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EBS > SEC Filings for EBS > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for EMERGENT BIOSOLUTIONS INC.

Form 10-Q for EMERGENT BIOSOLUTIONS INC.


6-Aug-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 two marketed products: BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine approved by the U.S. Food and Drug Administration, or FDA, for the prevention of anthrax disease and RSDL® (decontamination lotion), or RSDL, that we acquired in August 2013 from Bracco Diagnostics, Inc. or Bracco. RSDL has been approved by the FDA, Health Canada, the United Kingdom's Medicines and Healthcare products Regulatory Agency and Australia's Therapeutics Goods Administration for the removal or neutralization of chemical warfare agents from the skin, including nerve agents, mustard gas, and toxins. Our Biodefense division also includes 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. During this time, 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 $96.0 million and $87.5 million for the six months ended June 30, 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; 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. 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 that we in-licensed from a third party. 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 requirements of BARDA under our CIADM contract, 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 SNS 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 June 30, 2013, we have delivered and, upon CDC acceptance, recognized revenue on approximately 12.4 million doses, representing approximately $330 million under this contract.

As part of the acquisition of the assets of the Healthcare Protective Products Division, or HPPD, a division of Bracco, we assumed responsibility for a five year contract from the U.S. Department of Defense that began in 2012 to provide RSDL to active military personnel. The contract has an estimated value of up to approximately $240 million.

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 BioThrax BARDA            9/2007    9/2007 - 3/2016
NuThrax                                           NIAID            7/2008    7/2008 - 6/2013
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 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 spending, the number of product candidates under development, the size, structure and duration of any follow-on clinical programs that we may initiate, the costs associated with manufacturing our product candidates on a large-scale basis for later-stage clinical trials, and our ability to use or rely on data generated by government agencies, such as studies involving BioThrax conducted by the CDC.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of 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 and six months ended June 30, 2013, except for the addition of our to revenue recognition policy for our contract with the BARDA to establish a CIADM. 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.

Our contract with the Biomedical Advanced Research and Development Authority to establish a Center for Innovation in Advanced Development and Manufacturing, or CIADM, is a service arrangement that includes multiple elements. The CIADM contract requires us to provide a flexible infrastructure to supply medical countermeasures to the U.S. Government over the contract period and includes such items as construction and facility design, workforce development and licensure of a pandemic flu vaccine. Since none of the individual elements by themselves satisfy the purpose of the contract, we have concluded that the CIADM contract elements cannot be separated as they do not have stand-alone value to the U.S. Government. Therefore, we have concluded that there is a single unit of account associated with the CIADM contract. We recognize revenue under the CIADM contract on a straight-line basis, based upon its estimate of the total payments to be received under the contract. We analyze the estimated payments to be received on a quarterly basis to determine if an adjustment to revenue is required. Changes in estimates attributed to modifications in the estimate of total payments to be received are recorded prospectively.

Results of Operations

Quarter Ended June 30, 2013 Compared to Quarter Ended June 30, 2012

Revenues

Product sales revenues increased by $12.4 million, or 23%, to $65.6 million for the three months ended June 30, 2013 from $53.2 million for the three months ended June 30, 2012. This increase in product sales revenues was due to a 21% increase in the number of doses of BioThrax delivered, attributable to the timing of deliveries to the SNS, and a modest increase in the average sales price per dose. Product sales revenues during the three months ended June 30, 2013 consisted of BioThrax sales to the CDC of $65.6 million and aggregate international and other sales of $28,000. Product sales revenues during the three months ended June 30, 2012 consisted of BioThrax sales to the CDC of $53.1 million and aggregate international and other sales of $111,000.

Contracts and grants revenues decreased by $378,000, or 2%, to $16.8 million in the three months ended June 30, 2013 from $17.2 million in the three months ended June 30, 2012. The decrease in contracts and grants revenues was primarily due to decreased revenue related to a milestone payment received related to our post-exposure prophylaxis, or PEP, indication for BioThrax and the sale of our spi-VECTM (live attuenated bacterial vaccine vector) technology during the second quarter of 2012 along with decreased revenues from our agreements with Abbott and Pfizer that terminated during 2012, partially offset by increased revenues from BARDA related to the establishment of our CIADM. Contracts and grants revenues during the three months ended June 30, 2013 consisted of $16.8 million in development contract and grant revenue from NIAID and BARDA. Contracts and grants revenues during the three months ended June 30, 2012 consisted of $13.8 million in development contract and grant revenues from NIAID and BARDA, $1.4 million from Abbott Laboratories, or Abbott, $512,000 from Pfizer Inc., and $1.5 million from the sale of patent and trademark rights and related materials pertaining to our spi-VEC technology platform.

Cost of Product Sales

Cost of product sales increased by $3.8 million, or 29%, to $16.9 million for the three months ended June 30, 2013 from $13.2 million for the three months ended June 30, 2012. This increase was attributable to the 21% increase in the number of BioThrax doses delivered coupled with an increase in the cost per dose sold associated with decreased production yield in the period in which the doses were produced.

Research and Development Expenses

Research and development expenses decreased by $367,000, or 1%, to $30.3 million for the three months ended June 30, 2013 from $30.6 million for the three months ended June 30, 2012. This decrease primarily reflects lower contract service costs, and includes decreased expenses of $1.9 million for product candidates and technology platform development activities categorized in the Biosciences segment and decreased expenses of $266,000 in other research and development, which are in support of central research and development activities technology platform development, offset by increased expenses of $1.8 million 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 $13.3 million and $11.3 million, respectively, during the three months ended June 30, 2013 and 2012.

Our principal research and development expenses during the three months ended June 30, 2013 and 2012 are shown in the following table:

                                             Three Months ended
                                                  June 30,
(in thousands)                                2013          2012
Biodefense:
  Large-scale manufacturing for BioThrax   $    4,004     $  4,105
  BioThrax related programs                     2,764        3,104
  PreviThrax                                    3,791        4,242
  NuThrax                                       2,084        2,011
  Pandemic influenza                            2,500            -
  Thravixa                                          -          280
  Other Biodefense                              1,805        1,418
Total Biodefense                               16,948       15,160
Biosciences:
  Tuberculosis vaccine                            279        5,544
  otlertuzumab (formerlyTRU-016)                7,022        3,241
  ES414 (formerly T-Scorp)                      1,833        1,011
  ES301 (formerly DRACO)                            -          790
  Other Biosciences                             2,986        3,423
Total Biosciences                              12,120       14,009
Other                                           1,210        1,476
Total                                      $   30,278     $ 30,645

The decrease in spending for our large-scale manufacturing for BioThrax was primarily due to the timing of the manufacture of consistency lots. The decrease in spending for BioThrax related programs was related to the timing of clinical studies to support applications for label expansion for BioThrax. The decrease in spending for PreviThrax was primarily due to the timing of model optimization and non-clinical studies. The spending for NuThrax was primarily for clinical trial activities. The increase in spending for pandemic influenza was related to a license fee for the rights to manufacture and sell pandemic influenza products. 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.

The decrease in spending for our tuberculosis vaccine product candidate was related to the costs incurred during 2012 to complete the Phase IIb clinical trial. As a result of clinical trial data published in February 2013, we expect future spending will decrease significantly as we cease our tuberculosis product development efforts. The increase in spending for our otlertuzumab (formerly TRU-016) product candidate was primarily related to manufacturing 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 decrease in spending for our other Biosciences activities was primarily due to a decrease in 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 $2.6 million, or 15%, to $20.5 million for the three months ended June 30, 2013 from $17.9 million for the three months ended June 30, 2012. This increase includes $785,000 in costs related to the restructuring of our U.K. operations and increased spending related to professional services. The majority of the selling, general and administrative expenses are attributable to the Biodefense segment, which increased by $1.7 million, or 13%, to $14.8 million during the three months ended June 30, 2013 from $13.0 million during the three months ended June 30, 2012. Selling, general and administrative expenses related to our Biosciences segment increased by $889,000, or 18%, to $5.7 million during the three months ended June 30, 2013 from $4.9 million during the three months ended June 30, 2012, principally due to the U.K. restructuring charges.

Total Other Income (Expense)

Total other income decreased by $911,000, or 97%, to $25,000 for the three months ended June 30, 2013 from $936,000 for the three months ended June 30, 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 June 30, 2012.

Income Taxes

Provision for income taxes increased by $338,000, or 8%, to $4.4 million for the three months ended June 30, 2013 from $4.0 million for the three months ended June 30, 2012. The increase in the provision for income taxes was primarily due to the $3.2 million increase in our income before provision for income taxes and the loss attributable to noncontrolling interests.

Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest decreased by $2.0 million, or 94%, to $128,000 for the three months ended June 30, 2013 from $2.1 million for the three months ended June 30, 2012. The decrease resulted primarily from the termination of clinical and development activities and related expenses related to our tuberculosis vaccine candidate. These amounts represent the portion of the losses incurred by the joint ventures for the quarters ended June 30, 2013 and 2012, respectively that is attributable to our joint venture partners.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenues

Product sales revenues increased by $8.4 million, or 10%, to $96.0 million for the six months ended June 30, 2013 from $87.5 million for the six months ended June 30, 2012. This increase in product sales revenues was due to a 7% increase in the number of doses of BioThrax delivered, attributable to the timing of deliveries to the SNS, and a modest increase in the average sales price per dose. Product sales revenues for the six months ended June 30, 2013 consisted of BioThrax sales to CDC of $94.9 million and aggregate international and other sales of $1.1 million. Product sales revenues for the six months ended June 30, 2012 consisted of BioThrax sales to CDC of $87.3 million and aggregate international and other sales of $199,000.

Contracts and grants revenues decreased by $3.6 million, or 11%, to $29.6 million for the six months ended June 30, 2013 from $33.2 million for the six months ended June 30, 2012. The decrease in contracts and grants revenues was primarily due to decreased revenue related to a milestone payment received related to our PEP indication for BioThrax and the sale of our spi-VEC technology during 2012 along with decreased revenues from our agreements with Abbott and Pfizer that terminated during 2012, partially offset by increased revenues from BARDA related to the establishment of our CIADM. Contracts and grants revenues for the six months ended June 30, 2013 consisted of $29.6 million in development contract and grant revenues from NIAID and BARDA. Contracts and grants revenues for the six months ended June 30, 2012 consisted of $28.1 million in development contract and grant revenues from NIAID and BARDA, $3.6 million from Abbott and Pfizer and $1.5 million from the sale of our spi-VEC platform technology.

Cost of Product Sales

Cost of product sales increased by $1.9 million, or 9%, to $22.6 million for the six months ended June 30, 2013 from $20.7 million for the six months ended June 30, 2012. This increase was primarily attributable to the 7% increase in the number of doses of BioThrax sold.

Research and Development Expenses

Research and development expenses increased by $4.1 million, or 7%, to $61.0 million for the six months ended June 30, 2013 from $56.9 million for the six months ended June 30, 2012. This increase primarily reflects higher contract service and increased depreciation expense related to our Baltimore facility, and includes increased expenses of $1.2 million for product candidates and manufacturing development categorized in the Biodefense segment and increased expenses of $3.1 million for product candidates and technology platform development activities categorized in the Biosciences segment, offset by decreased expenses of $191,000 in other research and development, which are in support of central research and development activities. For the six months ended June 30, 2013 and 2012, we incurred research and development expenses net of development contract and grant reimbursements along with the net loss attributable to noncontrolling interests of $30.6 million and $20.4 million, respectively.

Our principal research and development expenses for the six months ended June 30, 2013 and 2012 are shown in the following table:

                                             Six Months ended
                                                 June 30,
(in thousands)                               2013         2012
Biodefense:
  Large-scale manufacturing for BioThrax   $  8,730     $  8,802
  BioThrax related programs                   5,557        5,568
  PreviThrax                                  8,030        8,745
  NuThrax                                     4,332        4,617
  Pandemic influenza                          2,500            -
  Thravixa                                        -          813
  Other Biodefense                            3,493        2,873
Total Biodefense                             32,642       31,418
Biosciences:
  Tuberculosis vaccine                        4,185        8,775
  otlertuzumab (formerly TRU-016)            11,649        6,024
  ES414 (formerly T-Scorp)                    3,865        1,427
  ES301 (formerly DRACO)                          -        1,842
  Other Biosciences                           5,523        4,076
Total Biosciences                            25,222       22,144
Other                                         3,138        3,329
Total                                      $ 61,002     $ 56,891

The spending for our large-scale manufacturing for BioThrax was primarily due to non-clinical studies and the manufacturing of consistency lots. The increase in . . .

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