News Column

EMERGENT BIOSOLUTIONS INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 8, 2014

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, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. You should 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

Product Portfolio

Emergent BioSolutions Inc. is a specialty biopharmaceutical company seeking to protect and enhance life by offering specialized products to healthcare providers and governments for use in addressing medical needs and emerging health threats. We have two operating divisions: Biodefense and Biosciences. For financial reporting purposes, we operate in two business segments that correspond to these two divisions. On February 21, 2014, we acquired Cangene Corporation, or Cangene, for approximately $222 million. As part of the acquisition, we received the following revenue-generating products: BATTM [Botulism Antitoxin Heptavalent (A, B, C, D, E, F, G)-Equine], AIGIV (Anthrax Immune Globulin Intravenous (Human)) and VIGIV (Vaccinia Immune Globulin Intravenous (Human)) in the Biodefense segment; and WinRho® SDF [Rho(D) Immune Globulin Intravenous (Human)], HepaGam B® (Hepatitis B Immune Globulin Intravenous (Human)), VARIZIG® (Varicella Zoster Immune Globulin (Human)) and episil® in the Biosciences segment. Our Biodefense division is a specialty biopharmaceutical business focused on countermeasures (vaccines, therapeutics and medical devices) that address Chemical, Biological, Radiological and Nuclear, or CBRN, threats. The U.S. government is the primary purchaser of our Biodefense products, and often provides us with substantial funding for the development of our Biodefense product candidates. Our Biodefense product portfolio consists of five revenue-generating products, including BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine approved by the U.S. Food and Drug Administration, or the FDA, for the prevention of anthrax disease, RSDL® (KBDO individual use skin decontamination packet), BAT, AIGIV and VIGIV, and various investigational stage product candidates. Operations that support this division include manufacturing, medical affairs, regulatory affairs, quality assurance, quality control, international sales and marketing, and domestic government affairs in support of our marketed products, as well as product development and manufacturing infrastructure in support of our investigational stage product candidates. Our Biosciences division is a specialty biopharmaceutical business focused on therapeutics and vaccines in hematology/oncology, transplantation and infectious disease. Our Biosciences portfolio consists of four revenue-generating products, including WinRho, HepaGam B, VARIZIG, and episil®, as well as various investigational stage product candidates and a contract manufacturing services business, which we acquired in our recent acquisition of Cangene. Operations that support this division include manufacturing, quality, regulatory, medical affairs, and sales and marketing in support of our marketed products, as well as additional product development capabilities in support of our investigational stage product candidates. Our Biodefense segment has generated net income for each of the last five fiscal years. Over this same time frame, our Biosciences segment has generated revenue through development contracts and collaborative funding, but has not generated any product sales revenues. As a result, our Biosciences segment has incurred a net loss for each of the last five fiscal years.



Product Sales

We have derived the majority of our historical product sales revenues from BioThrax sales to the U.S. government. We are currently a party to a contract with the Centers for Disease Control and Prevention, or CDC, an operating division of the U.S. Department of Health and Human Services, or HHS, to supply up to 44.75 million doses of BioThrax for placement into the Strategic National Stockpile, or SNS, over a five-year period ending September 30, 2016. We expect to continue to derive a majority of product sales revenues from our sales of BioThrax to the U.S. government. Our total revenues from BioThrax sales were $92.0 million and $96.0 million for the six months ended June 30, 2014 and 2013, respectively. We are focused on the following:



§ increasing sales for our Biodefense products to U.S. government customers; and

§ expanding the market for our product portfoilio to other customers domestically

and internationally. Contract Manufacturing We provide contract manufacturing services, including biopharmaceutical product development and filling services for injectable and other sterile products, as well as process design, technology transfer, manufacturing validation, laboratory support, aseptic filling, lyophilization and accelerated and ongoing stability studies. We produce finished units of commercial drugs for a variety of customers ranging from small biopharmceutical companies to major multinationals. We are focused on increasing services to third party biopharmecutical companies, both domestically and internationally.



Contracts and Grants

We seek to advance development of our product candidates through external funding arrangements. We may slow down development programs or place them on hold during periods that are not covered by external funding. In addition, we perform certain ongoing product-related services for which we receive funding. We have received funding from the U.S. government for the following programs:



§ BioThrax as a post-exposure prophylaxis, or PEP;

§ NuThrax;

§ Large-scale manufacturing for BioThrax;

§ PreviThrax; § BAT; § AIGIV; and § VIGIV.



We continue to actively pursue additional government sponsored development contracts and grants and commercial collaborative relationships. We also encourage both governmental and non-governmental agencies and philanthropic organizations to provide funding for non-clinical activities and to conduct clinical studies of our product candidates.

Financial Operations Overview

Revenues

We entered into a contract with the CDC effective as of September 30, 2011 to supply up to 44.75 million doses of BioThrax to the CDC over a five-year period. The period of performance under the award is from September 30, 2011 through September 30, 2016. The maximum amount that could be paid to us under the contract is up to $1.25 billion, subject to availability of funding by the U.S. government. To date, the U.S. government has committed approximately $704 million for the procurement of BioThrax doses under this contract. Through June 30, 2014, we have delivered and, upon CDC acceptance, recognized revenue on approximately 21 million doses, representing approximately $570 million in revenue under this contract. We have received contract and grant funding from the CDC, National Institute of Allergy and Infectious Diseases, or NIAID, and the Biomedical Advanced Research and Development Authority, or BARDA, for the following development programs: Development Programs Funding Source Award Date Performance Period Post-Exposure Prophylaxis indication for BioThrax BARDA 9/2007 9/2007 - 3/2016 Large-scale manufacturing for BioThrax BARDA 7/2010

7/2010 - 7/2016 NuThrax NIAID 7/2010 8/2010 - 4/2015 PreviThrax BARDA 9/2010 9/2010 - 9/2015 CIADM BARDA 6/2012 6/2012 - 6/2037 BAT CDC 1/2003 1/2003 - 1/2015 BAT BARDA 5/2006 5/2006 - 5/2026 AIGIV BARDA 9/2005 9/2005 - 4/2021 AIGIV BARDA 9/2002 9/2002 - 12/2015 AIGIV BARDA 9/2013 9/2013 - 9/2018 VIGIV CDC 8/2012 8/2012 - 12/2015

Our revenue, operating results and profitability have varied, and we expect they will continue to vary on a quarterly basis, primarily due to the timing of sales of our products and the timing of reimbursement under our contracts and grants.



Cost of Product Sales

The primary expense that we incur to deliver our vaccines and therapeutics to our customers is manufacturing cost, consisting of fixed and variable costs. Variable manufacturing costs consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing and filling operations, and sales-based royalties. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. We determine the cost of product sales for products sold during a reporting period based on the average manufacturing cost per unit in the period those units were manufactured. In addition to the fixed and variable manufacturing costs described above, the cost of product sales depends on utilization of available manufacturing capacity. The primary expense that we incur to deliver our medical device, RSDL, to our customers is the cost per unit of production from our third-party contract manufacturer. Other associated expenses include sales-based royalties, amortization of intangible assets, shipping, logistics and the cost of support functions.



Research and Development Expenses

We expense research and development costs as incurred. Our research and development expenses consist primarily of:

§ personnel-related expenses;

§ fees to professional service providers for, among other things, analytical

testing, independent monitoring or other administration of our non-clinical

studies and clinical trials; and obtaining and evaluating data from our

clinical trials and non-clinical studies;

§ costs of contract manufacturing services for clinical trial material;

§ costs of materials used in clinical trials and research and development;

§ depreciation of capital assets used to develop our products; and

§ operating costs, such as the operating costs of facilities and the legal costs

of pursuing patent protection of our intellectual property.

We intend to focus our product development efforts on promising late-stage candidates that we believe satisfy well-defined criteria and seek to utilize collaborations or non-dilutive funding. We plan to seek funding for development activities from external sources and third parties, such as governments and non-governmental organizations, including commerical partners. We expect that our research and development spending will be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of research and development spending, the number of product candidates under development, the size, structure and duration of any follow-on clinical programs that we may initiate, the costs associated with manufacturing our product candidates on a large-scale basis for later stage clinical trials, and our ability to use or rely on data generated by government agencies, such as studies involving BioThrax conducted by the CDC.



Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executive, sales and marketing, business development, government affairs, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs not otherwise included in cost of product sales and contract manufacturing or research and development expense.



In-process Research and Development

The intangible asset associated with in-process research and development, or IPR&D, acquired from Cangene, is the IXINITY product candidate. As part of the preliminary purchase price allocation with respect to the Cangene acquisition, management determined that the estimated acquisition date fair value related to IPR&D was $8.5 million. The estimated fair value was determined using the income approach, which discounts expected future cash flows to present value. We estimated the fair value using a present value discount rate of 16%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Cangene. 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 from the IPR&D projects were based on key assumptions, including: estimates of revenues and operating profits related to each project considering its stage of development 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 alternative treatments in any future target markets. IPR&D assets will be considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. On July 29, 2014, the U.S. Food and Drug Administration ("FDA") issued a complete response letter for the New Drug Application ("NDA") of IXINITY. The complete response letter requested additional analyses of data from completed studies and noted deficiencies in the chemistry, manufacturing, and controls section of the license application, all of which must be resolved before approval can be granted by FDA. We determined the FDA's response to our NDA is a potential indicator of impairment of the related IXINITY IPR&D asset. However, we have not yet completed our interim impairment assesment. We have determined the potential range of impairment could be from zero to the carrying value

of the IXINITY IPR&D asset. Inventory Step-up As part of the preliminary purchase price allocation with respect to the Cangene acquisition, management determined that acquired inventory includes a $6.2 million adjustment to record inventory at fair value, referred to as a step-up adjustment. The $6.2 million step-up was estimated to be amortized through cost of product sales and contract manufacturing over the next five years based on estimated inventory turnover, which will increase costs of product sales and contract manufacturing during such period.



Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. During the six months ended June 30, 2014, there have been no significant changes to our summary of significant accounting policies, contained in the our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission, or SEC, except for additions to our accounting policy for revenue recognition related to the Cangene acquisition.



Revenue Recognition

We recognize revenues from product sales if four basic criteria have been met:

§ there is persuasive evidence of an arrangement;

§ delivery has occurred or title has passed to our customer;

§ the fee is fixed or determinable; and

§ collectibility is reasonably assured.

All revenues from product sales are recorded net of applicable allowances for sales returns, rebates, special promotional programs, and discounts. We estimate allowances for deductions from revenue using a combination of information received from third parties including market data, inventory reports from major wholesalers, historical information and analysis. These estimates are subject to the inherent limitations of estimates that rely on third-party data, as certain third-party information may itself rely on estimates and reflect other limitations. Provisions for estimated rebates and other allowances, such as discounts and promotional and other credits, are estimated based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and contract terms, and actual discounts offered. Management believes that such provisions are determinable because of the limited number of assumptions involved and the consistency of historical experience. We market and sell our Biosciences products through commercial wholesalers (direct customers) who purchase the products at a price referred to as the wholesale acquisition cost, or WAC. Additionally, we enter into agreements with indirect customers for a contracted price that is less than the WAC. The indirect customers, such as group-purchasing organizations, physician practice-management groups and hospitals, purchase the Company's products from the wholesalers. Under these agreements with the wholesalers, we guarantee that it will credit them for the difference between the WAC and the indirect customers' contracted price. This credit is referred to as a chargeback. Wholesalers provide detailed information regarding indirect customer purchases as part of the justification for their credit request. Once received by us, these requests are standardized and tracked within a software system that adjudicates and reconciles all indirect claims coming from wholesalers. The database with these claims is used for historical trending and estimating future indirect sales, which are used to estimate accruals. Adjustments to these provisions are made periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. We make subjective judgments primarily based on its evaluation of current market conditions and trade inventory levels related to the products. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or as an adjustment to past sales, or both. We estimate allowances for revenue-reducing obligations such as rebates, special promotional programs, and discounts, using a combination of historical trends, contractual obligations and information received from third parties. The accuracy of these estimates is dependent upon the inherent limitations of extrapolating estimates from historical trends and upon the quality of the third-party information.



Results of Operations

Three Months ended June 30, 2014 Compared to Three Months ended June 30, 2013

Revenues

Product sales revenues increased by $12.7 million, or 19%, to $78.3 million for the three months ended June 30, 2014 from $65.6 million for the three months ended June 30, 2013. Product sales revenue included:



§ BioThrax - $67.5 million for the three months ended June 30, 2014 as compared

to $65.6 million for the three months ended June 30, 2013;

§ RSDL (acquired in August 2013) - $1.5 million for the three months ended June

30, 2014;

§ WinRho (acquired in February 2014) - $6.3 million for the three months ended

June 30, 2014;

§ HepaGam (acquired in February 2014) - $2.2 million for the three months ended

June 30, 2014; and

§ Other products (acquired in February 2014) - $770,000 for the three months

ended June 30, 2014. BioThrax product sales revenues during the three months ended June 30, 2014 consisted of sales to the CDC of $65.7 million and aggregate international and other sales of $1.8 million. Product sales revenues during the three months ended June 30, 2013 consisted of BioThrax sales to the CDC of $65.6 million and aggregate international and other sales of $28,000.



Contract manufacturing (which we acquired in February 2014) revenue was $9.2 million for the three months ended June 30, 2014. Contract manufacturing revenues primarily consists of contract services to third parties.

Contracts and grants revenues increased by $6.0 million, or 36%, to $22.9 million for the three months ended June 30, 2014 from $16.8 million for the three months ended June 30, 2013. The increase in contracts and grants revenues was primarily due to the following: § development funding of $6.3 million for BAT (acquired in February 2014);



§ development funding of $4.5 million for AIG (acquired in February 2014); and

§ increased revenue of $1.6 million for NuThrax, due to the timing of clinical

trial activities.



These increases were partially offset by;

§ decreased revenue of $4.8 million from 2013 related to the establishment of our

CIADM, primarily due to a license fee milestone achieved in 2013; and

§ decreased revenue of $2.8 million under our development contracts for

PreviThrax and large scale manufacturing of BioThrax, primarily due to the

timing of development efforts.

Cost of Product Sales and Contract Manufacturing

Cost of product sales and contract manufacturing increased by $17.6 million, or 104%, to $34.5 million for the three months ended June 30, 2014 from $16.9 million for the three months ended June 30, 2013. The increase was primarily attributable to the following:



§ RSDL (acquired in August 2013) - $3.1 million for the three months ended June

30, 2014; and

§ product and contract manufacturing costs associated with revenues acquired as

part of the Cangene acquisition (acquired in February 2014) - $14.4 million for

the three months ended June 30, 2014.

Research and Development Expenses

Research and development expenses increased by $7.1 million, or 24%, to $37.4 million for the three months ended June 30, 2014 from $30.3 million for the three months ended June 30, 2013. This increase primarily reflects higher contract service costs, and includes increased expenses of $3.6 million for product candidates and manufacturing development categorized in the Biodefense segment, increased expenses of $2.2 million for product candidates and technology platform development activities categorized in the Biosciences segment and increased expenses of $1.3 million in other research and development, which are in support of central research and development activities. Net of development contract and grant reimbursements along with the net loss attributable to noncontrolling interests, we incurred research and development expenses of $14.5 million and $13.3 million, during the three months ended June 30, 2014 and 2013, respectively.



Our principal research and development expenses for the three months ended June 30, 2014 and 2013 are shown in the following table:

Three Months ended June 30, (in thousands) 2014 2013



Biodefense:

Large-scale manufacturing for BioThrax $ 4,250$ 4,004 BioThrax related programs 2,055 2,764 PreviThrax 2,506 3,791 NuThrax 2,148 2,084 Botulinum antitoxin 3,017 - Anthrax immune globulin 3,391 - Pandemic influenza (1) - 2,500 Other Biodefense 3,192 1,805 Total Biodefense 20,559 16,948 Biosciences: ES414 (formerly T-Scorp) 3,373 1,833 IXinity 2,915 - otlertuzumab (formerly TRU-016) 1,950 7,022 Tuberculosis vaccine - 279 Other Biosciences 6,122 2,986 Total Biosciences 14,360 12,120 Other 2,482 1,210 Total $ 37,401$ 30,278 The spending for our large-scale manufacturing for BioThrax was primarily due to the timing of manufacturing development activities. The decrease in spending for BioThrax related programs was primarily related to the timing of clinical studies to support applications for label expansion for BioThrax. The decrease in spending for PreviThrax was primarily due to the timing of non-clinical studies. The spending for NuThrax was primarily for clinical trial activities. The spending for our Botulinum Antitoxin program (which we acquired from Cangene) was primarily due to plasma collection services and stability testing. The spending for our Anthrax Immune Globulin program (which we acquired from Cangene) was due to plasma collecion services. The decrease in spending for pandemic influenza was related to a license fee for the rights to manufacture and sell pandemic influenza products during 2013. The increase in spending for our other Biodefense activities was primarily due to increased spending related to manufacturing development. The increase in spending for our ES414 (formerly T-Scorp) product candidate was primarily due to manufacturing development. The spending for our IXINITY product candidate in 2014 was primarily for clinical trial activities. The decrease in spending for our otlertuzumab (formerly TRU-016) product candidate was primarily related to the timing of clinical trial activities. The spending for our tuberculosis vaccine product candidate during 2013 was for manufacturing development activities. The increase in spending for our other Biosciences activities was primarily due to increased costs associated with the development of platform technologies along with costs associated with programs acquired in our acquisition of Cangene.



The spending for other research and development activities was primarily due to centralized research and development activities attributable to product candidates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $10.1 million, or 49%, to $30.6 million for the three months ended June 30, 2014 from $20.5 million for the three months ended June 30, 2013. This increase includes additional post-acquisition selling, general and administrative costs of $7.2 million associated with the operations of Cangene and in support of RSDL. Selling, general and administrative expenses attributable to the Biodefense segment increased by $2.6 million, or 18%, to $17.4 million during the three months ended June 30, 2014 from $14.8 million during the three months ended June 30, 2013. Selling, general and administrative expenses related to our Biosciences segment increased by $7.5 million, or 130%, to $13.2 million for the three months ended June 30, 2014 from $5.7 million for the three months ended June 30, 2013. Total Other Income (Expense) Total net other income (expense) decreased by $393,000 to a net other expense of $368,000 for the three months ended June 30, 2014, from a net other income of $25,000 for the three months ended June 30, 2013. The decrease was primarily due to interest expense from our 2.875% Convertible Senior Notes due 2021, or the Notes, of $1.3 million that was not capitalized in 2014 and $381,000 of loan fee amortization expense associated with the Notes and our revolver loan facility, partially offset by $1.4 million in rental income.



Income Taxes

Provision for income taxes decreased by $1.9 million, or 44%, to $2.5 million for the three months ended June 30, 2014 from $4.4 million for the three months ended June 30, 2013. The decrease in the provision for income taxes is primarily due to the $7.4 million decrease in our income before provision for income taxes and the net loss attributable to noncontrolling interest.



Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest decreased to $0 during the three months ended June 30, 2014 from $128,000 for three months ended June 30, 2013. The decrease resulted from the liquidation of the Oxford Emergent Tuberculosis Consortium in 2014.

Six months ended June 30, 2014 Compared to Six ended June 30, 2013

Revenues

Product sales revenues increased by $18.1 million, or 19%, to $114.0 million for the six months ended June 30, 2014 from $96.0 million for the six months ended June 30, 2013. Product revenue included: § BioThrax - $92.0 million for 2014 as compared to $96.0 million for 2013;



§ RSDL (acquired in August 2013) - $9.0 million for 2014;

§ WinRho (acquired in February 2014) - $8.0 million for 2014;

§ HepaGam (acquired in February 2014) - $3.5 million for 2014; and

§ Other products (acquired in February 2014) - $1.5 million for 2014.

The decrease in BioThrax sales was primarily due to a 7% decrease in the number of doses of BioThrax delivered, attributable to the timing of deliveries to the SNS. BioThrax product sales revenues during the six months ended June 30, 2014 consisted of sales to the CDC of $90.1 million and aggregate international and other sales of $1.9 million. Product sales revenues during the three months ended June 30, 2013 consisted of BioThrax sales to the CDC of $94.9 million and aggregate international and other sales of $1.1 million.



Contract manufacturing revenue was $11.9 million for the six months ended June 30, 2014. Contract manufacturing revenues primarily consists of contract services to third parties.

Contracts and grants revenues increased by $8.7 million, or 29%, to $38.3 million for the six months ended June 30, 2014 from $29.6 million for the six months ended June 30, 2013. The increase in contracts and grants revenues was primarily due to the following:



§ development funding of $9.4 million for BAT (which we acquired in February

2014);

§ development funding of $5.3 million for AIG (which we acquired in February

2014);

§ a payment of $1.9 million received in 2014 for our PEP indication for BioThrax

related to the progress of development activities; and

§ increased revenue of $1.4 million for NuThrax, due to the timing of clinical

trial activities.



These increases were partially offset by;

§ decreased revenue related to the establishment of our CIADM of $3.7 million,

primarily due to a license fee milestone achieved in 2013; and

§ decreased revenue of $6.3 million under our development contracts for

PreviThrax and large scale manufacturing of BioThrax, primarily due to the

timing of development efforts.

Cost of Product Sales and Contract Manufacturing

Cost of product sales and contract manufacturing increased by $30.9 million, or 136%, to $53.5 million for the six months ended June 30, 2014 from $22.6 million for the six months ended June 30, 2013. The increase was primarily attributable to the following:



§ RSDL (acquired in August 2013) - $7.6 million for the six months ended June 30,

2014; and

§ product and contract manufacturing costs associated with revenues acquired as

part of the Cangene acquisition (acquired in February 2014) - $21.3 million for

the six months ended June 30, 2014.

Research and Development Expenses

Research and development expenses increased by $6.7 million, or 11%, to $67.7 million for the six months ended June 30, 2014 from $61.0 million for the six months ended June 30, 2013. This increase primarily reflects higher contract service costs, and includes increased expenses of $3.6 million for product candidates and manufacturing development categorized in the Biodefense segment, increased expenses of $2.0 million for product candidates and technology platform development activities categorized in the Biosciences segment, and increased expenses of $1.1 million in other research and development, which are in support of central research and development activities. Net of development contract and grant reimbursements along with the net loss attributable to noncontrolling interests, we incurred research and development expenses of $29.4 million and $30.6 million, during the six months ended June 30, 2014 and 2013, respectively.



Our principal research and development expenses during the six months ended June 30, 2014 and 2013 are shown in the following table:

Six Months ended June 30, (in thousands) 2014 2013



Biodefense:

Large-scale manufacturing for BioThrax $ 7,739$ 8,730 BioThrax related programs 4,379 5,557 PreviThrax 5,034 8,030 NuThrax 4,555 4,332 Botulinum antitoxin 3,663 - Anthrax immune globulin 4,091 - Pandemic influenza - 2,500 Other Biodefense 6,754 3,492 Total Biodefense 36,215 32,641 Biosciences: ES414 (formerly T-Scorp) 7,871 3,865 IXINITY 4,162 - otlertuzumab (formerly TRU-016) 5,195 11,649 Tuberculosis vaccine - 4,185 Other Biosciences 9,959 5,523 Total Biosciences 27,187 25,222 Other 4,255 3,139 Total $ 67,657$ 61,002

The decrease in spending for our large-scale manufacturing for BioThrax was primarily due to the timing of manufacturing development activities. The decrease in spending for BioThrax related programs was primarily related to the timing of clinical studies to support applications for label expansion for BioThrax. The decrease in spending for PreviThrax was primarily due to the timing of stability and non-clinical studies. The spending for NuThrax was primarily due to clinical trial activities. The spending for our Botulinum Antitoxin program (which we acquired from Cangene) was primarily due to plasma collection services and stability testing. The spending for our Anthrax Immune Globulin program (which we acquired from Cangene) was due to plasma collection services. The decrease in spending for pandemic influenza was related to a license fee for the rights to manufacture and sell pandemic influenza products during 2013. The increase in spending for our other Biodefense activities was primarily due to increased spending related to manufacturing development. The increase in spending for our ES414 (formerly T-Scorp) product candidate was primarily due to manufacturing development. The spending for our IXINITY product candidate in 2014 was primarily for clinical trial activities. The decrease in spending for our otlertuzumab (formerly TRU-016) product candidate was primarily related to the timing of clinical trial activities. The spending for our tuberculosis vaccine product candidate during 2013 was for manufacturing development activities. The increase in spending for our other Biosciences activities was primarily due to increased costs associated with the development of platform technologies technologies along with costs associated with programs acquired in our acquisition of Cangene.



The spending for other research and development activities was primarily due to centralized research and development activities not attributable to product candidates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $20.1 million, or 50%, to $60.6 million for the six months ended June 30, 2014 from $40.5 million for the six months ended June 30, 2013. This increase included increased spending for professional services of $5.0 million associated with the acquisition and integration of Cangene, which we acquired in February 2014, along with additional post-acquisition selling, general and administrative costs of $11.1 million associated with the operations of Cangene and in support of RSDL. Selling, general and administrative expenses attributable to the Biodefense segment increased by $5.5 million, or 19%, to $34.3 million during the six months ended June 30, 2014 from $28.7 million during the six months ended June 30, 2013. The increase in Biodefense selling, general and administrative expense was primarily due to post acquisition cossts associated with our acquisitions of RSDL and Cangene. Selling, general and administrative expenses related to our Biosciences segment increased by $14.6 million, or 124%, to $26.4 million during the six months ended June 30, 2014 from $11.8 million during the six months ended June 30, 2013. The increase in the Biosciences selling, general and administrative expense was due to professional services to support due diligence along with other acquisition-related activities and post-acquisition operations associated with our acquisition of Cangene.



Total Other Income (Expense)

Total net other income (expense) decreased by $3.4 million to a net other expense of $3.4 million for the six months ended June 30, 2014, from a net other income of $54,000 for the six months ended June 30, 2013. The decrease was primarily due to interest expense from our Notes of $2.8 million that was not capitalized in 2014, $1.8 million of costs associated with the termination of our $125 million term loan facility and $699,000 of loan fee amortization expense associated with Notes and our revolver loan facility, partially offset by $1.9 million in rental income.



Income Taxes

Provision for (benefit from) income taxes increased by $5.6 million to a benefit from income taxes of $5.7 million for the six months ended June 30, 2014 from a provision for income taxes of $135,000 for the six months ended June 30, 2013. The increase in the benefit from income taxes was primarily due to the $23.2 million increase in our loss before provision for income taxes and the loss attributable to noncontrolling interests.The estimated effective annual tax rate for the six months ended June 30, 2014 and 2013 was approximately 26% and 30%, respectively. The reduction in the estimated effective tax rate was primarily due to an increase in tax credits associated with research and development activities. The provision for (benefit from) income taxes for the six months ended June 30, 2013 includes a one-time discrete reduction in tax expense of approximately $823,000 associated with the 2012 research and development tax credit that was recorded in 2013 due to the legislation extending the credit not being signed into law until January 2013.



Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest decreased to $0 for the six months ended June 30,2014 from $871,000 for for the six months ended June 30, 2013. The decrease resulted from the liquidation of our noncontrolling interest in the Oxford Emergent Tuberculosis Consortium during the six months ended June 30, 2014.



Liquidity and Capital Resources

Sources of Liquidity

We have funded our cash requirements from inception through June 30, 2014 principally with a combination of revenues from BioThrax product sales, debt financings, development funding from government entities and non-government and philanthropic organizations and collaborative partners, the net proceeds from our initial public offering and the sale of our common stock upon exercise of stock options. We have operated profitably for each of the five years ended December 31, 2013.



As of June 30, 2014, we had cash and cash equivalents of $168.1 million. Additionally, at June 30, 2014, our accounts receivable balance was $78.3 million.

Cash Flows

The following table provides information regarding our cash flows for the six months ended June 30, 2014 and 2013:

Six Months ended June 30, (in thousands) 2014



2013

Net cash provided by (used in): Operating activities(1) $ (18,424 )$ 28,245 Investing activities (187,567 ) (14,123 ) Financing activities 194,783 455



Net increase (decrease) in cash and cash equivalants $ (11,208 )$ 14,577

(1) Includes the effect of exchange rates on cash and cash equivalents.

Net cash used in operating activities of $18.4 million for the six months ended June 30, 2014 was primarily due to our net loss attributable to Emergent BioSolutions Inc. of $15.2 million, a decrease in income taxes of $10.4 million related to timing differences, and a decrease in accounts payable of $10.4 million, primarily due to acquisition related activities, partially offset by a non-cash charge of $15.3 million for depreciation and amortization. Net cash provided by operating activities of $28.2 million for the six months ended June 30, 2013 was principally due to a decrease in accounts receivable of $41.7 million related to the timing of collection of amounts billed primarily to the CDC, non-cash charges of $5.7 million for stock-based compensation and $8.4 million for depreciation and amortization, partially offset by a decrease in net income taxes of $8.1 million related to timing differences and a decrease in accrued compensation of $7.1 million primarily related to the payment of 2012 bonuses.



Net cash used in investing activities of $187.6 million for the six months ended June 30, 2014 was primarily due to the acquisition of Cangene for $178.2 million, which is net of $43.6 million of acquired cash, and capital expenditures of $9.4 million for infrastructure and equipment investments.

Net cash used in investing activities of $14.1 million for the six months ended June 30, 2013 was primarily due to capital expenditures, and includes construction and renovation of facilities at our Lansing, Michigan campus, and costs of other infrastructure and equipment investments. Net cash provided by financing activities of $194.8 million for the six months ended June 30, 2014 was primarily due to proceeds from our convertible debenture of $250.0 million, of which $241.7 million (net of $8.3 million of transaction costs) was from our Notes, $10.0 million in proceeds from the issuance of common stock pursuant to employee equity plans and $5.2 million in excess tax benefits from the exercise of stock options, partially offset by a principal payment on indebtedness of $62.0 million under our revolving credit facility. Net cash provided by financing activities of $455,000 for the six months ended June 30, 2013 was primarily due to $1.8 million in excess tax benefits from the exercise of stock options and $933,000 in proceeds from employee equity plans, partially offset by principal payments on indebtedness of $2.2 million.



Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2014: Payments due by period Less than 1 to 3 4 to 5 More than (in thousands) Total 1 year Years Years 5 years Contractual obligations: Convertible debt $ 250,000 $ - $ - $ - $ 250,000 Long-term indebtedness including current portion 1,000 - - - 1,000 Operating lease obligations 3,816 2,880 866 70 -



Total contractual obligations $ 254,816$ 2,880$ 866

$ 70$ 251,000

There are a number of uncertainties that we face in the development of new product candidates that prevent us from making a reasonable estimate of the cash obligations under our license agreements. Because of these uncertainties, the preceding table excludes contingent contractual payments that we may become obligated to make under such agreements. These agreements typically provide for the payment of milestone fees upon achievement of specified research, development and commercialization milestones, such as the commencement of clinical trials, the receipt of funding awards, the receipt of regulatory approvals, and the achievement of sales milestones. The amount of contingent contractual milestone payments that we may become obligated to make is variable based on the actual achievement and timing of the applicable milestones and the characteristics of any products or product candidates that are developed, including factors such as number of products or product candidates developed, type and number of components of each product or product candidate, ownership of the various components and the specific markets affected, and the aggregate payments could be as much as approximately $118 million. The success of our efforts to commercialize our product candidates depends on many factors, including those set forth in "Risk Factors-Our business depends on our success in developing and commercializing our product candidates. If we are unable to commercialize these product candidates, or experience significant delays or unanticipated costs in doing so, our business would be materially affected." and is highly uncertain. Even if these efforts are successful, the timing of success is highly unpredictable and variable. The same is true for any contingent contractual royalty payments that we may be obligated to make upon successful commercialization of these product candidates or for products we have acquired. We do not expect that any such payments would have an adverse effect on our financial position, operations and capital resources because, if payable, we expect that the benefits associated with the achievement of the relevant milestones or the achievement of revenue would offset the burden of making these payments. Deferred income taxes and liabilities for unrecognized income tax benefits are excluded from the above table since they are not contractually fixed as to timing and amount.



Debt Financing

On January 29, 2014, we issued $250.0 million aggregate principal amount of Notes. The Notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2014. The Notes mature on January 15, 2021, unless earlier purchased by us, redeemed or converted. The conversion rate is equal to 30.8821 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $32.38 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. On December 11, 2013, we entered into a senior secured credit agreement, or the Credit Agreement, with three lending financial institutions, or the Lenders, led by Bank of America, N.A., as administrative agent. The Credit Agreement originally provided for a revolving credit facility of up to $100.0 million through December 11, 2018, or such earlier date required by the terms of the Credit Agreement, and a term loan facility of up to $125.0 million that was to be drawn in full, if at all, on or prior to June 30, 2014. On January 29, 2014, in connection with our issuance of the Notes, the unused $125 million term loan portion of our Credit Agreement terminated automatically in accordance with its terms. As of June 30, 2014, there was no outstanding balance under the revolving credit facility. Our payment obligations under the Credit Agreement are secured by a lien on substantially all of our assets, including the stock of all of our subsidiaries, and the assets of the subsidiary guarantors, including mortgages over certain of their real properties, including our large-scale vaccine manufacturing facility in Lansing, Michigan and our biodefense facility in Baltimore, Maryland. The Credit Agreement, as amended, contains affirmative and negative covenants customary for financing of this type. Negative covenants in the Credit Agreement, among other things: limit our ability to incur indebtedness and liens; dispose of assets; make investments including loans, advances or guarantees; and enter into certain mergers or similar transactions. The Credit Agreement also contains financial covenants, tested quarterly and in connection with any triggering events under the Credit Agreement that include the maintenance of: (1) a minimum consolidated debt service coverage ratio of 2.50 to 1.00, (2) a maximum consolidated leverage ratio for the measurements period ending on or prior to September 30, 2014 of 4.00 to 1.00, for the measurement period ending December 31, 2014 of 3.75 to 1.00, and thereafter of 3.50 to 1.00, (3) a maximum consolidated senior leverage ratio of 2.00 to 1.00 (when no term loan is outstanding) and (4) a minimum liquidity requirement of $50.0 million. Upon the occurrence and continuance of an event of default under the Credit Agreement, the commitments of the lenders to make loans under the Credit Agreement may be terminated and our payment obligations under the Credit Agreement may be accelerated. The events of default under the Credit Agreement include, among others, subject in some cases to specified cure periods: payment defaults; inaccuracy of representations and warranties in any material respect; defaults in the observance or performance of covenants; bankruptcy and insolvency related defaults; the entry of a final judgment in excess of a threshold amount; change of control; and the invalidity of loan documents relating to the Credit Agreement.



Funding Requirements

We expect to continue to fund our anticipated operating expenses, capital expenditures and debt service requirements from existing cash and cash equivalents, revenues from product sales, development contract and grant funding, and our revolving credit facility and any other lines of credit we may establish from time to time. There are numerous risks and uncertainties associated with product sales and with the development and commercialization of our product candidates. We may seek additional external financing to provide additional financial flexibility. Our future capital requirements will depend on many factors, including:



§ the level, timing and cost of product sales;

§ the extent to which we acquire or invest in and integrate companies,

businesses, products or technologies;

§ the acquisition of new facilities and capital improvements to new or existing

facilities;

§ the payment obligations under our indebtedness;

§ the scope, progress, results and costs of our development activities;

§ our ability to obtain funding from collaborative partners, government entities

and non-governmental organizations for our development programs;

§ the costs of commercialization activities, including product marketing, sales

and distribution; and

§ the costs involved in preparing, filing, prosecuting, maintaining and enforcing

patent claims and other patent-related costs.

If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings, bank loans or collaboration and licensing arrangements. We have an effective shelf registration statement on file with the SEC that allows us to issue up to an aggregate of $180 million of equity, debt and certain other types of securities through one or more future offerings. If we raise funds by issuing equity securities, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us. We are not restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that could have the effect of diminishing our ability to make payments on our indebtedness.


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Source: Edgar Glimpses


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