Emergent BioSolutions(EBS) - 2022 Q4 - Annual Report

Part I Business Overview Emergent BioSolutions, a global life sciences company, focuses on public health threats through its Products and Services segments, initiating a 2023-2025 strategic plan and agreeing to divest its travel health business - The company operates through two segments: Products (Government - MCM and Commercial) and Services (CDMO)[18] - A new three-year strategic plan (2023-2025) was implemented to replace the 2020-2024 plan, aiming to strengthen the company's financial position and refocus on core products like NARCAN® and MCMs, and enhance CDMO services[23][24][25] - In February 2023, Emergent agreed to sell its travel health business, including Vaxchora®, Vivotif®, and the CHIKV VLP vaccine candidate, to Bavarian Nordic for $270 million upfront, plus potential milestones up to $110 million[20][21] - The company's primary customer is the U.S. Government (USG), which procures a significant portion of its MCM products for the Strategic National Stockpile (SNS)[19] Primary Products and Product Candidates The company's portfolio is divided into Government-MCM products, Commercial products, and developmental Product Candidates, with key products including smallpox and anthrax vaccines, NARCAN® Nasal Spray, and divested travel health products Key Government - MCM Products | Product | Indication(s) | | :--- | :--- | | ACAM2000® | Active immunization against smallpox disease | | Anthrasil® | Treatment of inhalational anthrax | | BAT® | Treatment of symptomatic botulism | | BioThrax® | Pre- and post-exposure prophylaxis of anthrax disease | | TEMBEXA® | Treatment of human smallpox disease | | VIGIV® | Treatment of complications from vaccinia vaccination | Key Commercial Products | Product | Indication(s) | | :--- | :--- | | NARCAN® Nasal Spray | Emergency treatment of known or suspected opioid overdose | | Vaxchora® | Active immunization against cholera (pending sale) | | Vivotif® | Immunization against typhoid fever (pending sale) | - The company submitted a supplemental New Drug Application (sNDA) for NARCAN® Nasal Spray for over-the-counter (OTC) use, which was granted Priority Review by the FDA with a PDUFA goal date of March 29, 2023[40] - The company is developing AV7909, a next-generation anthrax vaccine candidate, already procured by the USG under a pre-Emergency Use Authorization (EUA) submission, with a Biologics License Application (BLA) submitted to the FDA in April 2022[49] Regulation The company's operations are extensively regulated by U.S. and international bodies, including the FDA and Federal Acquisition Regulation, with specific legislation like Project BioShield and PREP Act supporting MCM development and providing liability protection - As a U.S. Government contractor, Emergent is subject to numerous statutes and regulations, including the Federal Acquisition Regulation (FAR), governing government contracts[76] - The Project BioShield Act and the Pandemic and All Hazards Preparedness Act (PAHPA) are key legislative frameworks supporting the development and procurement of the company's MCMs for the Strategic National Stockpile (SNS)[78][79] - For certain MCMs where human efficacy trials are unethical or unfeasible, the company may use the FDA's "Animal Rule" for approval, relying on animal efficacy data combined with human safety and immunogenicity data[87] - The Public Readiness and Emergency Preparedness (PREP) Act provides liability immunity for manufacturers of designated MCMs, including the company's products for smallpox, anthrax, and botulism, except in cases of willful misconduct[83] Human Capital As of December 31, 2022, Emergent had approximately 2,500 employees, undergoing restructuring that eliminated 132 roles and will transfer 280 employees as part of a business sale, while focusing on employee well-being and DEI - As of December 31, 2022, the company had approximately 2,500 employees[130] - In January 2023, an organizational restructuring resulted in the elimination of 132 roles, with approximately 280 employees expected to transfer to Bavarian Nordic due to the travel health business sale[131] Risk Factors The company faces substantial risks including heavy reliance on U.S. Government contracts, significant manufacturing compliance issues, intense competition for commercial products, substantial debt maturing in October 2023 raising going concern doubts, a material weakness in internal control, and ongoing legal and reputational challenges - Government Contracting Risk: A substantial portion of revenue is derived from USG procurement of AV7909, TEMBEXA®, ACAM2000®, and BioThrax®; reduced demand or funding would materially harm the business[154] - Manufacturing Risk: Inability to maintain cGMP compliance at manufacturing facilities, as evidenced by a 2022 FDA warning letter for the Camden facility, could hinder production for both internal products and CDMO customers[175][176] - Financial Risk: The company has substantial debt, including Senior Secured Credit Facilities maturing in October 2023, and was not in compliance with certain debt covenants as of December 31, 2022, raising substantial doubt about its ability to continue as a going concern[331][333][334][342] - Regulatory and Compliance Risk: A material weakness was identified in the company's internal control over financial reporting as of December 31, 2022, related to inventory accounting[358][359] - Competition Risk: NARCAN® Nasal Spray faces both branded and generic competition, which could erode sales and revenue[280][281][283] - Legal and Reputational Risk: The company is subject to multiple shareholder class action and derivative lawsuits, as well as government investigations, related to its manufacturing of COVID-19 vaccine bulk drug substance[316][317] Item 2. Properties Emergent owns and leases approximately 1.6 million square feet across 25 North American and European locations for development, manufacturing, laboratories, offices, and warehouses, with key owned manufacturing sites in Lansing, Winnipeg, and Baltimore - The company owns and leases approximately 1.6 million square feet of space across 25 locations in North America and Europe[394] Principal Property Locations | Location | Use | Approx. Square Feet | Owned/Leased | | :--- | :--- | :--- | :--- | | Lansing, MI | Manufacturing, office, lab | 336,000 | Owned | | Winnipeg, MB, Canada | Manufacturing, office, lab | 330,800 | Owned/Leased | | Gaithersburg, MD | Lab, office, rental | 173,000 | Owned | | Canton, MA | Manufacturing, warehouse | 149,508 | Owned/Leased | | Baltimore, MD (Bayview) | Manufacturing, office, lab | 112,000 | Owned | Item 3. Legal Proceedings The company is involved in significant legal proceedings, including multiple class action and shareholder derivative lawsuits, and government investigations related to its COVID-19 vaccine manufacturing - The company is subject to multiple putative class action lawsuits filed in 2021, alleging false and misleading statements about its COVID-19 vaccine manufacturing capabilities[718] - Several shareholder derivative lawsuits have been filed in federal and state courts against current and former officers and directors for alleged breach of fiduciary duties, waste of corporate assets, and unjust enrichment related to the same manufacturing issues[719][722][723] - The company has received inquiries and subpoenas from the Department of Justice, the SEC, various state attorneys general, and Congressional committees, related to these matters[724] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Emergent's common stock trades on the NYSE under "EBS", with a closing price of $13.98 on February 22, 2023, and the company has not paid cash dividends since its 2006 IPO, showing significant stock volatility and decline in 2022 - The company's common stock trades on the NYSE under the symbol "EBS"[395] - The company has not declared or paid any cash dividends since becoming a public company and has no current plans to pay them[397] Stock Performance Comparison (Value of $100 Invested on 12/31/2017) | Company / Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Emergent BioSolutions Inc. | $100.00 | $127.57 | $116.10 | $192.81 | $93.54 | $25.41 | | S&P 500 | $100.00 | $95.62 | $125.72 | $148.85 | $191.58 | $156.89 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2022, total revenues decreased by 37% to $1.12 billion, driven by an 82% decline in CDMO services, resulting in a net loss of $223.8 million, with significant debt maturing in October 2023 raising going concern doubts, prompting strategic actions like the TEMBEXA® acquisition, restructuring, and travel health business sale Consolidated Financial Highlights (in millions) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,120.9 | $1,792.7 | (37)% | | Product Sales, net | $966.2 | $1,023.9 | (6)% | | Services Revenues | $113.3 | $634.6 | (82)% | | Income (loss) from operations | $(172.7) | $352.6 | NM | | Net income (loss) | $(223.8) | $230.9 | NM | - Going Concern: Due to $960.8 million in debt maturing in October 2023 and non-compliance with debt covenants, there is substantial doubt about the company's ability to continue as a going concern; management plans to amend credit facilities[460][461] - Net cash used in operating activities was $34.1 million in 2022, a significant decrease from $321.1 million provided by operating activities in 2021, primarily due to the net loss[467][468] - The company acquired exclusive worldwide rights to TEMBEXA® from Chimerix in 2022, which contributed $117.6 million in revenue for the year[409][445] Results of Operations For 2022, total revenues fell 37% to $1.1 billion, primarily due to an 82% decline in Services revenue and a 6% decrease in Product sales, resulting in a net loss of $223.8 million compared to a net income in 2021 Revenue by Major Product/Service (in millions) | Revenue Source | 2022 | 2021 | $ Change | | :--- | :--- | :--- | :--- | | Nasal Naloxone Products | $373.7 | $434.3 | $(60.6) | | Anthrax Vaccines | $274.3 | $259.8 | $14.5 | | ACAM2000 | $63.4 | $206.5 | $(143.1) | | TEMBEXA | $117.6 | — | $117.6 | | CDMO - Services | $108.4 | $334.9 | $(226.5) | | CDMO - Leases | $4.9 | $299.7 | $(294.8) | - CDMO services revenue decreased by $226.5 million primarily due to reduced production activities at the Bayview facility following a halt in manufacturing under the Janssen contract and the cessation of activities under the AstraZeneca contract[450] - CDMO lease revenue decreased by $294.8 million, mainly due to the completion of the COVID-19 development partnership with BARDA in November 2021[452] - Nasal Naloxone product sales decreased by $60.6 million, driven by lower commercial retail sales and a lower price per unit following the launch of a generic competitor[442] Financial Condition, Liquidity and Capital Resources As of December 31, 2022, the company's financial position is strained with $642.6 million in cash and $1.41 billion in total debt, of which $957.3 million is current and matures in October 2023, raising substantial doubt about its going concern ability due to covenant non-compliance, prompting refinancing efforts and the planned sale of its travel health business Financial Position Summary (in millions) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $642.6 | $576.1 | | Total borrowings | $1,405.8 | $841.0 | | Debt, current portion | $957.3 | $31.6 | | Total working capital | $(19.2) | $898.3 | - The company's Senior Secured Credit Facilities, with an outstanding balance of $960.8 million as of December 31, 2022, mature in October 2023, creating significant liquidity risk and raising substantial doubt about its ability to continue as a going concern[461] - The company was not in compliance with its debt service coverage ratio and consolidated net leverage ratio covenants as of December 31, 2022, receiving a limited waiver from lenders until April 17, 2023, and is working to replace the facilities before maturity[333][463] - Net cash used in operating activities was $34.1 million in 2022, compared to net cash provided by operating activities of $321.1 million in 2021[467] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from variable interest rates on its debt, where a one-percentage-point increase in the eurocurrency rate would increase annual interest expense by approximately $6.1 million, and from foreign currency fluctuations in Euro, Canadian dollar, Swiss franc, and British pound - The company has significant interest rate risk due to variable-rate debt; a hypothetical 1% increase in the eurocurrency rate would increase annual interest expense by approximately $6.1 million[495] - The company is exposed to foreign currency exchange rate fluctuations, primarily with respect to the Euro, Canadian dollar, Swiss franc, and British pound[496] Item 8. Financial Statements and Supplementary Data The consolidated financial statements for 2022 show significant deterioration, with the auditor's report highlighting substantial doubt about going concern due to debt maturities and covenant non-compliance, and an adverse opinion on internal control over financial reporting due to a material weakness in inventory accounting - The independent auditor's report includes an explanatory paragraph stating that substantial doubt exists about the Company's ability to continue as a going concern[502] - The independent auditor issued an adverse opinion on the Company's internal control over financial reporting as of December 31, 2022, due to a material weakness related to inventory accounting[501][742][743] Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $3,166.6 | $2,959.0 | | Total Liabilities | $1,783.6 | $1,340.0 | | Total Stockholders' Equity | $1,383.0 | $1,619.0 | Consolidated Statement of Operations Highlights (in millions) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $1,120.9 | $1,792.7 | $1,555.4 | | Income (loss) from operations | $(172.7) | $352.6 | $433.8 | | Net income (loss) | $(223.8) | $230.9 | $305.1 | Item 9A. Controls and Procedures As of December 31, 2022, management concluded that disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting related to insufficient controls over inventory capitalization of pre-launch materials, with remediation efforts underway - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were not effective[732] - A material weakness was identified in internal control over financial reporting related to the improper capitalization of inventory, specifically insufficient controls to assess pre-launch materials[734][735] - The independent registered public accounting firm, Ernst & Young LLP, issued an attestation report concluding that the company has not maintained effective internal control over financial reporting as of December 31, 2022[737][742] - Remediation efforts are underway, including creating a formal policy for accounting for pre-launch materials and implementing a monthly review control[736] Part III Items 10-14 Information for Items 10 through 14, covering Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accountant Fees and Services, is incorporated by reference from the forthcoming 2023 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the forthcoming 2023 proxy statement[754][755][756][757][758] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, including consolidated financial statements, the auditor's report, and Schedule II detailing valuation and qualifying accounts - This section contains the list of all financial statements, schedules, and exhibits filed with the 10-K[760][761][762] Schedule II - Valuation and Qualifying Accounts (in millions) | Account | Beginning Balance (1/1/22) | Charged to Costs | Deductions | Ending Balance (12/31/22) | | :--- | :--- | :--- | :--- | :--- | | Inventory allowance | $42.7 | $79.1 | $(40.5) | $81.3 | | Prepaid expenses and other current assets allowance | $3.7 | $3.9 | $(0.5) | $7.1 |