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EBS > SEC Filings for EBS > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for EMERGENT BIOSOLUTIONS INC.


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, including information with respect to our plans and strategy for our business, include forward-looking statements that involve risks and uncertainties. You should review the "Special Note Regarding Forward-Looking Statements" and the "Risk Factors" sections of this quarterly report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview
Product Portfolio
Emergent BioSolutions is a specialty pharmaceutical company seeking to protect and enhance life by developing and offering specialized products to healthcare providers and governments for use in addressing medical needs and emerging health threats. For financial reporting purposes, we operate in two business divisions or segments, Biodefense and Biosciences.

Our Biodefense division is directed to government-sponsored development and supply of countermeasures against potential agents of bioterror or biowarfare and primarily targets the infectious disease anthrax. Our programs in this division include one marketed product, BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine approved by the U.S. Food and Drug Administration, or FDA, for the prevention of anthrax disease, as well as investigational product candidates. Operations in this division include biologics manufacturing, regulatory and quality affairs in support of BioThrax and a product development and manufacturing infrastructure in support of our investigational product candidates.

Our Biosciences division is directed to commercial opportunities and primarily targets oncology indications. Our programs in this division include one clinical stage product candidate for chronic lymphocytic leukemia, or CLL, as well as investigational product candidates and platform technologies. Operations in this division include product development in support of our CLL product candidate, our investigational product candidates, and manufacturing and related infrastructure initiatives in support of our platform technologies.

Our Biodefense segment has generated net income for each of the last five fiscal years. Over this timeframe, our Biosciences segment has generated revenue through development contracts and collaborative funding, but none of our Biosciences product candidates have received marketing approval and, therefore, our Biosciences segment has not generated any product sales revenues. As a result, our Biosciences segment has incurred a net loss for each of the last five fiscal years.
Product Sales
We have derived substantially all of our product sales revenues from BioThrax sales to the U.S. government. We are currently a party to a contract with the Centers for Disease Control and Prevention, or CDC, an operating division of the U.S. Department of Health and Human Services, or HHS, to supply up to 44.75 million doses of BioThrax for placement into the Strategic National Stockpile, or SNS, over a five-year period. We expect for the foreseeable future to continue to derive substantially all of our product sales revenues from sales of BioThrax to the U.S. government. Our total revenues from BioThrax sales were $30.4 million and $34.4 million for the three months ended March 31, 2013 and 2012, respectively. We are focused on increasing sales of BioThrax to U.S. government customers, expanding the market for BioThrax to other customers domestically and internationally and pursuing label expansions and improvements for BioThrax.
Contracts and Grants
We seek to advance development of our product candidates through external funding arrangements. We may slow down development programs or place them on hold during periods that are not covered by external funding. We have received funding from the U.S. government for the following development programs:

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

§ NuThrax;

§ Large-scale manufacturing for BioThrax;

§ PreviThrax;

§ Thravixa; and

§ To establish a Center for Innovation in Advanced Development and Manufacturing, or CIADM.

We continue to actively pursue additional government sponsored development contracts and grants and commercial collaborative relationships. We also encourage both governmental and non-governmental agencies and philanthropic organizations to provide development funding or to conduct clinical studies of our product candidates.
Manufacturing Infrastructure
We conduct our primary vaccine manufacturing operations at a multi-building campus on approximately 12.5 acres in Lansing, Michigan. To augment our existing manufacturing capabilities, we have constructed Building 55, a 50,000 square foot large-scale manufacturing facility on our Lansing campus. In July 2010, we entered into an agreement with the Biomedical Advanced Research and Development Authority, or BARDA, to finalize development of and obtain regulatory approval for large-scale manufacturing of BioThrax in Building 55.

In 2009, we purchased a building in Baltimore, Maryland for product development and manufacturing purposes, and have completed renovation, improvement and equipment acquisitions at this facility. We have entered into two loan agreements with PNC Bank totaling up to $42.0 million to fund these renovations, improvements and equipment acquisitions. In June 2012, we entered into a contract with BARDA, which established us as a CIADM and provides funding for manufacturing and development activities relating to a clinical stage pandemic flu vaccine candidate. In addition, we expect this facility will support future CIADM development and manufacturing, activities for chemical, biological, radiological and nuclear countermeasures as well as our future product development and manufacturing needs. Our specific plans for this facility will be contingent on the progress of our existing development programs and the outcome of our efforts to acquire new product candidates. Financial Operations Overview
Revenues
We are currently a party to a contract with the CDC to supply up to 44.75 million doses of BioThrax to the CDC over a five-year period. The period of performance under the award is from September 30, 2011 through September 29, 2016. The total amount that could be paid to us under the contract is up to $1.25 billion, subject to availability of funding by the U.S. government. To date, the U.S. government has committed approximately $477 million for the procurement of BioThrax doses under this contract. Through March 31, 2013, we have delivered and, upon CDC acceptance, recognized revenue on approximately 10.0 million doses, representing approximately $265 million under this contract.

We have received contract and grant funding from BARDA and the National Institute of Allergy and Infectious Diseases, or NIAID, for the following development programs:

Development Programs                       Funding Source Award Date Performance Period
Post-Exposure Prophylaxis indication for   BARDA            9/2007    9/2007 - 3/2016
BioThrax
NuThrax                                    NIAID            7/2008    7/2008 - 6/2013
Thravixa                                   NIAID/BARDA      9/2008    9/2008 - 8/2012
Large-scale manufacturing for BioThrax     BARDA            7/2010    7/2010 - 7/2015
NuThrax                                    NIAID            7/2010    8/2010 - 8/2014
PreviThrax                                 BARDA            9/2010    9/2010 - 9/2015
CIADM                                      BARDA            6/2012    6/2012 - 6/2037

Our revenue, operating results and profitability have varied, and we expect that they will continue to vary on a quarterly basis, primarily due to the timing of our fulfilling orders for BioThrax and work done under new and existing development grants and contracts, and collaborative relationships. Cost of Product Sales
The primary expense that we incur to deliver BioThrax to our customers is manufacturing cost, which primarily consists of fixed costs. These fixed manufacturing costs include facilities and utilities. Variable manufacturing costs for BioThrax consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff and contract filling operations.

We determine the cost of product sales for doses sold during a reporting period based on the average manufacturing cost per dose in the period those doses were manufactured. We calculate the average manufacturing cost per dose in the period of manufacture by dividing the actual costs of manufacturing in such period by the number of units produced in that period. In addition to the fixed and variable manufacturing costs described above, the average manufacturing cost per dose depends on the efficiency of the manufacturing process, utilization of available manufacturing capacity and the production yield for the period of production.

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

§ personnel-related expenses;

§ fees to professional service providers for, among other things, analytical testing, independent monitoring or other administration of our clinical trials and acquiring and evaluating data from our clinical trials and non-clinical studies;

§ costs of contract manufacturing services for clinical trial material;

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

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

§ operating costs, such as the operating costs of facilities and the legal costs of pursuing patent protection of our intellectual property.

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive, sales and marketing, business development, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs not otherwise included in cost of product sales or research and development expense and professional fees for legal, accounting and auditing services. We currently market and sell BioThrax directly to the U.S. government with a small, targeted marketing and sales group. As we seek to broaden the market for BioThrax and if we acquire additional product candidates or if we receive marketing approval for our product candidates, we expect that we will increase our spending for marketing and sales activities.
Critical Accounting Policies and Estimates There have been no significant changes to our Critical Accounting Policies and Estimates during the three months ended March 31, 2013. Refer to our Critical Accounting Policies and Estimates section in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission, or SEC.
Results of Operations
Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012 Revenues
Product sales revenues decreased by $4.0 million, or 12%, to $30.4 million for the three months ended March 31, 2013 from $34.4 million for the three months ended March 31, 2012. This decrease in product sales revenues was primarily due to a 14% decrease in the number of doses of BioThrax delivered, primarily attributable to the timing of deliveries to the SNS. Product sales revenues during the three months ended March 31, 2013 consisted of BioThrax sales to the CDC of $29.3 million and aggregate international and other sales of $1.0 million. Product sales revenues during the three months ended March 31, 2012 consisted of BioThrax sales to the CDC of $34.3 million and aggregate international and other sales of $89,000.

Contracts and grants revenues decreased by $3.2 million, or 20%, to $12.7 million in the three months ended March 31, 2013 from $16.0 million in the three months ended March 31, 2012. The decrease in contracts and grants revenues was primarily due to decreased revenues from our agreements with Abbott and Pfizer that terminated during 2012, along with decreased activity and associated revenue from our development contracts with BARDA and NIAID for our NuThrax and Thravixa product candidates and our contract for large-scale manufacturing for BioThrax. Contracts and grants revenues during the three months ended March 31, 2013 consisted of $12.7 million in development contract and grant revenue from NIAID and BARDA. Contracts and grants revenues during the three months ended March 31, 2012 consisted of $14.3 million in development contract and grant revenue from NIAID and BARDA and $1.7 million from Abbott and Pfizer.

Cost of Product Sales
Cost of product sales decreased by $1.8 million, or 24%, to $5.7 million for the three months ended March 31, 2013 from $7.5 million for the three months ended March 31, 2012. This decrease was attributable to the 14% decrease in the number of BioThrax doses delivered coupled with a reduction in the cost per dose associated with an adjustment to certain BioThrax testing specifications that allowed us to sell doses that were previously expensed. Research and Development Expenses
Research and development expenses increased by $4.5 million, or 17%, to $30.7 million for the three months ended March 31, 2013 from $26.2 million for the three months ended March 31, 2012. This increase primarily reflects higher contract service costs, and includes increased expenses of $5.0 million for product candidates and technology platform development activities categorized in the Biosciences segment, increased expenses of $75,000 in other research and development, which are in support of central research and development activities, offset by decreased expenses of $601,000 for product candidates and manufacturing development categorized in the Biodefense segment. Net of development contract and grant reimbursements along with the net loss attributable to noncontrolling interests, we incurred research and development expenses of $17.2 million and $9.1 million, respectively, during the three months ended March 31, 2013 and 2012.

Our principal research and development expenses during the three months ended March 31, 2013 and 2012 are shown in the following table:

                                             Three Months ended
                                                  March 31,
(in thousands)                                2013          2012
Biodefense:
  Large-scale manufacturing for BioThrax   $    4,726     $  4,697
  BioThrax related programs                     2,793        2,464
  PreviThrax                                    4,238        4,503
  NuThrax                                       2,248        2,606
  Thravixa                                          -          533
  Other Biodefense                              1,652        1,455
Total Biodefense                               15,657       16,258
Biosciences:
  Tuberculosis vaccine                          3,906        3,231
  TRU-016                                       4,627        2,782
  ES414 (formerly T-Scorp)                      2,032          416
  ES301 (formerly DRACO)                            -        1,053
  Other Biosciences                             2,574          653
Total Biosciences                              13,139        8,135
Other                                           1,928        1,853
Total                                      $   30,724     $ 26,246

The decrease in spending on Biodefense product candidates, detailed in the table above, was primarily attributable to the timing of development efforts on several programs as we completed various studies and prepared for subsequent studies and trials. The increase in spending for our large-scale manufacturing for BioThrax program was primarily due to the manufacture of consistency lots. The increase in spending for BioThrax related programs was related to clinical studies to support applications for label expansion for BioThrax. The decrease in spending for PreviThrax was primarily due to the timing of model optimization and stability studies. The decrease in spending for NuThrax was primarily due to the timing of clinical and non-clinical trial activities. The spending for Thravixa in 2012 was for clinical trial activities. The increase in spending for our other Biodefense activities was primarily due to increased spending related to manufacturing development, partially offset by decreased spending associated with our double mutant recombinant protective antigen anthrax vaccine and Anthrivig product candidates.

The increase in spending on Biosciences product candidates, detailed in the table above, was primarily attributable to the timing of development efforts. The increase in spending for our tuberculosis vaccine product candidate is related to the timing of costs incurred to complete clinical trial and manufacturing development activities. As a result of clinical trial data published in February 2013, we expect future spending will decrease significantly as we close out our tuberculosis product development efforts. The increase in spending for our TRU-016 product candidate is primarily related to our Phase II CLL clinical trial activities. The increase in spending for our ES414 (formerly T-Scorp) product candidate was primarily due to process development and non-clinical studies. The spending for our ES301 product candidate in 2012 was primarily for process development and non-clinical activities. The increase in spending for our other Biosciences activities was primarily due to a reduction of the contingent value right, or CVR, obligations associated with our agreement with Pfizer in 2012 and increased spending associated with development of platform technologies, partially offset by decreased spending associated with our preclinical product candidates.

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

Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $536,000, or 3%, to $20.0 million for the three months ended March 31, 2013 from $19.5 million for the three months ended March 31, 2012. This increase is primarily due to $2.0 million in costs related to a restructuring of our U.K. operations, partially offset by decreased spending related to professional services. The majority of the selling, general and administrative expenses are attributable to the Biodefense segment, which decreased by $520,000, or 4%, to $14.0 million during the three months ended March 31, 2013 from $14.5 million during the three months ended March 31, 2012. Selling, general and administrative expenses related to our Biosciences segment increased by $1.1 million, or 21%, to $6.1 million during the three months ended March 31, 2013 from $5.0 million during the three months ended March 31, 2012, prinicpally due to the U.K. restructuring charges. Impairment of in-process research and development

Impairment of in-process research and development was $9.6 million for the three months ended March 31, 2012. The impairment charge for the three months ended March 31, 2012 resulted from the full impairment of our SBI-087 in-process research and development asset. There was no impairment for the three months ended March 31, 2013.
Total Other Income (Expense)
Total net other income decreased by $847,000, or 97%, to net other income of $29,000 for the three months ended March 31, 2013 from $876,000 for the three months ended March 31, 2012. The decrease was primarily due to a business interruption insurance recovery related to a power outage at our Lansing, Michigan facility during the three months ended March 31, 2012. Income Taxes
Benefit from income taxes increased by $876,000, or 24%, to $4.5 million for the three months ended March 31, 2013 from $3.6 million for the three months ended March 31, 2012. The increase in the benefit from income taxes is primarily due to the $2.1 million increase in our loss before benefit from income taxes and the loss attributable to noncontrolling interests. Net Loss Attributable to Noncontrolling Interest Net loss attributable to noncontrolling interest decreased by $450,000, or 38%, to $743,000 for the three months ended March 31, 2013 from $1.2 million for the three months ended March 31, 2012. The decrease resulted primarily from the timing of clinical and development activities and related expenses incurred by our joint ventures. These amounts represent the portion of the losses incurred by the joint ventures for the quarters ended March 31, 2013 and 2012, respectively that is attributable to our joint venture partners.

Liquidity and Capital Resources
Sources of Liquidity
We have funded our cash requirements from inception through March 31, 2013 principally with a combination of revenues from BioThrax product sales, debt financings and facilities leases, development funding from government entities and non-government and philanthropic organizations and collaborative partners, and the net proceeds from our initial public offering and the sale of our common stock upon exercise of stock options. We have operated profitably for each of the five years ended December 31, 2012.

As of March 31, 2013 we had cash and cash equivalents of $130.2 million. Additionally, at March 31, 2013, our accounts receivable balance was $63.0 million.
Cash Flows
The following table provides information regarding our cash flows for the three months ended March 31, 2013 and 2012:

                                                                  Three Months ended March 31,
(in thousands)                                                      2013                 2012
Net cash provided by (used in):
Operating activities(1)                                        $        (4,744 )     $      13,872
Investing activities                                                    (7,679 )            (8,598 )
Financing activities                                                       995               1,250
Net increase (decrease) in cash and cash equivalents           $       (11,428 )     $       6,524

(1) Includes the effect of exchange rates on cash and cash equivalents. Net cash used in operating activities of $4.7 million for the three months ended March 31, 2013 was principally due to our net loss attributable to Emergent BioSolutions Inc. of $8.1 million, a decrease in income taxes of $12.4 million related to timing differences, a decrease in accrued compensation of $11.0 million primarily related to the payment of 2012 bonuses and a decrease in inventory of $7.0 million primarily related to the timing of deliveries to the SNS, partially offset by a decrease in accounts receivable of $33.1 million due to the timing of collection of amounts billed primarily to CDC and non-cash charges of $3.0 million for stock-based compensation and $4.2 million for depreciation and amortization.

Net cash provided by operating activities of $13.9 million for the three months ended March 31, 2012 was principally due to a decrease in accounts receivable of $30.5 million due to the timing of collection of amounts billed to the CDC, non-cash charges of $9.6 million for the impairment of in-process research and development, $2.7 million for stock-based compensation, $2.4 million for depreciation and amortization, and $1.2 million for development expenses primarily from our joint ventures, partially offset by our net loss of $6.8 million, a decrease in accrued compensation of $10.9 million associated with the payment of 2011 bonuses, a net decrease of income taxes of $4.2 million related to timing differences and a $3.0 million decrease in the fair value of CVR obligations related to our agreement with Pfizer.

Net cash used in investing activities of $7.7 million for the three months ended March 31, 2013 was primarily due to capital expenditures, and includes construction and renovation of facilities at our Lansing, Michigan campus, and costs of other infrastructure and equipment investments.

Net cash used in investing activities of $8.6 million for the three months ended March 31, 2012 was primarily due to capital expenditures of $22.3 million related to the construction and related costs of our facility in Baltimore, Maryland, and infrastructure investments and other equipment, partially offset by net proceeds from the sale of our two Frederick, Maryland buildings of $11.8 million and the maturity of U.S. Treasury securities of $2.0 million.

Net cash provided by financing activities of $995,000 for the three months ended March 31, 2013 was primarily due to $1.6 million in excess tax benefits from the exercise of stock options and $504,000 in proceeds from stock option exercises, partially offset by principal payments on indebtedness of $1.1 million.

Net cash provided by financing activities of $1.3 million for the three months ended March 31, 2012 was primarily due to $9.6 million in advances under our construction and equipment loans with PNC Bank related to the renovation, improvement and equipment purchases at our Baltimore facility and $1.1 million related to excess tax benefits from the exercise of stock options, partially offset by $8.2 million in principal payments on indebtedness, including $7.7 million in repayment of indebtedness related to our Frederick, Maryland buildings, and a $1.7 million CVR payment to former Trubion stockholders and option holders.

Debt Financing
As of March 31, 2013, we had $61.7 million principal amount of debt outstanding, comprised primarily of the following:

§ $17.8 million outstanding under a term loan from HSBC Realty Credit Corporation used to finance a portion of the costs of our facility expansion in Lansing, Michigan;

§ $4.1 million outstanding under a mortgage loan from HSBC Realty Credit Corporation used to finance a portion of the purchase price of our facility in Gaithersburg, Maryland;

§ $29.0 million outstanding under a construction loan from PNC Bank used to fund the renovations of our Baltimore, Maryland facility; and

§ $10.8 million outstanding under an equipment loan from PNC Bank used to fund equipment purchases at our Baltimore, Maryland facility.

Funding Requirements
We expect to continue to fund our anticipated operating expenses, capital expenditures and debt service requirements from existing cash and cash equivalents, revenues from BioThrax product sales, development contract and grant funding, and any lines of credit we may establish from time to time. There are numerous risks and uncertainties associated with BioThrax 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, among others:

§ the level, timing and cost of sales of BioThrax and other products;

§ the extent to which we acquire or invest in companies, businesses, products or technologies;

. . .

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