual installments beginning on the day prior to the anniversary of the grant date. On May 24, 2018, the Company's stockholders approved an increase in the number of shares issuable under the Plan by 3.0 million shares, to a total of 21.9 million shares, and extended the plan term to May 23, 2028.
9. Income taxes
The estimated effective annual tax rate for the Company, which excludes discrete adjustments, was 26% and 32% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in the estimated effective annual tax rate is primarily due to the impact of the Tax Reform Act enacted on December 22, 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21%, offset by state taxes, non-deductible expenses, international provisions from the U.S. tax reform and the impact of a change in the Company's jurisdictional mix of earnings. For the nine months ended September 30, 2018 and 2017, the Company recorded a discrete tax benefit of $8.7 million and $3.3 million, respectively, primarily associated with equity awards activity and finalizing positions taken on the Company's 2017 US federal and state income tax filings.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. For the nine months ended September 30, 2018, the Company revised certain provisional estimates recognized in 2017 upon the filing of US federal and state income tax filings. As the Internal Revenue Service and state jurisdictions continue to issue and/or clarify guidance, additional work may be necessary for a more detailed analysis of the Company's deferred tax assets and liabilities, its historical foreign earnings, as well as potential correlative adjustments. Any correlative adjustment to these amounts will be recorded to current tax expense in the final quarter of 2018 when the analysis is complete.
10. Earnings per share
The following table presents the calculation of basic and diluted net income per share:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(in thousands, except share and per share data) | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Numerator: | | | | | | | | | | | | |
Net income | | $ | 20,945 | | | $ | 33,551 | | | $ | 66,181 | | | $ | 48,652 | |
Interest expense on convertible debt, net of tax | | | - | | | | 704 | | | | - | | | | 2,445 | |
Amortization of convertible debt issuance costs, net of tax | | | - | | | | 195 | | | | - | | | | 586 | |
Net income, adjusted | | $ | 20,945 | | | $ | 34,450 | | | $ | 66,181 | | | $ | 51,683 | |
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted-average number of shares—basic | | | 50,071,632 | | | | 41,222,504 | | | | 49,851,082 | | | | 40,989,813 | |
Dilutive securities—equity awards | | | 1,415,364 | | | | 1,148,857 | | | | 1,338,598 | | | | 1,003,794 | |
Dilutive securities—convertible debt | | | - | | | | 8,096,468 | | | | - | | | | 8,096,481 | |
Weighted-average number of shares—diluted | | | 51,486,996 | | | | 50,467,829 | | | | 51,189,680 | | | | 50,090,088 | |
| | | | | | | | | | | | | | | | |
Net income per share - basic | | $ | 0.42 | | | $ | 0.81 | | | $ | 1.33 | | | $ | 1.19 | |
Net income per share - diluted | | $ | 0.41 | | | $ | 0.68 | | | $ | 1.29 | | | $ | 1.03 | |
For the three and nine months ended September 30, 2018 and 2017, basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.
For the three and nine months ended September 30, 2018, diluted earnings per share was computed using the "treasury method" by dividing the net income by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares is adjusted for the potential dilutive effect of the exercise of stock options, and the vesting of restricted stock units and performance stock units.
For the three and nine months ended September 30, 2017, diluted earnings per share is computed using the "if-converted" method by dividing the net income adjusted for interest expense and amortization of debt issuance cost, both net of tax, associated with the 2.875% Convertible Senior Notes due 2021 (the "Notes") by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares is adjusted for the potential dilutive effect of the exercise of stock options; and the vesting of restricted stock units and performance stock units along with the assumption of the conversion of the Notes, at the beginning of the period. The Company terminated the conversion rights under the Notes during the fourth quarter of 2017.
For the three and nine months ended September 30, 2018 and 2017, there were no stock options excluded from the calculation of diluted earnings per share.
11. Litigation
Shareholder Class Action Lawsuit filed July 19, 2016
On July 19, 2016, Plaintiff William Sponn ("Sponn"), filed a putative class action complaint in the United States District Court for the District of Maryland on behalf of purchasers of the Company's common stock between January 11, 2016 and June 21, 2016, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 against the Company and certain of its senior officers and directors, collectively, the Defendants. The complaint alleges, among other things, that the Company made materially false and misleading statements about the government's demand for BioThrax and expectations that the Company's five-year exclusive procurement contract 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 allegations to the original complaint. The Company filed a Motion to Dismiss on February 27, 2017. The Plaintiffs filed an opposition brief on April 28, 2017. The Company's Motion to Dismiss was heard and denied on July 6, 2017. The Company filed its answer on July 28, 2017. The parties then engaged in the process of exchanging discovery. The Plaintiffs filed an amended motion for class certification and appointment of Sponn and Geoffrey L. Flagstad as lead plaintiffs on December 20, 2017. A hearing on that motion was heard on May 2, 2018. On June 8, 2018 the Court granted class certification with a shortened class period, May 5, 2016 to June 21, 2016. The Defendants have denied, and continue to deny any and all allegations of fault, liability, wrongdoing, or damages. However, recognizing the risk, time, and expense of litigating any case to trial, on August 27, 2018, the Company reached an agreement in principle with Plaintiffs to settle all of the related claims of any individual plaintiff that purchased Company stock from January 11, 2016 to June 21, 2016, for $6.5 million, an amount that will be paid by the Company's insurance carrier. The settlement requires no payment by any of the Defendants. The Company and Defendants continue to deny any and all liability. The parties executed the settlement agreement on October 16, 2018, and filed the agreement with the court on October 17, 2018. The court granted preliminary approval of the settlement on October 18, 2018 and has scheduled a hearing regarding final approval for January 22, 2019. Although the court has granted preliminary approval, the court could decide not to grant final approval of the settlement or change terms of the settlement, and the law requires that individual plaintiffs have the right to opt-out of the settlement and bring their own, individual claims. The Company, therefore, at this time, cannot predict the results of this lawsuit and possible other legal proceedings with certainty. Defendants continue to believe that the allegations in the complaint are without merit. As of the date of this filing, the range of potential loss cannot be determined or estimated.
12. Subsequent events
Acquisitions
Acquisition of 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, an adenovirus 4/7 vaccine candidate being developed for military personnel under contract with the DoD, and additional clinical-stage vaccine candidates targeting chikungunya and other emerging infectious diseases, European-based current good manufacturing practices ("cGMP")(cGMP) biologics manufacturing facilities, and approximately 250 employees including those in research and development, manufacturing, and commercial operations with a specialty vaccines salesforce in the U.S. and in select European countries. The products and product candidates within PaxVax's portfolio are consistent with the Company’s mission and will expand the Company’s core business of addressing PHTs. In addition, the acquisition expands the Company's manufacturing infrastructure and related capabilities.
At the closing, theThe Company paid
a cash
purchase priceconsideration of
$270$273.1 million
using a combination of cash-on-hand and borrowings under the Company's senior secured credit agreement. This transaction will be 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 will be recorded as of October 4, 2018, the acquisition date, at their respective fair values, and combined with those of the Company.PaxVax. As of the date of this filing, the
Company has not completed the initial accounting for the PaxVax acquisition
is preliminary due to the Company's need to
continue to gather data
necessary to
completeassess the fair value
valuationof property, plant and equipment, intangible assets and accounting for taxes. The table below summarizes the preliminary allocation of the
purchase price based upon estimated fair values of assets acquired and liabilities
assumed.assumed at October 4, 2018 updated for measurement period adjustments recorded through March 31, 2019. |
| | | | | | | | | | | |
| October 4, 2018 | | Measurement Period Adjustments | | Updated October 4, 2018 |
Estimated fair value of tangible assets acquired and liabilities assumed: | | | | | |
Cash | $ | 9.0 |
| | $ | — |
| | $ | 9.0 |
|
Accounts receivable | 4.1 |
| | — |
| | 4.1 |
|
Inventory | 19.7 |
| | — |
| | 19.7 |
|
Prepaid expenses and other assets | 12.2 |
| | — |
| | 12.2 |
|
Property, plant and equipment | 57.8 |
| | — |
| | 57.8 |
|
Deferred tax assets | 3.8 |
| | — |
| | 3.8 |
|
Accounts payable | (3.5 | ) | | — |
| | (3.5 | ) |
Accrued expenses and other liabilities | (33.6 | ) | | — |
| | (33.6 | ) |
Total estimated fair value of tangible assets acquired and liabilities assumed | 69.5 |
| | — |
| | 69.5 |
|
| | | | | |
Acquired in-process research and development | 9.0 |
| | (9.0 | ) | | — |
|
Acquired intangible assets | 133.0 |
| | — |
| | 133.0 |
|
Goodwill | 61.6 |
| | 9.0 |
| | 70.6 |
|
Total purchase price | $ | 273.1 |
| | $ | — |
| | $ | 273.1 |
|
The preliminary estimated fair value of the intangible assets acquired for PaxVax's marketed products is a total of $133.0 million. The Company determined the estimated fair value of the intangible assets using the income approach, which is based on the present value of future cash flows. The fair value measurements are based on significant unobservable inputs that are developed by the Company using estimates and assumptions of the respective market and market penetration of the acquired Company's products. The Company has determined that the weighted average useful lives of the intangible assets to be 19 years. The Company estimated the fair value of the Vivotif and Vaxchora intangible
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
On Octoberassets using a present value discount rate of 14.5% and 15.0%, respectively, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of PaxVax. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from 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 the 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 both the cost approach and 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 $70.6 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 manufacturing services. The majority of the goodwill generated from the PaxVax acquisition is expected to be deductible for tax purposes based upon the structure used in the acquisition.
Impact of Business Acquisitions
The operations of each of the two business acquisitions discussed above were included in the consolidated financial statements as of each of their respective acquisition dates. The following table presents their revenue and earnings as reported within the consolidated financial statements.
|
| | | |
| March 31, 2019 |
Revenue | $ | 74.9 |
|
Operating loss | (3.8 | ) |
4. Inventories
The components of inventory are as follows:
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
Raw materials and supplies | | $ | 57.3 |
| | $ | 51.8 |
|
Work-in-process | | 112.7 |
| | 103.2 |
|
Finished goods | | 41.0 |
| | 50.8 |
|
Total inventories | | $ | 211.0 |
| | $ | 205.8 |
|
5. Property, plant and equipment
Property, plant and equipment consisted of the following:
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
Land and improvements | | $ | 44.3 |
| | $ | 44.6 |
|
Buildings, building improvements and leasehold improvements | | 223.4 |
| | 216.2 |
|
Furniture and equipment | | 316.8 |
| | 293.9 |
|
Software | | 55.5 |
| | 55.2 |
|
Construction-in-progress | | 57.2 |
| | 71.8 |
|
Property, plant and equipment, gross | | 697.2 |
| | 681.7 |
|
Less: Accumulated depreciation and amortization | | (183.8 | ) | | (171.5 | ) |
Total property, plant and equipment, net | | $ | 513.4 |
| | $ | 510.2 |
|
In the table presented above, construction-in-progress includes costs related to construction and equipment purchases.
6. Lease liabilities
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 operating lease right-of-use (ROU) reflected as a component of other current liabilities and other liabilities in our condensed consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses an implicit rate when readily determinable. At the beginning of a lease, the operating lease ROU asset also includes any concentrated lease payments expected to be paid and excludes lease incentives. The Company's lease ROU asset may include options to extend or terminate the lease when it is reasonably certain that the Company will 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 15 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows:
|
| | | | |
| | March 31, 2019 |
Operating lease cost: | | |
Amortization of right-of-use assets | | $ | 0.6 |
|
Interest on lease liabilities | | 0.1 |
|
Total operating lease cost | | $ | 0.7 |
|
Supplemental balance sheet information related to leases was as follows:
|
| | | | |
(In millions, except lease term and discount rate) | | March 31, 2019 |
Operating lease right-of-use assets | | $ | 12.9 |
|
| | |
Other current liabilities | | 2.0 |
|
Operating lease liabilities | | 11.6 |
|
Total operating lease liabilities | | $ | 13.6 |
|
| | |
Operating leases: | |
|
|
Weighted Average Remaining Lease Term | | 9.3 |
|
Weighted Average Discount Rate | | 4.27 | % |
7. Intangible assets
The Company's intangible assets consist of CBRNE, travelers' and opioid products acquired via business combinations or asset acquisitions. The following table summarizes the carrying amount of the Company's intangible assets and goodwill, net of accumulated amortization:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| Estimated Life (years) | Cost | | Measurement Period Adjustment | | Additions | | Gross Total | | Accumulated Amortization | | Net |
Intangible assets, net | 5-22 | $ | 818.4 |
| | — |
| | $ | 10.0 |
| | $ | 828.4 |
| | $ | (71.3 | ) | | $ | 757.1 |
|
IPR&D | indefinite | 50.0 |
| | (9.0 | ) | | — |
| | 41.0 |
| | — |
| | 41.0 |
|
Goodwill | indefinite | 259.7 |
| | 8.0 |
| | — |
| | 267.7 |
| | — |
| | 267.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Estimated Life (years) | Cost | | Measurement Period Adjustment | | Additions | | Gross Total | | Accumulated Amortization | | Net |
Intangible assets, net | 5-22 | $ | 151.4 |
| | — |
| | 667.0 |
| | $ | 818.4 |
| | $ | (56.8 | ) | | $ | 761.6 |
|
IPR&D | indefinite | 50.0 |
| | — |
| | — |
| | 50.0 |
| | — |
| | 50.0 |
|
Goodwill | indefinite | 49.1 |
| | — |
| | 210.6 |
| | 259.7 |
| | — |
| | 259.7 |
|
During the three months ended March 31, 2019 and 2018, the Company completedrecorded amortization expense for intangible assets of $14.5 million and $3.9 million, respectively. As of March 31, 2019, the acquisitionweighted average amortization period remaining for intangible assets was 14.3 years. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of Adapt Pharma Limited ("Adapt") and its NARCAN® (naloxone HCl) Nasal Spray marketed product, the first and only 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 includes the NARCAN Nasal Spray marketed product and a development pipeline of new treatment and delivery options to address opioid overdose, and approximately 50 employees, located in the U.S., Canada, and Ireland, including those responsible for supply chain management,associated research and development government affairs,efforts.
8. Contingent consideration
Contingent consideration liabilities associated with business combinations are fair value measurement items. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders if future events occur or conditions are met. These liabilities are measured at fair value at inception and commercial operations.at each subsequent reporting date. The changes in the fair value are primarily due to the expected amount and timing of future net sales and achieving regulatory milestones, which are inputs that have no observable market (Level 3). The Company also has contingent consideration associated with its asset acquisitions. These liabilities are accrued when milestones have been achieved. The following table is a reconciliation of the beginning and ending balance of contingent considerations and is based on level 3 significant unobservable inputs for the three months ended March 31, 2019.
The Company paid approximately $575 million15
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in cash at the closing (exclusive of closing adjustments)millions, except share and issued 733,309 shares of Common Stock, based on the volume-weighted average price per share amounts)
|
| | | |
| |
Balance at December 31, 2018 | $ | 60.0 |
|
Milestone achievement - asset acquisition | 10.0 |
|
Measurement period adjustment | 1.5 |
|
Change in fair value | 1.7 |
|
Settlements | (0.5 | ) |
Balance at March 31, 2019 | $ | 72.7 |
|
During the three months ended March 31, 2019, a contingent milestone was achieved related to the Company's acquisition of the Common Stockraxibacumab in October 2017. The acquisition of raxibacumab was accounted for as reported on the New York Stock Exchange for the ten-trading day period ending two days before closing, or $65.28 per share (an aggregate total of $47.9 million, inclusive of adjustments). The remaining consideration payable for thean asset acquisition consists of up to $100 million in cash based onand therefore the achievement of certain sales milestones through 2022. the $10.0 million milestone resulted in an increase to the contingent consideration liability with a corresponding increase in intangible assets.
9. Revenue recognition
The Company fundedoperates as one operating segment. Therefore, results of its operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. The Company's revenues disaggregated by the cash portionmajor sources were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 |
| | U.S Government | | Non-U.S. Government | | Total | | U.S Government | | Non-U.S. Government | | Total |
Product sales | | $ | 73.3 |
| | $ | 79.7 |
| | $ | 153.0 |
| | $ | 66.0 |
| | $ | 9.8 |
| | $ | 75.8 |
|
Contract manufacturing | | — |
| | 15.9 |
| | 15.9 |
| | — |
| | 26.1 |
| | 26.1 |
|
Contracts and grants | | 20.4 |
| | 1.3 |
| | 21.7 |
| | 14.8 |
| | 1.1 |
| | 15.9 |
|
Total revenues | | $ | 93.7 |
| | $ | 96.9 |
| | $ | 190.6 |
| | $ | 80.8 |
| | $ | 37.0 |
| | $ | 117.8 |
|
Contract liabilities
When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations is reflected as deferred revenue on the consolidated balance sheets and is deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of deferred revenue contract liability balances:
|
| | | | |
| | |
December 31, 2018 | | $ | 73.1 |
|
Deferral of revenue | | 4.9 |
|
Revenue recognized | | (2.8 | ) |
March 31, 2019 | | $ | 75.2 |
|
Transaction price allocated to remaining performance obligations
As of March 31, 2019, the Company had expected future revenues associated with performance obligations that have not been satisfied of approximately $510.8 million. The Company expects to recognize a majority of these revenues within the next 24 months, with the remainder recognized thereafter. However, the amount and timing of revenue recognition for unsatisfied performance obligations can materially change due to timing of funding appropriations from the USG and the overall success of the payments made at closing using a combinationCompany's development activities associated with its PHT product candidates that are then receiving development funding support from the government under development contracts. In addition, the amount of cash-on-hand and borrowings under its Amended Credit Agreement, as describedfuture revenues associated with unsatisfied performance obligations excludes the value associated with unexercised option periods in the Long-term debt section below.Company's contracts (which are not performance obligations as of March 31, 2019).
This transaction will be accounted16
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
Contract assets
The Company considers unbilled accounts receivables and deferred costs associated with revenue generating contracts, which are not included in inventory or property, plant and equipment, as contract assets. As of March 31, 2019 and December 31, 2018, the Company had contract assets associated with deferred costs of $1.3 million and $1.2 million, respectively, which is included in prepaid expenses and other current assets on the Company's consolidated balance sheets.
Accounts receivable
Accounts receivable including unbilled accounts receivable contract assets consist of the following:
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
Billed, net | | $ | 89.6 |
|
| $ | 234.0 |
|
Unbilled | | 31.9 |
|
| 28.5 |
|
Total, net | | $ | 121.5 |
|
| $ | 262.5 |
|
As of March 31, 2019 and December 31, 2018, allowance for doubtful accounts were de minimis.
10. Income taxes
The estimated effective annual tax rate for the Company, which excludes discrete adjustments, was 27% and 26% for the three months ended March 31, 2019 and 2018, respectively. The increase in the estimated effective annual tax rate is primarily due to the impact of the acquisitions of Adapt and PaxVax on state taxes and changes in fair value of the Apapt contingent consideration which is non-deductible. For the three months ended March 31, 2019 and 2018, the Company recorded a discrete tax benefit of $1.8 million and $2.3 million, respectively, primarily associated with equity awards activity during the quarters.
11. Earnings per share
The following table presents the calculation of basic and diluted net income per share:
|
| | | | | | | | |
(in millions, except share and per share data) | | Three Months Ended March 31, |
| 2019 | | 2018 |
Numerator: | | | | |
Net loss | | $ | (26.0 | ) | | $ | (4.9 | ) |
| | | | |
Denominator: | | | | |
Weighted-average number of shares—basic | | 51.2 |
| | 49.6 |
|
Dilutive securities—equity awards | | — |
| | — |
|
Weighted-average number of shares—diluted | | 51.2 |
| | 49.6 |
|
| | | | |
Net loss per share - basic | | $ | (0.51 | ) | | $ | (0.10 | ) |
Net loss per share - diluted | | $ | (0.51 | ) | | $ | (0.10 | ) |
For the three months ended March 31, 2019 and 2018, basic earnings per share is computed by dividing net loss by the Company underweighted average number of shares of common stock outstanding during the acquisitionperiod.
For the three months ended March 31, 2019 and 2018, diluted earnings per share is computed using the treasury method by dividing net loss by the weighted average number of accounting, withshares of common stock outstanding during the Companyperiod, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised and are not anti-dilutive. No adjustment for the potential dilutive effect of dilutive securities is reported as the acquirer. Under the acquisition method of accounting, the assets and liabilities of Adapt will be recorded as of October 15, 2018, the acquisition date, at their respective fair values, and combined with those of the Company. As of the date of this filing, the Company has not completed the initial accountingeffect would have been anti-dilutive for the Adapt acquisitionthree months ended March 31, 2019 and 2018 due to the Company's neednet loss. For the three months ended March 31, 2019 and 2018, approximately 3.1 million and 3.2 million, respectively, of equity awards were excluded from the calculation of diluted earnings per share.
12. Equity
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
During the three months ended March 31, 2019, the Company granted stock options to continuepurchase 0.3 million shares of common stock and 0.3 million restricted stock units under the Emergent BioSolutions Inc. Stock Incentive Plan (the Plan). The grants vest over three equal annual installments beginning on the day prior to gather data necessarythe anniversary of the grant date.
13. Defined benefit plan
The Company sponsors a defined benefit pension plan covering eligible employees in Switzerland (the Swiss Plan). Under the Swiss Plan, the Company and certain of its employees with annual earnings in excess of government determined amounts are required to completemake 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 valuationconsistent with its contract value based on the practicability exception using level 3 inputs. The entire liability is listed as non-current, because plan assets are greater than the expected benefit payments over the next year. The Company recognized pension expense related to the Swiss Plan of $$0.3 million, reflected as a component of selling, general and administrative for the three months ended March 31, 2019.
The measurement date used for the Swiss Plan is December 31, annually. The expense components of the assets acquiredSwiss Plan consisted of the following:
|
| | | | |
| | Three Months Ended March 31, 2019 |
Net service cost | | $ | 0.3 |
|
Expected return on plan assets, net of expenses | | (0.1 | ) |
Total | | $ | 0.2 |
|
14. Commitments and liabilities assumed.Contingencies
Legal proceedings associated with the acquisition of Adapt
ANDA Litigation
- Perrigo 4mg
On September 14, 2018, Adapt Pharma Inc., Adapt Pharma Operations Limited and Adapt Pharma Ltd. (collectively, "Adapt Pharma")Adapt Pharma), and Opiant Pharmaceuticals, Inc. ("Opiant")(Opiant), received notice from Perrigo UK FINCO Limited Partnership ("Perrigo"),(Perrigo) that Perrigo had filed an Abbreviated New Drug Application ("ANDA"),(ANDA) with the United States Food and Drug Administration (the "FDA"),FDA, 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")‘253 Patent), 9,468,747 (the "'747 Patent")‘747 Patent), 9,561,177 (the "'177 Patent")‘177 Patent), 9,629,965 (the "'965 Patent")‘965 Patent), and 9,775,838 (the "'838 Patent")‘838 Patent). Perrigo'sOn or about October 25, 2018, Perrigo sent a subsequent notice letter assertsrelating 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'BioSolutions’ Adapt Pharma subsidiaries and Opiant (collectively, the "Plaintiffs")Plaintiffs), filed a complaint for patent infringement of the ‘253, ‘747, ‘177, ‘965, and the ‘838 Patents against Perrigo in the United States District Court for the District of New Jersey arising from Perrigo'sPerrigo’s ANDA filing with the FDA. Plaintiffs filed a second complaint against Perrigo on December 7, 2018, for the infringement of the ‘937 Patent. As a result of timely filing the first lawsuit in accordance with the Hatch-Waxman Act, a 30-month stay of approval will be imposed by the FDA on Perrigo'sPerrigo’s ANDA, which is expected to remain in effect until March 2021 absent an earlier judgment, unfavorable to the Plaintiffs, by the Court. The Plaintiffs seek, among other relief, an order that the effective date of FDA approval of the
ANDA be a date no earlier than the expiration of each of the '253 Patent, the '747 Patent, the '177 Patent, the '965 Patent and the '838 Patent, as well as equitable relief enjoining Perrigo from infringing these patents, and monetary relief as a result of any such infringement. Emergent continues to vigorously enforce the intellectual property portfolio related to NARCAN® Nasal Spray.Litigation - Teva 2mg
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),
or 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")‘644 Patent), and U.S. Patent No. 9,707,226 (the
"'226 Patent")'226 Patent). Teva's notice letter asserts that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the '644 Patent or the '226 Patent, or that the '644 Patent and '226 Patent are invalid or unenforceable. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant filed a complaint for patent infringement against Teva in the United States District Court for the District of New Jersey.
ANDA Litigation - Teva 4mg
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
On or about September 13, 2016, Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received notice from Teva that Teva had filed an ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 4 mg/spray before the expiration of U.S. Patent No. 9,211,253 (the "'253 Patent").the '253 Patent. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant received additional notices from Teva relating to the '747, the '177, the '965, the '838, and the '838‘937 Patents. Teva's notice letters assert that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the '253, the '747, the '177, the '965, the '838, or the '838‘937 Patent, or that the '253, the '747, the '177, the '965, the '838, and the '838‘937 Patents are invalid or unenforceable. Adapt Pharma Inc., and Adapt Pharma Operations Limited and Opiant filed a complaint for patent infringement against Teva in the United States District Court for the District of New Jersey with respect to the '253 Patent. Adapt Pharma Inc. and Adapt Pharma Operations Limited and Opiant also filed complaints for patent infringement against Teva in the United States District Court for the District of New Jersey with respect to the '747, the '177, the '965, and the '838 Patents. All five proceedings have been consolidated.
As of the date of this filing, Adapt Pharma Inc., Adapt Pharma Operations Limited, and Opiant, have not filed a complaint related to the ‘937 Patent.
In the complaints described in the prior two paragraphs above, the Plaintiffs seek, among other relief, an orderorders that the effective date of FDA approvalapprovals of the Teva ANDA products and the Perrigo ANDA product be a date not earlier than the expiration of the applicable patent, as well aspatents listed for each product, equitable relief enjoining Teva and Perrigo from making, using, offering to sell, selling, or importing the productproducts that isare the subject of the Teva ANDAand Perrigo’s respective ANDAs, until after the expiration of the applicable patent,patents listed for each product, and monetary relief or other relief as deemed just and proper by the court.
Shareholder Class Action Lawsuit filed July 19, 2016
On July 19, 2016, Plaintiff William Sponn (Sponn), filed a resultputative class action complaint in the United States District Court for the District of Maryland on behalf of purchasers of the Company’s common stock between January 11, 2016 and June 21, 2016, inclusive (the Class Period), seeking to pursue remedies under the Exchange Act against the Company and certain of its senior officers and directors (collectively, the Defendants). The complaint alleged, among other things, that the Defendants made materially false and misleading statements about the government’s demand for BioThrax and expectations that the Company’s five-year exclusive procurement contract with the U.S. Department of Health and Human Services (HHS) would be renewed, and omitted certain material facts. Sponn sought 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 Robbins Geller Rudman & Dowd LLP as Lead Counsel. On December 27, 2016, the Plaintiffs filed an amended complaint that cited the same class period, named the same defendants and made similar allegations to the original complaint. The Defendants filed a Motion to Dismiss on February 27, 2017. The Plaintiffs filed an opposition brief on April 28, 2017. The Defendants’ Motion to Dismiss was heard and denied on July 6, 2017. The Defendants filed an answer on July 28, 2017. The parties then engaged in the discovery process. The Plaintiffs filed an amended motion for class certification and appointment of Lead Plaintiffs, Sponn, and Geoffrey L. Flagstad (Flagstad) as Class Representatives on December 20, 2017. A hearing on that motion was heard on May 2, 2018. On June 8, 2018 the Court granted class certification with a shortened class period, from May 5, 2016 to June 21, 2016. In that same order, the court appointed Flagstad as Class Representative and Robbins Geller Rudman & Dowd LLP as Class Counsel. The Defendants have denied, and continue to deny, any and all allegations of fault, liability, wrongdoing, or damages. However, recognizing the risk, time, and expense of litigating any case to trial, on August 27, 2018, the Defendants reached an agreement in principle with Plaintiffs to settle all of the related claims of any such infringement.
Asindividual plaintiff that purchased or acquired Company stock from January 11, 2016 to June 21, 2016, for $6.5 million, an amount that was paid by the Company’s insurance carrier. The settlement required no payment by any of the dateDefendants. The Defendants continue to deny any and all liability. The parties executed the settlement agreement on October 16, 2018 and filed the agreement with the court on October 17, 2018. The court granted preliminary approval of this filing, the rangesettlement on October 18, 2018, issued an amended preliminary approval of potential gain cannotthe settlement on October 25, 2018, and scheduled a hearing regarding final approval for January 22, 2019. At the time of the final approval hearing on January 22, 2019, there were no objections to the settlement, but there were two shareholders who had submitted opt-outs so that they could be determined or estimated forexcluded from the above mentioned complaints.settlement. On January 25, 2019, the court issued an order and final judgment approving the settlement. The time to file a notice of appeal has passed.Defendants continue to believe that the allegations in the complaint are without merit.
EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)
On September 29, 2017, the Company entered into15. Supplemental Information
The following table provides a senior secured credit agreement (the "2017 Credit Agreement") with four lending financial institutions. The 2017 Credit Agreement provided for a senior secured credit facilityreconciliation of up to $200 million through September 29, 2022. The 2017 Credit Agreement also included a $100 million accordion feature, which provided for an additional $100 million in revolver or incremental term loans, at the option of the Company, resulting in a potential aggregate commitment of up to $300 million. On October 4, 2018, the Company drew down $100 million under the 2017 Credit Agreement to pay for a portion of the purchase price of PaxVax.cash, cash equivalents and restricted cash:
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
Cash and cash equivalents | | $ | 137.2 |
| | $ | 112.2 |
|
Restricted cash | | 0.2 |
| | 0.2 |
|
Total cash, cash equivalents and restricted cash | | $ | 137.4 |
| | $ | 112.4 |
|
On October 15, 2018, the Company entered into an Amended20
EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in millions, except share and Restated Credit Agreement, dated as of October 15, 2018 (the "Amended Credit Agreement"), which amended and restated the Company's 2017 Credit Agreement, dated as of September 29, 2017.per share amounts)
The Amended Credit Agreement (i) increased the revolving credit facility (the "Revolving Credit Facility") from $200 million to $600 million, (ii) extended the maturity of the Revolving Credit Facility from September 29, 2022 to October 13, 2023, (iii) provided for a term loan in the original principal amount of $450 million (the "Term Loan Facility," and together with the Revolving Credit Facility, the "Senior Secured Credit Facility"), (iv) added several additional lenders, (v) amended the applicable margin such that borrowings with respect to the Revolving Credit Facility will bear interest at the annual rate described below, (vi) amended the provision relating to incremental credit facilities such that the Company may request one or more incremental term loan facilities, or one or more increases in the commitments under the Revolving Credit Facility (each an "Incremental Loan"), in any amount if, on a pro forma basis, the Company's consolidated secured net leverage ratio does not exceed 2.50 to 1.00 after such incurrence, plus $200 million and (vii) amended the maximum consolidated net leverage ratio financial covenant from 3.50 to 1.0 (subject to 0.50% step up in connection with material acquisitions) to the maximum consolidated net leverage ratio described below.
Prior to entering into the Amended Credit Agreement, the outstanding principal balance under the Revolving Credit Facility was $100 million. On October 15, 2018, the Company borrowed an additional $218 million, bringing the total borrowings under the Revolving Credit Facility to $318 million and the full $450 million under the Term Loan Facility. Such borrowings were used to finance a portion of the consideration for the Adapt acquisition and related fees, costs and expenses and the remainder will be used for general corporate purposes.
The Revolving Credit Facility may be utilized for working capital, permitted acquisitions, capital expenditures and other general corporate purposes. The Revolving Credit Facility is available for borrowing through October 12, 2023 (unless earlier terminated). Borrowings under the Revolving Credit Facility and the Term Loan Facility will bear interest at a rate per annum equal to (a) a eurocurrency rate plus a margin ranging from 1.25% to 2.00% per annum, depending on the Company's consolidated net leverage ratio or (b) a base rate (which is the highest of the prime rate, the federal funds rate plus 0.50%, and a eurocurrency rate for an interest period of one month plus 1%) plus a margin ranging from 0.25% to 1.00%, depending on the Company's consolidated net leverage ratio.
The Company is required to make quarterly payments under the Amended Credit Agreement for accrued and unpaid interest on the outstanding principal balance under the Revolving Credit Facility and the Term Loan Facility, based on the above interest rates. In addition, the Company is required to pay commitment fees ranging from 0.15% to 0.30% per annum, depending on the Company's consolidated net leverage ratio, in respect of the average daily unused commitments under the Revolving Credit Facility. The Company is to repay the outstanding principal amount of the Term Loan Facility in quarterly installments based on an annual percentage equal to 2.5% of the original principal amount of the Term Loan Facility during each of the first two years of the Term Loan Facility, 5% of the original principal amount of the Term Loan Facility during the third year of the Term Loan Facility and 7.5% of the original principal amount of the Term Loan Facility during each year of the remainder of the term of the Term Loan Facility until the maturity date of the Term Loan Facility, at which time the entire unpaid principal balance of the Term Loan Facility will be due and payable. The Company has the right to prepay the Term Loan Facility without premium or penalty. The Revolving Credit Facility and the Term Loan Facility mature (unless earlier terminated) on October 13, 2023.
The Amended Credit Agreement also provides for 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 Senior Secured Credit Facility from certain dispositions of property or from casualty events involving their property, subject to certain reinvestment rights.
The Amended Credit Agreement contains affirmative and negative covenants customary for financings of this type. Negative covenants in the Amended Credit Agreement, among other things, limit the ability of the Company to: incur indebtedness and liens; dispose of assets; make investments including loans, advances, guarantees, or acquisitions (other than permitted acquisitions, subject to compliance with the financial covenants and certain other conditions); and enter into certain merger or consolidation transactions. The Amended Credit Agreement also contains financial covenants, including (1) a minimum consolidated debt service coverage ratio of 2.50 to 1.00, and (2) a maximum consolidated net leverage ratio of 4.00 to 1.00 through September 29, 2019, 3.75 to 1.00 from September 30, 2019 through September 29, 2020 and 3.50 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, subject to the terms and conditions of the Amended Credit Agreement. Each of the ratios referred to in the foregoing clauses (1) and (2) is calculated on a consolidated basis for each consecutive four fiscal quarter period.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, includingincludes information with respect to our plans and strategy for our business and financing, includesas well as forward-looking statements that involve risks and uncertainties. You should carefully review the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this quarterly report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a global life sciences company focused on providing specialty products forto civilian and military populations a portfolio of innovative preparedness and response products and solutions that address accidental, intentionaldeliberate and naturally occurring public health threats, or PHTs. Within the category of our specialty products, wePHTs.
We are focused on developing, manufacturingthe following four distinct PHT categories: CBRNE; EID; travelers’ diseases; and commercializing medical countermeasures, or MCMs, that address PHTs.opioids. We have a product portfolio of eleven products through which we(vaccines, antibody therapeutics, and drug-device combination products) that generate our product sales revenue, which accounts for a majority of our total revenue,revenue. We also have a fully-integrated portfolio of contract manufacturing services, and a research and development pipeline of various investigational stage product candidates. The U.S. government is the primary purchaser of our products and provides us with substantial funding for the development of many of our product candidates. Our development pipeline consistsconsisting of a diversified mix of both pre-clinical-pre-clinical and clinical-stageclinical stage product candidates.candidates (vaccines, antibody therapeutics, and drug-device combination products). Finally, we have a fully-integrated portfolio of contract development and manufacturing services. We continue to pursue acquiring and developing products and solutions that provide an opportunity to serve both government and commercial (non-government) customers.