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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended
March 31, 2020
 
 
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from to
Commission file number: 001-33137

EMERGENTLOGO01.JPG
EMERGENT BIOSOLUTIONS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
14-1902018
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

 
 
400 Professional Drive Suite 400
Gaithersburg,
Maryland
20879
(Address and zip code of Principal Executive Offices)
(240) 631-3200
(Registrant's Telephone Number, Including Area Code)
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. 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). 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
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
As of April 24, 2020, the registrant had 52,427,756 shares of common stock outstanding.

1


Emergent BioSolutions Inc.
Index to Form 10-Q
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

EMERGENT BIOSOLUTIONS INC.

PART I. FINANCIAL INFORMATION
SPECIAL 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 and the expected impact of the COVID-19 pandemic, 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:
the impact of global economic conditions and public health crises and epidemics, such as the novel strain of coronavirus (SARS-CoV-2) causing COVID-19 disease, on our markets, operations and employees as well as those of our customers and suppliers;
the availability of U.S. government (USG) funding for procurement of our products;
our ability to perform under our contracts with the USG including the timing of and specifications relating to deliveries;
the continued exercise of discretion by the Biomedical Advanced Research and Development Authority (BARDA) to procure additional doses of AV7909 (anthrax vaccine adsorbed with adjuvant) prior to approval by the U.S. Food and Drug Administration (FDA);
the exercise of all options under our recently executed contract for the procurement of ACAM2000® (Smallpox (Vaccinia) Vaccine, Live);
our ability to secure licensure of AV7909 from the FDA within the anticipated timeframe, if at all;
our ability to secure follow-on procurement contracts for our public health threat (PHT) products that are under procurement contracts that have expired or will be expiring;
our ability and the ability of our collaborators to enforce patents related to NARCAN Nasal Spray against potential generic entrants;
our ability to identify and acquire companies, businesses, products or product candidates that satisfy our selection criteria;
our ability and the ability of our contractors and suppliers to maintain compliance with current good manufacturing practices and other regulatory obligations;
our ability to comply with the operating and financial covenants required by 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 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;
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

3

EMERGENT BIOSOLUTIONS INC.

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
References 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 brands, products, services and feature names, logos and slogans are trademarks or registered trademarks of Emergent 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.

4


ITEM 1. FINANCIAL STATEMENTS
Emergent BioSolutions Inc.
Condensed Consolidated Balance Sheets
(unaudited, in millions, except per share amounts)
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 

 
 
Cash and cash equivalents
$
181.5


$
167.8

Restricted cash
0.2


0.2

Accounts receivable, net
162.5


270.7

Inventories
248.1


222.5

Income tax receivable, net
10.2


4.6

Prepaid expenses and other current assets
24.1


20.4

Total current assets
626.6

 
686.2

 
 
 
 
Property, plant and equipment, net
549.2


542.3

Intangible assets, net
708.1


712.9

In-process research and development
29.0


29.0

Goodwill
266.4


266.6

Deferred tax assets, net
17.6


13.4

Other assets
81.8


76.9

Total assets
$
2,278.7

 
$
2,327.3

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
84.2


$
94.8

Accrued expenses
41.5


39.5

Accrued compensation
47.5


62.4

Debt, current portion
26.3


12.9

Other current liabilities
7.6


6.7

Total current liabilities
207.1

 
216.3

 
 
 
 
Contingent consideration, net of current portion
26.1


26.0

Debt, net of current portion
762.9


798.4

Deferred tax liability
63.9


63.9

Contract liabilities, net of current portion
85.0


85.6

Other liabilities
58.9


48.6

Total liabilities
$
1,203.9

 
$
1,238.8

 
 
 
 
Stockholders' equity:





Preferred stock, $0.001 par value; 15.0 shares authorized, no shares issued or outstanding



Common stock, $0.001 par value; 200.0 shares authorized, 53.5 and 53.0 shares issued; 52.3 and 51.7 shares outstanding, respectively
0.1


0.1

Treasury stock, at cost, 1.2 common shares
(39.6
)

(39.6
)
Additional paid-in capital
726.2


716.1

Accumulated other comprehensive loss, net
(21.2
)

(9.9
)
Retained earnings
409.3


421.8

Total stockholders' equity
1,074.8


1,088.5

Total liabilities and stockholders' equity
$
2,278.7


$
2,327.3

See accompanying notes.

5


Emergent BioSolutions Inc.
Condensed Consolidated Statements of Operations
(unaudited, in millions, except per share amounts)
 
Three Months Ended March 31,
 
2020
 
2019
Revenues:
 
 
 
Product sales, net
$
148.2


$
153.0

Contract development and manufacturing services
21.7


15.9

Contracts and grants
22.6


21.7

Total revenues
192.5

 
190.6


 
 
 
Operating expenses:
 
 
 
Cost of product sales and contract development and manufacturing services
76.9


91.8

Research and development
42.7


46.1

Selling, general and administrative
69.7


65.4

Amortization of intangible assets
14.8


14.5

Total operating expenses
204.1

 
217.8


 
 
 
Loss from operations
(11.6
)

(27.2
)

 
 
 
Other (expense) income:
 
 
 
Interest expense
(8.6
)

(9.6
)
Other expense, net
(1.1
)

(1.0
)
Total other expense, net
(9.7
)
 
(10.6
)

 
 
 
Loss before provision for income taxes
(21.3
)

(37.8
)
Income tax benefit
8.8


11.8

Net loss
$
(12.5
)
 
$
(26.0
)
 
 
 
 
Net loss per common share
 
 
 
Basic
$
(0.24
)
 
$
(0.51
)
Diluted
$
(0.24
)
 
$
(0.51
)
Shares used in computing loss per share
 
 
 
Basic
52.0


51.2

Diluted
52.0


51.2

See accompanying notes.

6


Emergent BioSolutions Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited, in millions)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
Net loss
$
(12.5
)
 
$
(26.0
)
 
Other comprehensive (loss) income, net of tax:


 
 
 
Foreign currency translation
(0.1
)
 
1.2

 
Unrealized losses on hedging activities, net of tax
(11.2
)
 

 
Unrealized losses on pension benefit obligation, net of tax

 
(0.2
)
 
Total other comprehensive (loss) income, net of tax
(11.3
)
 
1.0

 
Comprehensive loss
$
(23.8
)
 
$
(25.0
)
 
 
 
 
 
 
During the three months ended March 31, 2020, there were tax benefits related to unrealized losses on hedging activities of $2.8 million and tax losses related to foreign currency translations that were de minimus. During the three months ended March 31, 2019, the tax effects of the amounts presented were de minimus.
 
 
See accompanying notes.

7


Emergent BioSolutions Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in millions)
 
Three Months Ended March 31,
 
2020

2019
Cash flows provided by operating activities:
 
 
 
Net loss
$
(12.5
)
 
$
(26.0
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Share-based compensation expense
6.6

 
6.8

Depreciation and amortization
28.2

 
26.6

Amortization of deferred financing costs
0.7

 
0.7

Deferred income taxes
(4.2
)
 
(11.4
)
Change in fair value of contingent consideration, net
0.6

 
1.7

Other

 
(0.1
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
108.2

 
141.6

Inventories
(25.6
)
 
(5.2
)
Prepaid expenses and other assets
(15.3
)
 
(16.6
)
Accounts payable
(15.6
)
 
4.2

Accrued expenses
1.1

 
1.7

Accrued compensation
(14.9
)
 
(21.3
)
Contract liabilities
0.5

 
2.1

Net cash provided by operating activities:
57.8

 
104.8

Cash flows used in investing activities:
 
 
 
Purchases of property, plant and equipment and other
(24.2
)
 
(21.4
)
Net cash used in investing activities:
(24.2
)
 
(21.4
)
Cash flows used in financing activities:
 
 
 
Proceeds from revolving credit facility

 
30.0

Principal payments on revolving credit facility
(20.0
)
 
(80.0
)
Principal payments on term loan facility
(2.8
)
 
(2.8
)
Proceeds from issuance of common stock upon exercise of stock options
9.1

 
0.9

Taxes paid on behalf of employees for equity activity
(5.6
)
 
(6.0
)
Contingent consideration payments
(0.7
)
 
(0.5
)
Net cash used in financing activities:
(20.0
)
 
(58.4
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
0.1

 

Net increase in cash, cash equivalents and restricted cash
13.7

 
25.0

Cash, cash equivalents and restricted cash at beginning of period
168.0

 
112.4

Cash, cash equivalents and restricted cash at end of period
$
181.7

 
$
137.4

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for interest
$
7.4

 
$
8.9

Cash paid during the period for income taxes
$
3.6

 
$
5.0

Supplemental information on non-cash investing and financing activities:
 
 
 
Purchases of property, plant and equipment unpaid at period end
$
7.3

 
$
7.1

Reconciliation of cash and cash equivalent and restricted cash at March 31, 2020 and December 31, 2019:
 
 
 
Cash and cash equivalents
$
181.5

 
$
167.8

Restricted cash
$
0.2

 
0.2

Total
$
181.7

 
$
168.0


See accompanying notes.

8


Emergent BioSolutions Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited, in millions)
 
 
$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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
 
53.0

 
$
0.1

 
$
716.1

 
(1.2
)
 
$
(39.6
)
 
$
(9.9
)
 
$
421.8

 
$
1,088.5

Employee equity plans activity
 
0.5

 

 
10.1

 

 

 

 

 
10.1

Net income
 

 

 

 

 

 

 
(12.5
)
 
(12.5
)
Other comprehensive income
 

 

 

 

 

 
(11.3
)
 

 
(11.3
)
Balance at March 31, 2020
 
53.5

 
$
0.1

 
$
726.2

 
(1.2
)
 
$
(39.6
)
 
$
(21.2
)
 
$
409.3

 
$
1,074.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 income
 












(26.0
)

(26.0
)
Other comprehensive loss
 










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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes.

9

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)



1.    Business
Organization and business
Emergent BioSolutions Inc. (the "Company" or "Emergent") is a global life sciences company focused on providing civilian and military populations a portfolio of innovative preparedness and response products and solutions that address accidental, deliberate and naturally occurring public health threats ("PHTs," each a “PHT”).
The Company is focused on the following six distinct PHT categories: Chemical, Biological, Radiological, Nuclear and Explosives ("CBRNE"); emerging infectious diseases ("EID"); travel health; emerging health crises; acute/emergency care, and contract development and manufacturing ("CDMO"). The Company has a product portfolio of ten products and product candidates (vaccines, therapeutics, and drug-device combination products) that contribute a substantial portion of our revenue. The Company also has two product candidates that are procured under special circumstances by certain government agencies, although they are not approved by the FDA or any health agency. The U.S. government (the "USG') is the Company's largest customer and provides the Company with substantial funding for the development of a number of its product candidates.
The Company's product portfolio includes:
Vaccines
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;
BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the U.S. Food and Drug Administration ("FDA"), for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;
Vaxchora® (Cholera Vaccine, Live, Oral), the only FDA-licensed vaccine for the prevention of cholera; and
Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral vaccine licensed by the FDA for the prevention of typhoid fever.
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; and
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;
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.
Product Candidates
AV7909® (Anthrax Vaccine Absorbed with Adjuvant), is a product candidate being developed as a next generation anthrax vaccine for post-exposure prophylaxis of disease resulting from suspected or confirmed Bacillus anthracis exposure. The USG has started procuring AV7909 for the Strategic National Stockpile (SNS) prior to its approval by the FDA and has been reducing its purchases of BioThrax as a result; and
Trobigard® is a combination drug-device auto-injector product candidate that contains atropine sulfate and obidoxime chloride. It has not been approved by the FDA or any similar health regulatory body, but it is procured

10

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


by certain authorized government buyers under special circumstances for potential use as a nerve agent countermeasure.
The Company also generates revenue from contract development and manufacturing services on a clinical and commercial (small and large) scale by providing such services to the pharmaceutical and biotechnology industry.  These services include process development and bulk drug substance and drug product manufacturing of biologics, fill/finish formulation and analytical development services for injectable and other sterile products, inclusive of process design, technical transfer, manufacturing validations, aseptic filling, lyophilization, final packaging and stability studies, as well as manufacturing of vial and pre-filled syringe formats across bacterial, viral and mammalian therapy technology platforms.
The Company operates as one operating segment.

2.    Basis of Presentation and Principles of Consolidation
Basis of presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Emergent and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed 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 SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed 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, 2019, as filed with the SEC.
All 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 March 31, 2020. 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
During the three months ended March 31, 2020, 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, 2019, as filed with the SEC.
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 cash held in money market accounts (level 1), contingent purchase consideration (level 3) and interest rate swaps arrangements (level 2) that are measured at fair value on a recurring basis (Note 7 and Note 8). As of March 31, 2020 and December 31, 2019, the Company held cash in money market accounts of $90.7 million and $52.2 million, respectively. The Company also records the assets and liabilities of acquisitions at fair value. On a non-recurring basis, the Company measures its IPR&D assets (level 3) using fair value measurements. As of March 31, 2020 and December 31, 2019, the Company had no other significant assets or liabilities that were measured at fair value.

11

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


Recently issued accounting standards
Recently Adopted
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13")
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 generally result in the earlier recognition of allowances for losses. The guidance became effective for annual periods beginning after December 15, 2019, including interim periods within those years. The Company adopted the standard as of January 1, 2020 and has evaluated the effects of this standard and determined that the adoption did not have a material impact on the Company's consolidated financial statements.
ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820) ("ASU 2018-13")
In August 2018, the FASB issued ASU 2018-13. ASU 2018-13 improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company adopted the standard as of January 1, 2020 which has resulted in expanded disclosures around the Company's recurring level 3 fair value measurements. The disclosures are included in note 7 of the condensed consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")
In August 2018, the FASB issued ASU 2018-15. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for all entities for fiscal years beginning after December 15, 2019. The Company adopted the standard as of January 1, 2020 and has evaluated the effects of this standard and determined that the adoption did not have a material impact on the Company's consolidated financial statements.
ASU 2017-4, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-4")
In January 2017, the FASB issued ASU 2017-4. ASU 2017-4 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. ASU 2017-4 is effective for annual and interim goodwill tests beginning after December 15, 2019. The Company's measurement period is September 30. The Company adopted the standard as of January 1, 2020 and has evaluated the effects of this standard and determined that the adoption will not have a material impact on the Company's consolidation financial statements.
Not Yet Adopted
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued Topic 848. Topic 848 provides relief for impacted areas as it relates to impending reference rate reform. ASC 848 contains optional expedients and exceptions for applying US GAAP to debt arrangements, contracts, hedging relationships, and other areas or transactions that are impacted by reference rate reform. This guidance is effective for upon issuance for all entities and elections of certain optional expedients are required to apply the provisions of the guidance. The Company continues to assess all potential impacts of the standard and will disclose the nature and reason for any elections that the Company makes.
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14")
In August 2018, the FASB issued ASU 2018-14. ASU 2018-14 modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for all entities for fiscal years ending after December 15, 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-14 on its consolidated financial statements.

12

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


ASU 2019-12, Simplifications to Accounting for Income Taxes ("ASU 2019-12")
In December 2019, the FASB issued ASU 2019-12. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including deferred taxes for goodwill and allocating taxes for members of a consolidated group. ASU 2019-12 is effective for all entities for fiscal years beginning after December 15, 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements.
3.    Inventories
The components of inventory are as follows:
 
March 31, 2020
 
December 31, 2019
Raw materials and supplies
$
77.7

 
$
70.5

Work-in-process
114.2

 
89.7

Finished goods
56.2

 
62.3

Total inventories
$
248.1

 
$
222.5


4.    Property, plant and equipment
Property, plant and equipment consisted of the following:
 
March 31, 2020
 
December 31, 2019
Land and improvements
$
46.6

 
$
46.5

Buildings, building improvements and leasehold improvements
242.3

 
234.8

Furniture and equipment
340.0

 
334.2

Software
55.6

 
55.7

Construction-in-progress
86.5

 
81.5

Property, plant and equipment, gross
771.0

 
752.7

Accumulated depreciation
(221.8
)
 
(210.4
)
Total property, plant and equipment, net
$
549.2

 
$
542.3


5.    Leases
The Company has operating leases for corporate offices, research and development facilities and manufacturing facilities. We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use (ROU) assets and liabilities.
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: 

13

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


 
Three months ended March 31,
 
2020
 
2019
Operating lease cost:
 
 
 
Amortization of right-of-use assets
$
1.1

 
$
0.6

Interest on lease liabilities
0.3

 
0.1

Total operating lease cost
$
1.4

 
$
0.7


Supplemental balance sheet information related to leases was as follows:
(In millions, except lease term and discount rate)
Balance Sheet location
 
March 31, 2020
 
December 31, 2019
Operating lease right-of-use assets
Other assets
 
$
25.6

 
$
24.7

 
 
 
 
 
 
Operating lease liabilities, current portion
Other current liabilities
 
4.2

 
3.6

Operating lease liabilities
Other liabilities
 
22.7

 
22.1

Total operating lease liabilities
 
 
$
26.9

 
$
25.7

 
 
 
 
 
 
Operating leases:
 
 
 
 
 
Weighted average remaining lease term (years)
 
 
7.7

 
8.0

Weighted average discount rate
 
 
4.2
%
 
4.2
%

6.    Intangible assets
The Company's intangible assets consist of products acquired via business combinations or asset acquisitions. The following tables summarize the Company's intangible assets for the periods ended March 31, 2020 and December 31, 2019:
 
 
 
March 31, 2020
(in millions) 
Estimated Life
 
Cost
Additions
Accumulated Amortization
Net
Products
9-22 years
 
$
788.0

$
10.0

$
96.0

$
702.0

Customer relationships
8 years
 
28.6


23.8

4.8

Contract development and manufacturing
8 years
 
5.5


4.2

1.3

    Total intangible assets
 
 
$
822.1

$
10.0

$
124.0

$
708.1


 
 
 
December 31, 2019
(in millions) 
Estimated Life
 
Cost
Accumulated Amortization
Net
Products
9-22 years
 
$
788.0

$
82.2

$
705.8

Customer relationships
8 years
 
28.6

23.0

$
5.6

Contract development and manufacturing
8 years
 
5.5

4.0

$
1.5

    Total intangible assets
 
 
$
822.1

$
109.2

$
712.9



During the three months ended March 31, 2020, the Company achieved a sales milestone that resulted in a $10.0 million obligation related to the Company's asset acquisition of raxibacumab in October 2017. The achievement of the milestone resulted in an increase to intangible assets with a corresponding increase in accounts payable. As of March 31, 2020 there are no remaining contractual obligations for sales milestones related to the raxibacumab acquisition.

During the three months ended March 31, 2020 and 2019, the Company recorded amortization expense for intangible assets of $14.8 million and $14.5 million, respectively. As of March 31, 2020, the weighted average amortization period remaining for intangible assets was 13.3 years.

14

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)



In-process research and development (IPR&D) assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. There were no changes to the Company's IPR&D assets during the three months ended March 31, 2020.
Goodwill was $266.4 million and $266.6 million for the periods ended March 31, 2020 and December 31, 2019, respectively. The change in the balance during the period was due to foreign currency translation adjustments.
7.    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 and owners if future events occur or conditions are met. These liabilities associated with business combinations are measured at fair value at inception and at each subsequent reporting date. The changes in the fair value are primarily due to the expected amount and timing of future net sales, which are inputs that have no observable market (Level 3).

The following table is a reconciliation of the beginning and ending balance of contingent considerations and is based on level 3 significant unobservable inputs.
 
 
Balance at December 31, 2019
$
29.2

Change in fair value
0.6

Settlements
(0.7
)
Balance at March 31, 2020
$
29.1


The recurring Level 3 fair value measurements the Company's contingent consideration liability include the following significant unobservable inputs:
Contingent Consideration Liability
Fair Value as of March 31, 2020
Valuation Technique
Unobservable Input
Range
Weighted Average
Revenue milestone and royalty based
$29.1 million
Discounted cash flow
Discount rate
2.5% - 8.6%
4.3%
Probability of payment
10.0% - 40.0%
20.9%
Projected year of payment
2020 - 2028
2022


8.    Derivative instruments and hedging activities
Risk management objective of using derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company has entered into interest rate swaps to manage exposures that arise from the Company's senior secured credit agreement's payments of variable interest rate debt.
Accounting policy for derivative instruments and hedging activities
The Company entered into interest rate swaps in June 2019. The Company's interest rate swaps qualify for hedge accounting as cash flow hedges. All derivatives are recorded on the balance sheet at fair value. Hedge accounting provides for the matching of the timing of gain or loss recognition on these interest rate swaps with the recognition of the changes in interest expense on the Company's variable rate debt. For derivatives designated as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest

15

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


expense as interest payments are made on the Company’s variable-rate debt. The cash flows from the designated interest rate swaps are classified as a component of operating cash flows, similar to interest expense. If current fair values of designated interest rate swaps remained static over the next twelve months, the Company would reclassify $5.0 million of net deferred losses from accumulated other comprehensive loss to the statement of operations over the next twelve month period. All outstanding cash flow hedges mature in October 2023.
As of March 31, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
Number of Instruments
 
Notional
Interest rate swaps
7
 
$
350.0


The table below presents the fair value of the Company’s derivative financial instruments designated as hedges as well as their classification on the balance sheet.
Asset Derivatives
Liability Derivatives
 
March 31, 2020
December 31, 2019
March 31, 2020
 
December 31, 2019
 
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
Interest Rate Swaps
Other Current Assets
$

Other Current Assets
$

Other Current Liabilities
$
4.8

 
Other Current Liabilities
$

Other Assets
$

Other Assets
$

Other Liabilities
$
11.2

 
Other Liabilities
$
2.0


The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swaps fall into Level 2 in the fair value hierarchy.
The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income.
Hedging derivatives
Cumulative Amount of Gain/(Loss) Recognized in OCI on Derivative
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income
March 31,
 
Three months ended March 31,
 
2020
2019
 
 
2020
2019
Interest Rate Swaps
$
(16.0
)
$

Interest expense
 
$

$



16

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


9.    Debt
The components of debt are as follows:
 
March 31, 2020
 
December 31, 2019
Senior secured credit agreement - Term loan due 2023
$
433.1

 
$
435.9

Senior secured credit agreement - Revolver loan due 2023
353.0

 
373.0

2.875% Convertible Senior Notes due 2021
10.6

 
10.6

Other
3.0

 
3.0

Total debt
799.7

 
822.5

Current portion of long-term debt, net of debt issuance costs
(26.3
)
 
(12.9
)
Unamortized debt issuance costs
(10.5
)
 
(11.2
)
Non-current portion of debt
$
762.9

 
$
798.4



Senior secured credit agreement

In October 2018, the Company entered into a senior secured credit agreement with multiple lending institutions (the "Credit Agreement"). The terms of the credit agreement include (i) a revolving credit facility (the "Revolving Credit Facility") of $600 million with a maturity date of October 13, 2023, and (ii) a term loan with a principal amount of $450 million (the "Term Loan Facility," and together with the Revolving Credit Facility, the "Senior Secured Credit Facilities"). The Company may request incremental term loan facilities or increases in the Revolving Credit Facility (each an "Incremental Loan") as long as requirements relating to net leverage ratio will be maintained on a pro forma basis.

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 Credit Agreement for accrued and unpaid interest on the outstanding principal balance, based on the above interest rates. In addition, the Company is required to pay commitment fees ranging from 0.15% to 0.30% per annum, depending on the Company's consolidated net leverage ratio, in respect of the average daily unused commitments under the Revolving Credit Facility. The Company is to repay the outstanding principal amount of the Term Loan Facility in quarterly installments based on an 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 Credit Agreement also requires mandatory prepayments of the Term Loan Facility in the event the Company or its Subsidiaries (a) incur indebtedness not otherwise permitted under the Credit Agreement or (b) receive cash proceeds in excess of $100 million during the term of the Credit Agreement from certain dispositions of property or from casualty events involving their property, subject to certain reinvestment rights.

The financial covenants under the Credit Agreement currently require the quarterly presentation of a minimum consolidated 12-month rolling debt service coverage ratio of 2.50 to 1.00, and a maximum consolidated net leverage ratio of 3.75 to 1.00 for the quarterly filing periods from October 1, 2019 through September 29, 2020 and 3.50 to 1.0, thereafter, which may be adjusted to 4.00 to 1.00 for a four quarter period in connection with a material permitted acquisition. Negative covenants in the Credit Agreement, among other things, limit the ability of the Company to incur indebtedness and liens, dispose of assets, make investments, enter into certain merger or consolidation transactions and make restricted payments. As of the date of these financial statements, the Company is in compliance with all affirmative and negative covenants.


17

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


2.875% Convertible senior notes due 2021

On January 29, 2014, the Company issued 2.875% convertible senior notes due 2021 (the "Notes"). The Notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears on January 15 and July 15 of each year. The Notes mature on January 15, 2021.

10.    Revenue recognition
The Company operates 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 major sources were as follows:
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
U.S.
Government
 
Non-U.S.
Government
 
 Total
 
U.S.
Government
 
Non-U.S.
Government
 
 Total
Product sales, net
$
63.9

 
$
84.3

 
$
148.2

 
$
73.3

 
$
79.7

 
$
153.0

Contract development and manufacturing services

 
21.7

 
21.7

 

 
15.9

 
15.9

Contracts and grants
22.0

 
0.6

 
22.6

 
20.4

 
1.3

 
21.7

Total revenues
$
85.9

 
$
106.6

 
$
192.5

 
$
93.7

 
$
96.9

 
$
190.6

Contract liabilities
When performance obligations are not transferred to a customer at the end of a reporting period, cash received associated with amounts allocated to those performance obligations is reflected as contract liabilities on the consolidated balance sheets and is deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of the contract liability balances:
 
 
December 31, 2019
$
88.9

Deferral of revenue
6.4

Revenue recognized
(5.9
)
March 31, 2020
$
89.4


Transaction price allocated to remaining performance obligations
As of March 31, 2020, the Company expects future revenues of approximately $555.9 million associated with performance obligations that have not been satisfied. The Company expects to recognize a majority of these revenues within the next 24 months, with the remainder recognized thereafter. However, the amount and timing of revenue recognition for unsatisfied performance obligations can materially change due to timing of funding appropriations from the USG and the overall success of the Company's development activities associated with its PHT product candidates that are then receiving development funding support from the USG under development contracts. In addition, the amount of future revenues associated with unsatisfied performance obligations excludes the value associated with unexercised option periods in the Company's contracts.
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, 2020 and December 31, 2019, the Company had contract assets associated with deferred costs of $36.3 million and $34.0 million, respectively, which is reflected as a component of prepaid expenses and other current assets on the Company's consolidated balance sheets.

18

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


Accounts receivable
Accounts receivable, including unbilled accounts receivable contract assets, consist of the following:
 
 
March 31, 2020
 
December 31, 2019
Billed, net
 
$
119.4

 
$
227.3

Unbilled
 
43.1

 
43.4

Total, net
 
$
162.5

 
$
270.7


As of March 31, 2020 and December 31, 2019, allowances for doubtful accounts were $0.8 million and de minimis, respectively.
11.    Income taxes
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently assessing the impact of the CARES Act, but we do not expect there to be a material impact to our consolidated financial statements.
The estimated effective annual tax rate for the Company, which excludes discrete adjustments, was 26% and 27% for the three months ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, the Company recorded a discrete tax benefit of $3.2 million and $1.8 million, respectively, primarily due to activity associated with equity awards.
12.    Net loss per share
The following table presents the calculation of basic and diluted net loss per share:
 
Three Months Ended March 31,
2020
 
2019
Numerator:
 

 
 
Net loss
$
(12.5
)
 
$
(26.0
)
 
 
 
 
Denominator:
 
 
 
Weighted-average number of shares—basic
52.0

 
51.2

Dilutive securities—equity awards

 

Weighted-average number of shares—diluted
52.0

 
51.2

 
 
 
 
Net loss per share - basic
$
(0.24
)
 
$
(0.51
)
Net loss per share - diluted
$
(0.24
)
 
$
(0.51
)

Basic earnings (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed using the treasury method by dividing net loss by the weighted average number of shares of common stock outstanding during the period, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised and are not anti-dilutive. For the three months ended March 31, 2020 and 2019, approximately 0.7 million and 3.1 million stock options are not considered in the diluted net loss per share calculation because the exercise price of these options is greater than the average per share closing price during the three month period and their effect would be anti-dilutive.

19

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


13.    Share-based compensation
During the three months ended March 31, 2020, the Company granted stock options to purchase 0.4 million shares of common stock and 0.5 million restricted and performance stock units under the Emergent BioSolutions Inc. Stock Incentive Plan. The stock option and restricted stock unit grants vest over three equal annual installments beginning on the day prior to the anniversary of the grant date. The performance stock units settle in stock at the end of the three-year performance period based on the Company's results compared to the performance criteria.
14. Commitments and contingencies
ANDA Litigation - Perrigo 4mg
On September 14, 2018, Adapt Pharma Inc., Adapt Pharma Operations Limited and Adapt Pharma Ltd. (collectively, "Adapt Pharma"), and Opiant Pharmaceuticals, Inc. ("Opiant"), received notice from Perrigo UK FINCO Limited Partnership ("Perrigo"), that Perrigo had filed an Abbreviated New Drug Application ("ANDA"), with the United States Food and Drug Administration seeking regulatory approval to market a generic version of NARCAN®(naloxone hydrochloride) Nasal Spray 4mg/spray before the expiration of U.S. Patent Nos. 9,211,253, (the "‘253 Patent"), 9,468,747 (the "‘747 Patent"), 9,561,177, (the "‘177 Patent"), 9,629,965, (the "‘965 Patent") and 9,775,838 (the "‘838 Patent"). On or about October 25, 2018, Perrigo sent a subsequent notice letter relating to U.S. Patent No. 10,085,937 (the "937 Patent"). Perrigo’s notice letters assert that its generic product will not infringe any valid and enforceable claim of these patents.
On October 25, 2018, Emergent BioSolutions’ Adapt Pharma subsidiaries and Opiant, (collectively, the "Plaintiffs"), filed a 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’s ANDA filing with the FDA. Plaintiffs filed a second complaint against Perrigo on December 7, 2018, for the infringement of the ‘937 Patent. On February 12, 2020, Adapt Pharma and Perrigo entered into a settlement agreement to resolve the ongoing litigation. Under the terms of the settlement, Perrigo has received a non-exclusive license under Adapt Pharma's patents to make, have made and market its generic naloxone hydrochloride nasal spray under its own ANDA. Perrigo’s license will be effective as of January 5, 2033 or earlier under certain circumstances including circumstances related to the outcome of the current litigation against Teva (as defined below) or litigation against future ANDA filers. The Perrigo settlement agreement is subject to review by the U.S. Department of Justice and the Federal Trade Commission, and entry of an order dismissing the litigation by the U.S. District Court for the District of New Jersey.
ANDA 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"), that Teva had filed an ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 2 mg/spray before the expiration of U.S. Patent No. 9,480,644, (the "‘644 Patent"), and U.S. Patent No. 9,707,226, (the "'226 Patent"). Teva's notice letter asserts that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the '644 Patent or the '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
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"). 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 ‘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 ‘937 Patent, or that the '253, the '747, the '177, the '965, the '838, and the ‘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. Closing arguments took place on February 26, 2020.

20

EMERGENT BIOSOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except share and per share amounts)


In the complaints described in the paragraphs above, the Plaintiffs seek, among other relief, orders that the effective date of FDA approvals of the Teva ANDA products and the Perrigo ANDA product be a date not earlier than the expiration of the patents listed for each product, equitable relief enjoining Teva and Perrigo from making, using, offering to sell, selling, or importing the products that are the subject of Teva and Perrigo’s respective ANDAs, until after the expiration of the patents listed for each product, and monetary relief or other relief as deemed just and proper by the court.
Nalox-1 Pharmaceuticals, a non-practicing entity, filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (the "PTAB") requesting inter parties review ("IPR\") of five of the six patents listed in the Orange Book related to NARCAN® Nasal Spray 4mg/spray. In a series of decisions, the PTAB agreed to institute a review of the '253 Patent, the '747 Patent and the '965 Patent but denied review of the '177 Patent and the '838 Patent. Nalox-1 did not request review of the '937 Patent.

21

EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes and other financial information included elsewhere in this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. 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 six 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 product candidates that are procured under special circumstances by certain government agencies, although they are not approved by the FDA or any other health agency. 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. We continue to pursue acquiring and developing products and solutions that provide an opportunity to serve both government and commercial (non-government) customers globally. The majority of revenue comes from the following products and product candidates:
Vaccines
Anthrax Vaccines, including our AV7909 (Anthrax Vaccine Adsorbed with Adjuvant) 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 FDA-licensed vaccine for the prevention of cholera.
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

22

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)

Trobigard®, a combination drug-device auto-injector product candidate that contains atropine sulfate and obidoxime chloride. It has not been approved by the FDA or any similar health regulatory body, 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, as well as the governing bodies in Canada, Singapore and Ukraine 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
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.
Highlights and Business Accomplishments for 2020
On January 13, 2020, received agreement from the European Medicines Agency (EMA) and the U.S. Food and Drug Administration (FDA) on the company’s proposed development plan to use Serum Neutralizing Antibodies (SNA) as surrogate endpoint to predict likely clinical benefit of CHIKV VLP, the company’s chikungunya virus virus-like particle (VLP) vaccine candidate, in a Phase 3 safety and immunogenicity study anticipated in late 2020.
On January 31, 2020, received positive opinion and subsequent approval from EMA of Vaxchora® (Cholera Vaccine, Live, Oral), the company’s
 
cholera vaccine, making it the only single-dose oral vaccine indicated for active immunization against disease caused by Vibrio cholerae serogroup 01 in adults and children from 6 years of age across all 27 member states of the European Union and the European Economic Area countries.
On March 10, 2020, signed a development and manufacturing agreement with Novavax, Inc. for an experimental vaccine candidate for COVID-19.
On March 11, 2020, initiated development of two investigational plasma-derived therapies. COVID-Human Immune Globulin (COVID-HIG) is being developed as a human plasma-derived therapy candidate for potential treatment of COVID-19 in severe hospitalized and high-risk patients, and COVID-Equine Immune Globulin (COVID-EIG) is being developed as an equine plasma-derived therapy candidate for potential treatment of severe disease in humans.
On March 18, 2020, signed a development and manufacturing agreement with Vaxart, Inc. to produce its experimental oral vaccine candidate for COVID-19.
On March 31, 2020, signed an agreement with Novavax, Inc. to manufacture NanoFluTM, its seasonal influenza vaccine candidate.
On April 2, 2020, announced HHS funding valued at $14.5 million to support the development of COVID-Human Immune Globulin (COVID-HIG), which will be included in one of the studies of the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health, evaluating potential treatments for COVID-19.
On April 23, 2002, announced an agreement, valued at $135 million, to be U.S. manufacturing partner of Johnson & Johnson for its lead vaccine candidate for COVID-19.
Financial Operations Overview
Revenues
We generate revenues from the sale of our marketed products and product candidates which include vaccines, therapeutics and devices which have been described above. Additionally, revenue is generated from the performance of CDMO services, and our performance of research and development services under contracts and grants. The USG is the largest purchaser of our CBRNE products and primarily purchases our products for the SNS, a national repository of medical countermeasures

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)

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. 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 the performance of CDMO services for third-parties. Our services include fill/finish activities as well as the production of bulk drug substances on behalf of our customers.
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 have varied, and we expect that they will continue to vary on a quarterly basis.
Critical Accounting Policies and Estimates
During the three months ended March 31, 2020, 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, 2019, as filed with the SEC, (see Note 2 to the accompanying condensed consolidated financial statements).

24

EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)

Results of Operations
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
$ Change
 
% Change
Product sales net:
 
 

 
 
 
 
 
 
NARCAN Nasal Spray
 
$
72.2

 
$
65.5

 
$
6.7

 
10
%
ACAM2000
 

 
45.6

 
(45.6
)
 
(100
%)
Anthrax vaccines
 
51.9

 
11.7

 
40.2

 
NM

Other
 
24.1

 
30.2

 
(6.1
)
 
(20
)%
Total product sales, net
 
148.2

 
153.0

 
(4.8
)
 
(3
)%
Contract development and manufacturing services
 
21.7

 
15.9

 
5.8

 
36
 %
Contracts and grants
 
22.6

 
21.7

 
0.9

 
4
 %
Total revenues
 
192.5

 
190.6

 
1.9

 
1
 %
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of product sales and contract development and manufacturing services
 
76.9

 
91.8

 
(14.9
)
 
(16
%)
Research and development
 
42.7

 
46.1

 
(3.4
)
 
(7
%)
Selling, general and administrative
 
69.7

 
65.4

 
4.3

 
7
%
Amortization of intangible assets
 
14.8

 
14.5

 
0.3

 
2
%
Total operating expenses
 
204.1

 
217.8

 
(13.7
)
 
(6
%)
 
 
 
 
 
 
 
 
 
Loss from operations
 
(11.6
)
 
(27.2
)
 
15.6

 
(57
%)
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
(8.6
)
 
(9.6
)
 
1.0

 
(10
%)
Other expense, net
 
(1.1
)
 
(1.0
)
 
(0.1
)
 
%
Total other expense, net
 
(9.7
)
 
(10.6
)
 
0.9

 
(8
%)
 
 
 
 
 
 
 
 
 
Loss before provision for income taxes
 
(21.3
)
 
(37.8
)
 
16.5

 
(44
%)
Income tax benefit
 
8.8

 
11.8

 
(3.0
)
 
(25
%)
Net loss
 
$
(12.5
)
 
$
(26.0
)
 
$
13.5

 
(52
%)
NM - Not meaningful

25

EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)

Total Revenues
CHART-937E1A19D8725011B0D.JPG
 
NARCAN Nasal Spray
 
Other product sales
 
ACAM2000
 
Contracts development and manufacturing services
 
Anthrax vaccines
 
Contracts and Grants
Product Sales, net
NARCAN Nasal Spray
The increase in NARCAN Nasal Spray sales for the three months ended March 31, 2020 was primarily due to an increase in sales to the U.S. public interest markets slightly offset by a decrease in sales to the U.S. commercial markets.
ACAM2000
The decrease in ACAM2000 sales for the three months ended March 31, 2020 was due to timing of deliveries to the SNS between the two periods. ACAM2000 product sales are made under a long-term procurement contract. The fluctuations in ACAM2000 revenue are dictated by the timing of orders from the USG.
 
Anthrax Vaccines
The increase in anthrax vaccine sales for the three months ended March 31, 2020 was primarily due to the transition of SNS deliveries from BioThrax to a consistent cadence of deliveries of AV7909. There were limited sales of BioThrax during the three months ended March 31, 2019 in anticipation of the USG's transition from BioThrax to AV7909. Deliveries of AV7909 began in September of 2019.
Other Product Sales
The decrease in the Company's other product sales during the three months ended March 31, 2020 was primarily due to a decline in sales of raxibacumab, Vaxchora and Vivotif offset by an increase in sales of BAT.
Contract Manufacturing
The increase in contract manufacturing revenue for the three months ended March 31, 2020 is largely due to increased volumes at our Camden and Winnipeg facilities partially offset by decreases at our Bayview facility.
Contracts and Grants
Contracts and grants revenue for the three months ended March 31, 2020 was consistent with the three months ended March 31, 2019.
Cost of Product Sales and Contract Development and Manufacturing Services
CHART-F886E6C0564F5EDB9D1.JPG
 
Cost of Product Sales and Contract Manufacturing
l
Gross profit margin for product sales and contract manufacturing
Cost of product sales and contract development and manufacturing services decreased for the three months ended March 31, 2020 primarily due to decreases in

26

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)

sales of ACAM2000 and raxibacumab which have lower gross margins.
Research and Development Expenses (Gross and Net) CHART-7BE1608B6EA75FD5AA6.JPG
 
Research and Development expense
l
Research and Development expense, net of contracts and grants revenue
The decrease in research and development expenses during the three months ended March 31, 2020 is consistent with the decline of contract and grant revenue following completion of developmental activities associated with our AV7909 product candidate.
 
Selling, General and Administrative Expenses
CHART-93D7BF203AAB502F964.JPG
 
Selling, General and Administrative
l
SG&A as a percentage of total revenue
Selling, general and administrative expenses increased for the three months ended March 31, 2020 primarily due to professional services and staffing costs to support the Company's growth.
Amortization of Intangible Assets
CHART-45F5BCFAAC85917CB05.JPG
Amortization of intangible assets for the three months ended March 31, 2020 was consistent with the three months ended March 31, 2019.

27

EMERGENT BIOSOLUTIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)

Other Expense, Net
CHART-ADE9397B4CCF58CCA64.JPG
 
Interest expense
 
Other income (expense)
Total other income (expense), net decreased by $0.9 million for the three months ended March 31, 2020 due primarily to a decrease in interest expense due to a decline in interest rates period over period.
 
Income Tax Benefit
CHART-AECA25847B2A5D44978.JPG
 
Income tax benefit
l
Effective tax rate
During the three months ended March 31, 2020 and 2019, the estimated effective tax rate was 26% and 27%, respectively. The actual effective tax rate includes the effects of discrete tax benefits of $3.2 million and $1.8 million during the three months ended March 31, 2020 and 2019.

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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)

Liquidity and Capital Resources
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, 2019. As of March 31, 2020, we had unrestricted cash and cash equivalents of $181.5 million and capacity under our revolving credit facility of $244.8 million. As of March 31, 2020, we believe that we have sufficient liquidity to fund our operations over the next 12 months.
Cash Flows
The following table provides information regarding our cash flows for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31,
 
2020
 
2019
Net cash provided by (used in):
 

 
 
Operating activities
$
57.8

 
$
104.8

Investing activities
(24.2
)
 
(21.4
)
Financing activities
(20.0
)
 
(58.4
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
0.1

 

Net increase in cash, cash equivalents and restricted cash
$
13.7

 
$
25.0



 


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)



Operating Activities
Net cash provided by operating activities of $57.8 million for the three months ended March 31, 2020 was due to net income excluding non-cash items of $19.4 million and working capital changes of $38.4 million, made up of decreases in accounts receivable offset by various other items.
Net cash provided by operating activities of $104.8 million for the three months ended March 31, 2019 was due to net losses excluding non-cash items of $1.7 million and working capital changes of $106.5 million.
The cash flows from operating activities decreased during the three months ended March 31, 2020 largely due to a decline in cash collections on accounts receivables and an increase in spend for inventory.
Investing Activities
Net cash used in investing activities was $24.2 million and $21.4 for the three months ended March 31, 2020 and 2019, respectively. The cash used in investing activities increased during the three months ended March 31, 2020 due to an increase in infrastructure and equipment investments.
Financing Activities
Net cash used in financing activities of $20.0 million for the three months ended March 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.
Net cash used in financing activities of $58.4 million for the three months ended March 31, 2019 was primarily due to net $52.8 million of payments on the term loan and credit facility, primarily offset by cash provided by employee share-based compensation activity of $5.1 million.
The cash flows used in financing activities decreased $38.4 million during the three months ended March 31, 2020 due to a decrease in net payments on the term loan and revolving credit facility of $30.0 million and an increase in cash provided by net employee share-based compensation activity of $8.6 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 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-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 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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited, amounts in millions, except share and per share amounts)

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 our 2.875% Convertible Senior Notes due 2021 from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing our notes that could have the effect of diminishing our ability to make payments on our indebtedness. However, our Senior Secured Credit Facilities restricts our ability to incur additional indebtedness, including secured indebtedness.
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, 2020 and December 31, 2019 was:
(in millions)
 
 
Total Capacity
Outstanding Letters of Credit
Outstanding Indebtedness on Revolving Credit Facility
Unused Capacity
 
March 31, 2020
 
$
600.0

2.2

353.0

$
244.8

 
December 31, 2019
 
$
600.0

2.2

373.0

$
224.8

Share Repurchase Program

There were no repurchases of common stock that were made through open market transactions during the three months ended March 31, 2020. The Company previously had a share repurchase program, which expired as of December 31, 2019.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of additional risks arising from our operations, see “Item 1A-Risk Factors” in this quarterly report.
Market Risk

We have interest rate and foreign currency market risk. We manage our interest rate risk in part by entering into interest rate swaps to swap a portion of our indebtedness that is based on variable interest rates to a fixed rate. We currently do not hedge our foreign currency exchange exposure, and the movement of foreign currency exchange rates could have an adverse or positive impact on our results of operations. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents, we believe that an increase in market rates would likely not have a significant impact on the realized value of our investments, but any increase in market rates would likely increase the interest expense associated with our debt.
Interest Rate Risk
We have debt with a mix of fixed and variable rates of interest. Floating rate debt carries interest based generally on the eurocurrency, as defined in our Amended Credit Agreement, plus an applicable margin. We manage the impact of interest rate changes on our variable debt through derivative instruments such as interest rate swap arrangements. For debt that we have not hedged through our interest rate swap arrangements increases in interest rates could therefore increase the associated interest payments that we are required to make on this debt.
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our operating results assuming various changes in market interest rates. A hypothetical increase of one percentage point in the eurocurrency rate as of March 31, 2020 would increase our interest expense by approximately $4.5 million annually.
Foreign Currency Exchange Rate Risk
We have exposure to foreign currency exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Swiss franc and British pound. We manage our foreign currency exchange rate risk primarily by incurring, to the extent practicable, operating and financing expenses in the local currency in the countries in which we operate.


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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2020. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2020, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ANDA Litigation - Perrigo 4mg
On September 14, 2018, Adapt Pharma Inc., Adapt Pharma Operations Limited and Adapt Pharma Ltd., (collectively, Adapt Pharma), and Opiant Pharmaceuticals, Inc. (Opiant), received notice from Perrigo UK FINCO Limited Partnership (Perrigo), that Perrigo had filed an Abbreviated New Drug Application, (ANDA), with the United States Food and Drug Administration, seeking regulatory approval to market a generic version of NARCAN®(naloxone hydrochloride)
 
Nasal Spray 4mg/spray before the expiration of U.S. Patent Nos. 9,211,253, (the '253 Patent), 9,468,747 (the ‘747 Patent), 9,561,177, (the ‘177 Patent), 9,629,965, (the ‘965 Patent) and 9,775,838 (the ‘838 Patent). On or about October 25, 2018, Perrigo sent a subsequent notice letter relating to U.S. Patent No. 10,085,937 (the 937 Patent). Perrigo’s notice letters assert that its generic product will not infringe any valid and enforceable claim of these patents.
On October 25, 2018, Emergent BioSolutions’ Adapt Pharma subsidiaries and Opiant (collectively, 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’s ANDA filing with the FDA. Plaintiffs filed a second complaint against Perrigo on December 7, 2018, for the infringement of the ‘937 Patent.  On February 12, 2020, Adapt Pharma and Perrigo entered into a settlement agreement to resolve the ongoing litigation. Under the terms of the settlement, Perrigo has received a non-exclusive license under Adapt Pharma's patents to make, have made, and market its generic naloxone hydrochloride nasal spray under its own ANDA. Perrigo's license will be effective as of January 5, 2033 or earlier under certain circumstances including circumstances related to the outcome of the current litigation against Teva (as defined below) or litigation against future ANDA filers. The Perrigo settlement agreement is subject to review by the U.S. Department of Justice and the Federal Trade Commission, and entry of an order dismissing the litigation by the U.S. District Court for the District of New Jersey.
ANDA 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) that Teva had filed an ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray 2 mg/spray before the expiration of U.S. Patent No. 9,480,644, (the '644 Patent) and U.S. Patent No. 9,707,226, (the '226 Patent). Teva's notice letter asserts that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the '644 Patent or the '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.

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ANDA Litigation - Teva 4mg
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 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 ‘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 ‘937 Patent, or that the '253, the '747, the '177, the '965, the '838, and the ‘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. Closing arguments took place on February 26, 2020.
In the complaints described in the paragraphs above, the Plaintiffs seek, among other relief, orders that the effective date of FDA approvals of the Teva ANDA products and the Perrigo ANDA product be a date not earlier than the expiration of the patents listed for each product,  equitable relief enjoining Teva and Perrigo from making, using, offering to sell, selling, or importing the products that are the subject of Teva and Perrigo’s respective ANDAs, until after the expiration of the patents listed for each product, and monetary relief or other relief as deemed just and proper by the court.
Nalox-1 Pharmaceuticals, a non-practicing entity, filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board ("PTAB") requesting inter parties review (IPR) of five of the six patents listed in the Orange Book related to NARCAN® Nasal Spray 4mg/spray. In a series of decisions, the PTAB agreed to institute a review of the '253 Patent, the '747 Patent and the '965 Patent but denied review of the '177 Patent and the '838 Patent. Nalox-1 did not request review of the '937 Patent.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors in addition to the other information in this Quarterly Report on Form 10-Q when evaluating our
 
business because these risk factors may have a significant impact on our business, financial condition, operating results or cash flows. If any of the risks described below or in subsequent reports we file with the SEC actually occur, they may materially harm our business, financial condition, operating results or cash flows. Additional risks and uncertainties that we have not yet identified or that we presently consider to be immaterial may also materially harm our business, financial condition, operating results or cash flows. Discussion of these factors is incorporated by reference into and considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”
GLOBAL PANDEMIC RISK
The COVID-19 coronavirus pandemic could adversely impact our business, results of operations and financial performance.
In December 2019, a novel strain of coronavirus, SARS-CoV-2, was reported to have surfaced. Since then, the SARS-CoV-2 virus has been determined to cause the disease COVID-19. COVID-19 has spread worldwide, including in United States, Canada and several European countries.  The World Health Organization declared the COVID-19 coronavirus outbreak as a global pandemic on March 11, 2020. The pandemic has caused various governments, including in the United States at Federal and state levels, to impose restrictions on people and businesses, such as quarantines, closures, cancellations and travel restrictions. Depending upon the severity of the COVID-19 pandemic in the United States and elsewhere where we sell our products, we may experience significant disruptions that could severely impact our business and operations, including:
diversion of government funding away from our primary procured products and product candidates resulting from changes in government priorities;
limitation of company operations, including reduced productivity resulting from remote work and prolonged office closures as well as a potential adverse impact on our manufacturing operations if a significant number of our manufacturing employees contract the disease;
potential delays or difficulties in receiving raw and other materials from third party suppliers to manufacture our products and product candidates as the pandemic has resulted in the extended shutdown of certain businesses which may in turn result in disruptions or delays to our supply chain;

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potential delays delivering products to our customers which may lead to decline in sales of our government or commercially procured products that may consequently negatively impact our revenues;
decline to our revenues from the sales of our vaccine products that target travelers due to the significant reduction to international travel caused by the COVID-19 pandemic;
potential delays or disruptions in our key clinical trials; and
limitations in employee resources that would otherwise be focused on our business.
The global pandemic caused by COVID-19 continues to rapidly evolve. The extent to which the COVID-19 pandemic will impact our business, results of operations and our financial condition will depend on future developments, which are highly uncertain and cannot be predicted or reasonably estimated with confidence at this time, such as the duration of the pandemic, travel restrictions and social distancing policies and requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to mitigate and treat the disease.
Due to the widespread impact of the pandemic, it is possible that our consolidated financial results for future fiscal quarters and for 2020 may be negatively impacted, including as a result of increased government regulation and introduction of mitigation and prevention measures. In addition, the COVID-19 pandemic has adversely affected, and is expected to continue to adversely affect the United States and the global economy, possibly resulting in an economic downturn and recession that could impact demand for our products. Such events that are generally outside of our control could have a material adverse impact on our business, operating results and financial conditions.
GOVERNMENT CONTRACTING RISKS
We currently derive a substantial portion of our revenue from USG procurement of AV7909, BioThrax and ACAM2000. If the USG’s demand for and/or funding for procurement of AV7909, BioThrax or ACAM2000 is substantially reduced, our business, financial condition, operating results and cash flows would be materially harmed.
We derive a substantial portion of our current and expected future revenues from USG procurement of AV7909 and BioThrax. As AV7909 is a product development candidate, there is a higher level of risk that we may encounter challenges causing delays or
 
an inability to deliver AV7909 than with BioThrax, which may have a material effect on our ability to generate and recognize revenue.
The success of our business and our future operating results are significantly dependent on anticipated funding for the procurement of our anthrax vaccines and the terms of our BioThrax and AV7909 sales to the USG, including the price per dose, the number of doses and the timing of deliveries. We have no certainty that funding will be made available for the procurement of these vaccines. If priorities for the SNS change generally or with respect to our anthrax vaccines, funding to procure future doses of BioThrax or AV7909 may be delayed, limited or not available, BARDA may never complete the anticipated full transition to stockpiling AV7909 in support of anthrax preparedness, and our future business, financial condition, operating results and cash flows could be materially harmed.
In addition, we currently derive a substantial portion of our revenues from sales of ACAM2000 to the USG. If priorities for the SNS change with respect to ACAM2000 or the USG decides not to exercise options under our ACAM2000 contract our future business, financial condition, operating results and cash flows could be materially harmed.
Although a pre-EUA submission package related to AV7909 has been submitted to the FDA, we may not receive an EUA and eventual FDA licensure in a timely manner or at all. Delays in our ability to achieve a favorable outcome from the FDA could prevent us from realizing the full potential value of our BARDA contract for the advanced development and procurement of AV7909.
In collaboration with us, the CDC filed with the FDA a pre-EUA submission package related to AV7909, which enables FDA review of data in anticipation of a request for an EUA. This submission triggered BARDA to exercise its first contract option (valued at $261 million) in July 2019 to procure 10 million doses of AV7909 for inclusion into the SNS in support of anthrax preparedness.
Notwithstanding, the FDA may decide that our data are insufficient and require additional pre-clinical, clinical or other studies. If we are unsuccessful in obtaining an EUA and, ultimately, FDA licensure, in a timely manner or at all, we may not be able to realize the full potential value of the contract, which could have a material adverse effect on our future business, financial condition, operating results and cash flows. Furthermore, prior to FDA licensure, if we obtain an EUA, the EUA could be terminated if the emergency determination underlying the EUA terminates.
Our USG procurement and development contracts require ongoing funding decisions by the USG. Simultaneous reduction or discontinuation of funding

34

EMERGENT BIOSOLUTIONS INC.

of these contracts could cause our business, financial condition, operating results and cash flows to suffer materially.
The USG is the principal customer for our PHT-focused MCMs and is the primary source of funds for the development of most of our product candidates in our development pipeline, most notably our AV7909 product candidate. We anticipate that the USG will also be a principal customer for those MCMs that we successfully develop within our existing product development pipeline, as well as those we acquire in the future. Additionally, a significant portion of our revenue comes from USG development contracts and grants. Over its lifetime, a USG procurement or development program may be implemented through the award of many different individual contracts and subcontracts. The funding for such government programs is subject to Congressional appropriations, generally made on a fiscal year basis, even for programs designed to continue for several years. For example, sales of BioThrax to be supplied under our procurement contract with the CDC are subject to the availability of funding, mostly from annual appropriations. These appropriations can be subject to political considerations, changes in priorities due to global pandemics and stringent budgetary constraints.
Additionally, our government-funded development contracts typically give the USG the right, exercisable in its sole discretion, to extend these contracts for successive option periods following a base period of performance. The value of the services to be performed during these option periods may constitute the majority of the total value of the underlying contract. For example, the September 2016 contract award from BARDA for the development and delivery to the SNS of AV7909 for post-exposure prophylaxis of anthrax disease consists of a five-year base period of performance valued at approximately $200 million. The contract award also includes options for the delivery of additional doses of AV7909 to the SNS and options for an additional clinical study and post-marketing commitments, which, if both were to be exercised in full, would increase the total contract value to up to $1.5 billion. If levels of government expenditures and authorizations for public health countermeasure preparedness decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the USG otherwise declines to exercise its options under our existing contracts, our revenues would suffer, as well as our business, financial condition, operating results and cash flows.
There can be no assurance that we will be able to secure follow-on procurement contracts with the USG upon the expiration of any of our current product procurement contracts.
 
The majority of our revenue is substantially dependent upon product procurement contracts with the USG and foreign governments for our PHT products. Upon the expiration of a procurement contract, we may not be able to negotiate a follow-on procurement contract for the particular product for a similar product volume, period of performance, pricing or other terms, or at all. The inability to secure a similar or increased procurement contract could materially affect our revenues and our business, financial condition, operating results and cash flows could be harmed. For example, the BARDA procurement contract for raxibacumab that we acquired in our acquisition of raxibacumab from Human Genome Sciences, Inc. and GlaxoSmithKline LLC (collectively referred to as GSK), expired in November 2019. We intend to negotiate follow-on procurement contracts for most of our PHT products upon the expiration of a related procurement contract, including our procurement contract for raxibacumab, but there can be no assurance that we will be successful obtaining any follow-on contracts. Even if we are successful in negotiating a follow-on procurement contract, it may be for a lower product volume, over a shorter period of performance or be on less favorable pricing or other terms. An inability to secure follow-on procurement contracts for our products could materially and adversely affect our revenues, and our business, financial condition, operating results and cash flows could be harmed.
The government contracting process is typically a competitive bidding process and involves unique risks and requirements.
Our business involves government contracts and grants, which may be awarded through competitive bidding. Competitive bidding for government contracts presents many risks and requirements, including:

the possibility that we may be ineligible to respond to a request for proposal issued by the government;
the commitment of substantial time and attention of management and key employees to the preparation of bids and proposals for contracts that may not be awarded to us;
the need to accurately estimate the resources and cost structure that will be required to perform any contract that we might be awarded;
the submission by third parties of protests to our responses to requests for proposal that could result in delays or withdrawals of those requests for proposal; and
in the event our competitors protest or challenge contract or grant awards made to

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EMERGENT BIOSOLUTIONS INC.

us pursuant to competitive bidding, the potential that we may incur expenses or delays, and that any such protest or challenge could result in the resubmission of bids based on modified specifications, or in the termination, reduction or modification of the awarded contract.
The USG may choose not to award us future contracts for either the development of our new product candidates or for the procurement of our existing products addressing PHTs and may instead award such contracts to our competitors. If we are unable to secure particular contracts, we may not be able to operate in the market for products that are provided under those contracts. Additionally, if we are unable to consistently win new contract awards over an extended period, or if we fail to anticipate all of the costs or resources that we will be required to secure and, if applicable, perform under such contract awards, our growth strategy and our business, financial condition and operating results and cash flows could be materially and adversely affected.
There are a number of laws and regulations that pertain to government contracts and compliance with those laws and regulations require significant time and cost, which could have a material adverse effect on our business, financial condition, operating results and cash flows.
As a manufacturer and supplier of MCMs to the USG addressing PHTs, we must comply with numerous laws and regulations relating to the procurement, formation, administration and performance of government contracts. These laws and regulations govern how we transact business with our government clients and, in some instances, impose additional costs and related obligations on our business operations. Among the most significant government contracting regulations that affect our business are:

the Federal Acquisition Regulation (FAR), and agency-specific regulations supplemental to FAR, which comprehensively regulate the award, formation, administration and performance of government contracts;
the Defense Federal Acquisition Regulations (DFARs), and agency-specific regulations supplemental to DFARs, which comprehensively regulate the award, formation, administration and performance of U.S. Department of Defense (DoD) government contracts;
the Department of State Acquisition Regulation (DOSAR), which regulates the relationship between a Department of State organization and a contractor or potential contractor;
 
business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees, restrict the granting of gratuities and funding of lobbying activities and incorporate other requirements such as the Anti-Kickback Act, the Procurement Integrity Act, the False Claims Act and the Foreign Corrupt Practices Act;
trade controls, including export and import control laws, International Traffic in Arms Regulations (ITAR), U.S. sanctions programs, and anti-boycott laws and regulations; and
laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
We may be subject to government investigations of business practices and compliance with government acquisition regulations. USG agencies routinely audit and investigate government contractors for compliance with applicable laws and standards. Even though we take significant precautions to identify, prevent and deter fraud, misconduct and non-compliance, we face the risk that our personnel or outside partners may engage in misconduct, fraud or improper activities. If we are audited or investigated and such audit or investigation were to uncover improper or illegal activities, we could be subject to civil and criminal fines and penalties, administrative sanctions, including suspension or debarment from government contracting, and suffer significant reputational harm. The loss of our status as an eligible government contractor or significant fines or penalties associated with contract non-compliance or resulting from investigations could have a material adverse effect on our business.
The amount we are paid under our fixed price government procurement contracts is based on estimates we have made of the time, resources and expenses required for us to perform under those contracts. If our actual costs exceed our estimates, we may not be able to earn an adequate return or may incur a loss under these contracts, which could harm our operating results and materially reduce our net income.
Our current procurement contracts with HHS and the DoD are generally fixed price contracts. We expect that future procurement contracts we successfully secure with the USG would also be fixed price contracts. Under a fixed price contract, we are required to deliver our products at a fixed price regardless of the actual costs we incur. Estimating costs that are related to performance in accordance with contract

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EMERGENT BIOSOLUTIONS INC.

specifications is difficult, particularly where the period of performance is over several years. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed price contract could reduce the profitability of such a contract or cause a loss, which could harm our operating results and materially reduce our net income.
Unfavorable provisions in government contracts, some of which may be customary, may subject our business to material limitations, restrictions and uncertainties and may have a material adverse impact on our business, financial condition, operating results and cash flows.
Government contracts customarily contain provisions that give the USG substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the USG to:
terminate existing contracts, in whole or in part, for any reason or no reason;
unilaterally reduce or modify contracts or subcontracts, including by imposing equitable price adjustments;
cancel multi-year contracts and related orders, if funds for contract performance for any subsequent year become unavailable;
decline, in whole or in part, to exercise an option to purchase product under a procurement contract or to fund additional development under a development contract;
decline to renew a procurement contract;
claim rights to facilities or to products, including intellectual property, developed under the contract;
require repayment of contract funds spent on construction of facilities in the event of contract default;
take actions that result in a longer development timeline than expected;
direct the course of a development program in a manner not chosen by the government contractor;
suspend or debar the contractor from doing business with the government or a specific government agency;
pursue civil or criminal remedies under acts such as the False Claims Act and False Statements Act; and
 
control or prohibit the export of products.
Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the USG’s convenience. Under general principles of government contracting law, if the USG terminates a contract for convenience, the government contractor may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the USG terminates a contract for default, the government contractor is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. All of our contracts, both development and procurement, with the USG, are terminable at the USG’s convenience with these potential consequences.
In addition, our USG contracts grant the USG the right to use technologies developed by us under the government contract or the right to share data related to our technologies, for or on behalf of the USG. Under our USG contracts, we might not be able to prohibit third parties, including our competitors, from accessing such technology or data, including intellectual property, in providing products and services to the USG.
REGULATORY AND COMPLIANCE RISKS
Our long-term success depends, in part, upon our ability to develop, receive regulatory approval for and commercialize product candidates we develop or acquire and, if we are not successful, our business, financial condition, operating results and cash flows may suffer.
Our product candidates and the activities associated with them are subject to extensive FDA regulation and oversight, as well as oversight by other regulatory agencies in the United States and by comparable authorities in other countries. This includes, but is not limited to, laws and regulations governing product development, including testing, manufacturing, record keeping, storage and approval, as well as advertising and promotion. In limited circumstances, governments may procure products that have not obtained regulatory approval. In all other circumstances, failure to obtain regulatory approval for a product candidate will prevent us from selling and commercializing the product candidate.
In the United States, to obtain approval from the FDA to market any of our future drug, biologic, or vaccine products, we will be required to submit a new drug application (NDA) or biologics license application (BLA) to the FDA. Ordinarily, the FDA requires a company to support an NDA or BLA with substantial evidence of the product candidate’s effectiveness,

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safety, purity and potency in treating the targeted indication based on data derived from adequate and well-controlled clinical trials, including Phase 3 trials conducted in patients with the disease or condition being targeted.
However, many of our MCM product candidates, for example, may take advantage of a different regulatory approval pathway under the FDA’s “Animal Rule.” The Animal Rule provides a regulatory pathway for drug and biologic products targeting indications for which human efficacy studies are not feasible or would be unethical. Instead, efficacy must be demonstrated, in part, by utilizing animal models rather than testing in humans. We cannot guarantee that the FDA will permit us to proceed with licensure of any of our PHT MCM candidates under the Animal Rule. Even if we are able to proceed pursuant to the Animal Rule, it can be a very long process, and the FDA may decide that our data are insufficient to support approval and require additional preclinical, clinical or other studies, refuse to approve our products, or place restrictions on our ability to commercialize those products. Furthermore, products approved under the Animal Rule are subject to certain additional post-marketing requirements. For example, to the extent feasible and ethical, manufacturers of products approved pursuant to the Animal Rule must conduct post-marketing studies, such as field studies, to verify and describe the product candidate's clinical benefit and to assess its safety when used as indicated. We cannot guarantee that we will be able to meet this regulatory requirement even if one or more of our product candidates are approved under the Animal Rule.
The process of obtaining these regulatory approvals is expensive, often takes many years if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidate involved. Changes in the regulatory approval process during the development period, changes in or the enactment of additional statutes or regulations, or changes in the regulatory review process generally may cause delays in the approval or rejection of an application. There is a high rate of failure inherent in this process, and potential products that appear promising at early stages of development may fail for a number of reasons, and positive results from preclinical studies may not be predictive of similar results in human clinical trials. Similarly, promising results from earlier clinical trials of a product candidate may not be replicated in later clinical trials.
There are many other difficulties and uncertainties inherent in pharmaceutical research and development that could significantly delay or otherwise materially delay our ability to develop future product candidates. These include, but are not limited to:
 
Conditions imposed by regulators, ethics committees, or IRBs for preclinical testing and clinical trials relating to the scope or design of our clinical trials;
Restrictions placed upon, or other difficulties with respect to, clinical trials and clinical trial sites, such as clinical holds or suspension or termination of clinical trials due to, among other things, potential safety or ethical concerns or noncompliance with regulatory requirements;
Delayed or reduced enrollment in clinical trials, or high discontinuation rates;
Failure by third-party contractors, contract research organizations (CROs), clinical investigators, clinical laboratories, or suppliers to comply with regulatory requirements or meet their contractual obligations in a timely manner;
Greater than anticipated cost of or time required to complete our clinical trials; and
Insufficient product supply or inadequate product quality.
Failure to successfully develop future product candidates for any of these or other reasons may materially adversely affect our business, financial condition, operating results and cash flows.
Once an NDA or BLA is submitted, the FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient to support approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate.
Unapproved and investigational products are also subject to FDA's laws and regulations governing advertising and promotion, which prohibit the promotion of both unapproved products and unapproved uses of approved products.  There is some risk that the FDA could conclude that our communications relating to unapproved products or unapproved uses of approved products constitute the promotion of an unapproved product or product use in violation of FDA laws and regulations.  There is also a risk that a regulatory authority in another country could take a similar position under that country's laws and regulations and conclude that we have violated the laws and regulations related to product development, approval, or promotion in that country.  Therefore, there is a risk that we could be subject to

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enforcement actions if found to be in violation of such laws or regulations.
Even if we or our collaborators obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to generate revenue.
Once approval has been granted, an approved product and its manufacturer and marketer remain subject to ongoing review and extensive regulation.
We and our collaborators must therefore comply with requirements concerning advertising and promotion for any of our product candidates for which we obtain marketing approval. Promotional communications with respect to FDA-regulated products are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we will not be able to promote any products we develop for indications or uses for which they are not approved.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We and our collaborators and our contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.
Accordingly, were we to receive marketing approval for one or more of our product candidates, we would continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.
If we and our collaborators are not able to comply with post-approval regulatory requirements, we could have the marketing approvals for our products withdrawn by regulatory authorities and our ability to market any products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.
Any product candidate for which we or our collaborators obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to substantial penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.
 
Any product candidate for which we or our collaborators obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control and manufacturing, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the medicine, including the requirement to implement a risk evaluation and mitigation strategy.
Certain of our products are subject to postmarketing requirements (PMRs), which we are required to conduct, and postmarketing commitments (PMCs), which we have agreed to conduct. The FDA has the authority to take action against sponsors who fail to meet the obligations of a PMR, including civil monetary penalties and/or misbranding charges.
The FDA and other agencies, including the U.S. Department of Justice (DOJ) and the HHS Office of Inspector General (OIG), closely regulate and monitor the pre-approval and post-approval marketing and promotion of products to ensure that they are marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA, DOJ, and OIG impose stringent restrictions on manufacturers’ communications regarding unapproved products and unapproved uses of approved products and if we market unapproved products or market our approved products for unapproved indications, we may be subject to enforcement action for marketing of unapproved products or unapproved uses of approved products. Violations of the Federal Food, Drug, and Cosmetic Act (FDCA) and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription products may lead to investigations and enforcement actions alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturing partners or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

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restrictions on such products, manufacturing partners or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on distribution or use of a product;
requirements to conduct post-marketing studies or clinical trials;
warning letters or untitled letters;
withdrawal of the products from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of products;
damage to relationships with collaborators;
unfavorable press coverage and damage to our reputation;
fines, restitution or disgorgement of profits or revenues;
suspension or withdrawal of marketing approvals;
refusal to permit the import or export of our products;
product seizure;
injunctions or the imposition of civil or criminal penalties; and
litigation involving patients using our products.
Non-compliance with EU requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the EU and other legal and regulatory requirements regarding the protection of personal information can also lead to significant penalties and sanctions. Non-compliance with similar requirements in other jurisdictions can also result in enforcement actions and significant penalties.
Current and future legislation may increase the difficulty and cost for us and any collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the health care system that could prevent or delay marketing
 
approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. We expect that current laws, as well as other health care reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any collaborators, may receive for any approved products.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the ACA), passed in 2010, contains the following provisions of potential importance to our business and our product candidates:
an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription products and biologic agents;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for products that are inhaled, infused, instilled, implanted or injected;
expansion of health care fraud and abuse laws, including the civil False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand products to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient products to be covered under Medicare Part D;
extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
new requirements to report certain financial arrangements with physicians and teaching hospitals;

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a new requirement to annually report product samples that manufacturers and distributors provide to physicians;
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;
a new Independent Payment Advisory Board (IPAB), which has authority to recommend certain changes to the Medicare program to reduce expenditures by the program that could result in reduced payments for prescription products; and
established the Center for Medicare and Medicaid Innovation within the Centers for Medicare & Medicaid Services (CMS) to test innovative payment and service delivery models.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other health care funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which required most Americans to carry a minimal level of health insurance, became effective on January 1, 2019. In addition, Congress will likely consider other
 
legislation to replace elements of the ACA, during the next Congressional session. It is possible that such initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. We will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on our business.
There have been executive actions to challenge or delay implementation of the ACA. Since January 2017, there have been two Executive Orders issued designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, health care providers, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates the cost-sharing subsidies that reimburse insurers under the ACA. In addition, the CMS has proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. On May 16, 2019, CMS finalized a rule that amends the Medicare Advantage and Medicare Part D prescription drug benefit regulations to reduce out of pocket costs for plan enrollees and allow Medicare plans to negotiate lower rates for certain drugs. Among other things, the rule changes allow Medicare Advantage plans to use preauthorization (PA) and step therapy (ST) for six protected classes of drugs and, with certain exceptions, permit plans to implement PA and ST in Medicare Part B drugs. The first change took effect in January 2020, while the second change will take effect in January 2021. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
The costs of prescription pharmaceuticals have also been the subject of considerable discussion in the United States, and members of legislative and executive branches have stated that they will address such costs through new legislative and administrative measures. While any proposed measures will require authorization through additional legislation to become effective, there may be new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency

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measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal health care reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for health care products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
If we fail to comply with foreign, federal, state and local health care laws, including fraud and abuse and health information privacy and security laws, and antitrust laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.
In the United States, certain of our products are reimbursed under federal and state health care programs such as Medicaid, Medicare, TriCare, and/or state pharmaceutical assistance programs. Many foreign countries have similar laws. Federal and state laws designed to prevent fraud and abuse under these programs prohibit pharmaceutical companies from offering valuable items or services to customers or potential customers to induce them to buy, prescribe, or recommend our product (the so-called “anti-kickback” laws). Exceptions are provided for discounts and certain other arrangements if specified requirements are met. Other federal and state laws, and similar foreign laws, not only prohibit us from submitting any false information to government reimbursement programs but also prohibit us, our employees, or any third party acting on our behalf from doing anything to cause, assist, or encourage our customers to submit false claims for payment to these programs. We are also subject to various federal, state and foreign antitrust and competition laws that prohibit certain activities that may have an impact against potential competitors. Violations of the various fraud and abuse and antitrust laws may result in severe penalties against the responsible employees and us, including jail sentences, large
 
fines, and the exclusion of our products from reimbursement under federal and state programs. Some of the laws that may affect our ability to operate include:
the federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer or pay remuneration, directly or indirectly, overtly or covertly, to induce, or in return for, either the referral of an individual, or the purchase, lease, prescribing or recommendation of an item, good, facility or service reimbursable by a federally funded health care program, such as the Medicare or Medicaid program. The term “remuneration” has been interpreted broadly and may constrain our marketing practices, educational programs, pricing policies and relationships with health care providers or other entities, among other activities;
the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment by a federal health care program or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $11,181 to $22,363 per false claim;
the U.S. federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statement, in connection with the delivery of, or payment for, health care benefits, items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge

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of the statute or specific intent to violate it in order to have committed a violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and their respective implementing regulations mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions, as well as standards relating to the privacy, security and transmission of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among other things, HITECH makes HIPAA's security standards directly applicable to “business associates,” or independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity;
the Physician Payments Sunshine Act and its implementing regulations, which require certain manufacturers of drugs, biologics, medical devices and medical supplies for which payment is available under Medicare, Medicaid or the Centers for Medicare & Medicaid Services (CMS), certain payments and transfers of value made to U.S. physicians and teaching hospitals, and ownership or investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers will also be required to report information regarding payments and transfers of value provided to U.S. physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; state, local and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, obtain
 
pharmaceutical agent licensure, and/or otherwise restrict payments that may be