EMERGENT BIOSOLUTIONS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes and other financial information included elsewhere in this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, includes information with respect to our plans and strategy for our business and financing, as well as forward-looking statements that involve risks and uncertainties. You should carefully review the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this quarterly report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Business Overview We are a global life sciences company focused on providing to civilian and military populations a portfolio of innovative preparedness and response products and solutions that address accidental, deliberate and naturally occurring PHTs. We are currently focused on the following five distinct PHT categories: CBRNE, EID, travel health, emerging health crises, acute/emergency care; and CDMO. We have a product portfolio of ten products (vaccines, therapeutics, and drug-device combination products) that contribute a substantial portion of our revenue. We also have two procured product candidates that are procured under special circumstances by certain government agencies, although they are not approved by the FDA. Additionally, we have a development pipeline consisting of a diversified mix of both pre-clinical and clinical stage product candidates (vaccines, therapeutics, devices and combination products). Finally, we have a fully-integrated portfolio of contract development and manufacturing services. Our CDMO service offerings cover development services, drug substance manufacturing and drug product manufacturing across pharmaceutical and biotechnology industries as well as the USG and non-governmental organizations. The majority of our revenue comes from the following products and procured product candidates: Vaccines •Anthrax vaccines, including our AV7909 (Anthrax Vaccine Adsorbed with Adjuvant) procured product candidate being developed as a next-generation anthrax vaccine for post-exposure prophylaxis and BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the FDA for the general use prophylaxis and post-exposure prophylaxis of anthrax disease; •ACAM2000® (Smallpox (Vaccinia) Vaccine, Live), the only single-dose smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection; •Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral vaccine licensed by the FDA for the prevention of typhoid fever; and •Vaxchora® (Cholera Vaccine, Live, Oral), the only single-dose oral vaccine approved by the FDA and EMA for the prevention of cholera. 23 --------------------------------------------------------------------------------EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)
Devices
•NARCAN® (naloxone HCl) Nasal Spray, the first needle-free formulation of
naloxone approved by the FDA and Health Canada , for the emergency treatment of
known or suspected opioid overdose as manifested by respiratory and/or central
nervous system depression;
•RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device
cleared by the FDA to remove or neutralize the following chemical warfare agents
from the skin: tabun, sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and
T-2 toxin; and
•Trobigard®, a combination drug-device auto-injector procured product candidate
that contains atropine sulfate and obidoxime chloride. It has not been approved
by the FDA, but is procured by certain authorized government buyers under
special circumstances for potential use as a nerve agent countermeasure.
Therapeutics
•raxibacumab (Anthrax Monoclonal), the first fully human monoclonal antibody
therapeutic licensed by the FDA for the treatment and prophylaxis of
inhalational anthrax;
•Anthrasil® (Anthrax Immune Globulin Intravenous (Human)), the only polyclonal
antibody therapeutic licensed by the FDA and Health Canada for the treatment of
inhalational anthrax;
•BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only
heptavalent antibody therapeutic licensed by the FDA and Health Canada for the
treatment of botulism; and
•VIGIV (Vaccinia Immune Globulin Intravenous (Human)), the only polyclonal
antibody therapeutic licensed by the FDA and Health Canada to address certain
complications from smallpox vaccination.
Contract Development and Manufacturing Services
Our CDMO business unit consists of a fully integrated molecule-to-market
contract development and manufacturing services business, with offerings across
development services, drug substance manufacturing and drug product
manufacturing. These services include process development, formulation and
analytical
development, and packaging for supply. Our customers for such services include
pharmaceutical and biotechnology organizations as well as the USG and
non-governmental organizations ranging from small to mid to large whose programs
range from clinical stage to commercial stage. We compete for CDMO service
business with a number of biopharmaceutical product development organizations,
contract manufacturers of biopharmaceutical products and university research
laboratories. We also compete with in-house research, development and support
service departments of other biopharmaceutical companies.
Financial Operations Overview
Revenues
We generate product revenues from the sale of our marketed products and procured
product candidates which include vaccines, therapeutics and devices which have
been described above. The USG is the largest purchaser of our CBRNE products and
primarily purchases our products for the SNS, a national repository of medical
countermeasures including critical antibiotics, vaccines, chemical antidotes,
antitoxins, and other critical medical supplies. The USG primarily purchases our
products under long-term, firm fixed-price procurement contracts, generally with
annual options. Our opioid overdose reversal product, NARCAN® Nasal Spray and
our travel health products, comprising Vivotif and Vaxchora, are sold
commercially through wholesalers and distributors, physician-directed or
standing order prescriptions at retail pharmacies, as well as to other state and
local community healthcare agencies, practitioners and hospitals.
We also generate revenue from our CDMO business unit, which is based on our
established development and manufacturing infrastructure, technology platforms
and expertise. Our services include a fully integrated molecule-to-market
contract development and manufacturing services business offering across
development services, drug substance and drug product for small to mid to large
pharmaceutical and biotechnology industry and government
agencies/non-governmental organizations.
We have received contracts and grants funding from the USG and other
non-governmental organizations to perform research and development activities,
particularly related to programs addressing certain CBRNE threats and EIDs.
Our revenue, operating results and profitability vary quarterly based on the
timing of production and deliveries and the nature of our business to provide
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EMERGENT BIOSOLUTIONS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)
large scale bundles of products and services as needs arise. Since early 2020,
our revenues from the sales of our vaccine products that target travelers have
also declined due to the reduction of international travel caused by the
COVID-19 pandemic. We expect continued variability in our quarterly financial
statements.
Cost of Product Sales and CDMO Services
The primary expenses that we incur to deliver our products and to perform CDMO
services consist of fixed and variable costs. We determine the cost of product
sales for products sold during a reporting period based on the average
manufacturing cost per unit in the period those units were manufactured. Fixed
manufacturing costs include facilities, utilities and amortization of intangible
assets. Variable manufacturing costs primarily consist of costs for materials
and personnel-related expenses for direct and indirect manufacturing support
staff, contract manufacturing operations, sales-based royalties, shipping and
logistics. In addition to the fixed and variable manufacturing costs described
above, the cost of product sales depends on utilization of available
manufacturing capacity. For our commercial sales, other associated expenses
include sales-based royalties (which include fair value adjustments associated
with contingent consideration), shipping, and logistics.
We use the same manufacturing facilities and methods of production for our own
products as well as for fulfillment of our CDMO service contracts. We operate
nine manufacturing facilities, five of which perform manufacturing activities
for CDMO services customers. As a result, management reviews expenses associated
with manufacturing our own products as well CDMO service contracts on an
aggregate basis when analyzing the financial performance of its manufacturing
and development facilities. Our manufacturing process for our own products and
our CDMO service business includes the production of bulk material and
performing "fill finish" work for containment and distribution of biological
products. For "fill finish" customers, we receive work in process inventory to
be prepared for distribution. When producing bulk material, we generally procure
raw materials, manufacture the product and retain the risk of loss through the
manufacturing and review process until delivery.
Research and Development Expenses
We expense research and development costs as incurred. Our research and
development expenses consist primarily of:
?personnel-related expenses;
?fees to professional service providers for, among other things, analytical
testing, independent monitoring or other administration of our clinical trials
and obtaining and evaluating data from our clinical trials and non-clinical
studies;
?costs of CDMO services for clinical trial material; and
?costs of materials used in clinical trials and research and development.
In many cases, we plan to seek funding for development activities from external
sources and third parties, such as governments and non-governmental
organizations, or through collaborative partnerships. We expect our research and
development spending will be dependent upon such factors as the results from our
clinical trials, the availability of reimbursement of research and development
spending, the number of product candidates under development, the size,
structure and duration of any clinical programs that we may initiate, the costs
associated with manufacturing and development of our product candidates on a
large-scale basis for later stage clinical trials, and our ability to use or
rely on data generated by government agencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of
personnel-related costs and professional fees in support of our executives,
sales and marketing, business development, government affairs, finance,
accounting, information technology, legal, human resource functions and other
corporate functions. Other costs include facility costs not otherwise included
in cost of product sales and CDMO services or research and development expense.
Income Taxes
Uncertainty in income taxes is accounted for using a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. We recognize in
our financial statements the impact of a tax position if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position.
Management believes that the assumptions and estimates related to the provision
for income taxes are critical to the Company's results of operations.
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EMERGENT BIOSOLUTIONS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)
New Accounting Standards
For a discussion of new accounting standards please read Note 2. Basis of
Presentation, to our condensed consolidated financial statements included in
this report.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
U.S. , requires us to make estimates, judgments and assumptions that may affect
the reported amounts of assets, liabilities, equity, revenues and expenses and
related disclosure of contingent assets and liabilities. On an ongoing basis we
evaluate our estimates, judgments and methodologies. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable, the results of which form the basis for making judgments about the
carrying values of assets, liabilities and equity and the amount of revenues and
expenses. Actual results may differ from these estimates. During the three
months ended March 31, 2021 , there have been no significant changes to our
critical accounting policies and estimates contained in our Annual Report on
Form 10-K for the year ended December 31, 2020 , as filed with the SEC , (see Note
2 to the accompanying condensed consolidated financial statements).
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EMERGENT BIOSOLUTIONS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
(unaudited, amounts in millions, except share and per share amounts)
Results of Operations
Three Months Ended March 31,
2021 2020 $ Change % Change
Product sales net:
NARCAN Nasal Spray $ 74.2 $ 72.2 $ 2.0 3 %
Anthrax vaccines 55.0 51.9 3.1 6 %
Other product sales 8.7 24.1 (15.4) (64) %
Total product sales, net 137.9 148.2 (10.3) (7) %
Contract development and manufacturing
services 183.8 21.7 162.1 NM
Contracts and grants 21.3 22.6 (1.3) (6) %
Total revenues 343.0 192.5 150.5 78 %
Operating expenses:
Cost of product sales and contract development
and manufacturing services 99.3 76.9 22.4 29 %
Research and development 52.5 42.7 9.8 23 %
Selling, general and administrative 80.9 69.7 11.2 16 %
Amortization of intangible assets 14.9 14.8 0.1 1 %
Total operating expenses 247.6 204.1 43.5 21 %
Income (loss) from operations 95.4 (11.6) 107.0 NM
Other income (expense):
Interest expense (8.5) (8.6) 0.1 (1 %)
Other, net (1.7) (1.1) (0.6) 55 %
Total other income (expense), net (10.2) (9.7) (0.5) 5 %
Income (loss) before income taxes 85.2 (21.3) 106.5 NM
Income taxes (15.5) 8.8 (24.3) NM
Net income (loss) $ 69.7 $ (12.5) $ 82.2 NM
NM - Not meaningful
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EMERGENT BIOSOLUTIONS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION(unaudited, amounts in millions, except share and per share amounts) Total Revenues
[[Image Removed: ebs-20210331_g2.jpg]]Legend
NARCAN nasal spray Contract development and manufacturing services
Anthrax vaccines Contracts and Grants
Other product sales
Product Sales, net
NARCAN Nasal Spray
NARCAN Nasal Spray sales for the three months ended March 31, 2021 were
consistent with the sales during the three months ended March 31, 2020 . The
increase in sales of $2.0 million was primarily due to increased demand from the
retail market partially offset by a decline from the public interest markets.
Anthrax Vaccines
Anthrax vaccine sales for the three months ended March 31, 2021 were consistent
with the sales during the three months ended March 31, 2020 . The increase in
sales of $3.1 million was largely driven by sales to a foreign government.
Other Product Sales
The Company's other product sales decreased during the three months ended March
31, 2021 , primarily due to a decrease in sales of BAT due to timing of
deliveries to the SNS. Additionally, our travel health vaccines, largely
Vivotif, continue to be impacted by the decline of global travel. The slow down
in sales of travel health vaccines began during the latter part of the first
quarter of 2020.
CDMO Services
The increase in contract development and manufacturing services revenue for the
three months ended March 31, 2021 is due to the public-private partnership with
BARDA and arrangements with innovators to address the COVID-19 pandemic.
Contracts and Grants
The decrease in contracts and grants revenue for the three months ended March
31, 2021 is due to a decline associated with the AV7909 product candidate
partially offset by increases in development awards related to the COVID-HIG
therapeutic product candidate.
Cost of Product Sales and CDMO Services
[[Image Removed: ebs-20210331_g3.jpg]]
Cost of Product Sales and
l Gross profit margin for product sales and contract development and manufacturing
services
Cost of product sales and contract development and manufacturing services
increased for the three months ended
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EMERGENT BIOSOLUTIONS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION(unaudited, amounts in millions, except share and per share amounts) Research and Development Expenses (Gross and Net)
[[Image Removed: ebs-20210331_g4.jpg]]Research and Development expense
l Research and Development expense, net of contracts and grants revenue
The increase in research and development expenses during the three months endedMarch 31, 2021 is primarily due to costs associated with the development of the COVID-HIG therapeutic product candidate, offset by the decline in development costs associated with the AV7909 product candidate. Selling, General and Administrative Expenses [[Image Removed: ebs-20210331_g5.jpg]] Selling, General and Administrative l SG&A as a percentage of total revenue
The increase in selling, general and administrative expenses for the three
months ended
[[Image Removed: ebs-20210331_g6.jpg]]Amortization expense
Amortization of intangible assets and the composition of intangible assets amortized during the three months endedMarch 31, 2021 was consistent with the three months endedMarch 31, 2020 . Other Income (Expense), Net [[Image Removed: ebs-20210331_g7.jpg]] Interest expense Other income (expense) Total interest expense and other income (expense), net for the three months endedMarch 31, 2021 was consistent with the three months endedMarch 31, 2020 . The increase in total debt of$69.5 million fromMarch 31, 2020 toMarch 31, 2021 has been offset by a decline in interest rates during the periods. 29 --------------------------------------------------------------------------------EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
(unaudited, amounts in millions, except share and per share amounts)
Income Taxes
[[Image Removed: ebs-20210331_g8.jpg]]
Income taxes
l Effective tax rate
During the three months ended March 31, 2021 , income taxes increased largely due
to an increase in income before income taxes of $106.5 million , offset by an
increase in discrete tax benefits of $3.4 million .
Financial Condition, Liquidity and Capital Resources
Our financial condition is summarized as follows:
(in millions, except percentages) March 31, 2021 December 31, 2020 Change %
Financial assets:
Cash and cash equivalents $ 547.8 $ 621.3 (12) %
Borrowings:
Debt, current portion 26.0 33.8 (23) %
Debt, net of current portion 833.1 841.0 (1) %
Total borrowings 859.1 874.8 (2) %
Working capital:
Current assets 1,181.1 1,195.9 (1) %
Current liabilities 370.2 384.5 (4) %
Total working capital 810.9 $ 811.4 - %
Sources of Liquidity
We have historically financed our operating and capital expenditures through
cash on hand, cash from operations, debt financing and development funding. We
also obtain financing from the sale of our common stock upon exercise of stock
options. We have operated profitably for each of the last five years through the
period ended December 31, 2020 . As of March 31, 2021 , we had unrestricted cash
and cash equivalents of $547.8 million and capacity under our revolving credit
facility of $597.1 million . As of March 31, 2021 , we believe that we have
sufficient liquidity to fund our operations over the next 12 months.
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EMERGENT BIOSOLUTIONS INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
(unaudited, amounts in millions, except share and per share amounts)
Cash Flows
The following table provides information regarding our cash flows for the three
months ended March 31, 2021 and 2020:
Three
Months Ended
2021 2020
Net cash provided by (used in):
Operating activities $ 5.1 $ 57.8
Investing activities (56.1) (24.2)
Financing activities (22.2) (20.0)Effect of exchange rate changes on cash, cash equivalents and restricted cash
(0.3) 0.1
Net change in cash, cash equivalents and restricted cash $ (73.5)
Operating Activities Net cash provided by operating activities of$5.1 million for the three months endedMarch 31, 2021 was due to net income excluding non-cash items of$112.8 million offset by working capital changes of$107.7 million . Net cash provided by operating activities of$57.8 million for the three months endedMarch 31, 2020 was due to net income excluding non-cash items of$19.4 million and working capital changes of$38.4 million . Investing Activities Net cash used in investing activities largely relates to purchases of property, plant and equipment and was$56.1 million and$24.2 million for the three months endedMarch 31, 2021 and 2020, respectively. The cash used in investing activities increased during the three months endedMarch 31, 2021 largely due to infrastructure and equipment investments related to our CDMO arrangements. Financing Activities Net cash used in financing activities of$22.2 million for the three months endedMarch 31, 2021 was primarily due to payments on debt of$16.2 million and net payments related to employee share-based compensation activity of$5.3 million . Net cash used in financing activities of$20.0 million for the three months endedMarch 31, 2020 was primarily due to$22.8 million of principal payments on the term loan and credit facility, primarily offset by cash provided by employee share-based compensation activity of$3.5 million . Funding Requirements We expect to continue to fund our anticipated operating expenses, capital expenditures, debt service requirements and any future repurchase of our common stock from the following sources: ?existing cash and cash equivalents; ?net proceeds from the sale of our products and contract development and manufacturing services; ?development contracts and grants funding; and ?our Senior Secured Credit Facilities and any other lines of credit we may establish from time to time. There are numerous risks and uncertainties associated with product sales, delivery of CDMO services and with the development and commercialization of our product candidates. We may seek additional external financing to provide additional financial flexibility. Our future capital requirements will depend on many factors, including (but not limited to): ?the level, timing and cost of product sales and contract development and manufacturing services; ?the extent to which we acquire or invest in and integrate companies, businesses, products or technologies; ?the acquisition of new facilities and capital improvements to new or existing facilities; ?the payment obligations under our indebtedness; ?the scope, progress, results and costs of our development activities; ?our ability to obtain funding from collaborative partners, government entities and non- 31 --------------------------------------------------------------------------------EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
(unaudited, amounts in millions, except share and per share amounts)
governmental organizations for our development programs;
?the extent to which we adopt a share repurchase program and repurchase shares
of our common stock and;
?the costs of commercialization activities, including product marketing, sales
and distribution.
If our capital resources are insufficient to meet our future capital
requirements, we will need to finance our cash needs through public or private
equity or debt offerings, bank loans or collaboration and licensing
arrangements.
If we raise funds by issuing equity securities, our stockholders may experience
dilution. Public or bank debt financing, if available, may involve agreements
that include covenants, like those contained in our Senior Unsecured Notes due
2028 and the Senior Secured Credit Facilities, which could limit or restrict our
ability to take specific actions, such as incurring additional debt, making
capital expenditures, pursuing acquisition opportunities, buying back shares or
declaring dividends. If we raise funds through collaboration and licensing
arrangements with third parties, it may be necessary to relinquish valuable
rights to our technologies or product candidates or grant licenses on terms that
may not be favorable to us.
Economic conditions, including market volatility and adverse impacts on
financial markets as a result of the COVID-19 pandemic, may make it more
difficult to obtain financing on attractive terms, or at all. If financing is
unavailable or lost, our business, operating results, financial condition and
cash flows would be adversely affected, and we could be forced to delay, reduce
the scope of or eliminate many of our planned activities.
Unused Credit Capacity
Available room under the revolving credit facility for the periods ended
March 31, 2021 and December 31, 2020 was:
(in millions)
Outstanding Letters of Outstanding Indebtedness on
Total Capacity Credit Revolving Credit Facility Unused Capacity
March 31, 2021
$600.0 2.9 - $597.1
December 31, 2020
$600.0 2.8 - $597.2
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