Emergent BioSolutions(EBS) - 2023 Q2 - Quarterly Report

Part I. Financial Information This section presents the company's financial statements, management's discussion and analysis, and market risk disclosures Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, cash flows, and changes in stockholders' equity, along with detailed notes Condensed Consolidated Balance Sheets—June 30, 2023 and December 31, 2022 The balance sheets show a significant decrease in total assets from $3,166.6 million at December 31, 2022, to $2,178.8 million at June 30, 2023, primarily driven by a sharp decline in cash and cash equivalents and property, plant and equipment Balance Sheet Key Metrics | Metric | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change | | :-------------------------------- | :------------------------- | :------------------------- | :----- | | Cash and cash equivalents | $642.6 | $88.6 | (86.2%) | | Total current assets | $1,210.7 | $777.7 | (35.8%) | | Property, plant and equipment, net| $817.6 | $395.5 | (51.6%) | | Intangible assets, net | $728.8 | $592.8 | (18.7%) | | Total assets | $3,166.6 | $2,178.8 | (31.1%) | | Total current liabilities | $1,229.9 | $693.2 | (43.7%) | | Debt, current portion | $957.3 | $455.2 | (52.4%) | | Total liabilities | $1,783.6 | $1,222.5 | (31.5%) | | Total stockholders' equity | $1,383.0 | $956.3 | (30.8%) | Condensed Consolidated Statements of Operations—Three and Six Months Ended June 30, 2023 and 2022 The company reported a significant net loss for both the three and six months ended June 30, 2023, primarily due to a substantial impairment charge on long-lived assets and increased interest expense Statements of Operations Key Metrics | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (%) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :---------------------------------------- | :---------------------------------------- | :--------- | | Total revenues | $337.9 | $242.7 | 39.2% | $503.0 | $550.2 | (8.5%) | | Total operating expenses | $630.8 | $314.7 | 100.4% | $944.0 | $615.8 | 53.3% | | Impairment of long-lived assets | $306.7 | $0.0 | NM | $306.7 | $0.0 | NM | | Loss from operations | $(292.9) | $(72.0) | NM | $(441.0) | $(65.6) | NM | | Interest expense | $(28.6) | $(7.8) | 266.7% | $(46.5) | $(16.0) | 190.6% | | Gain on sale of business | $74.9 | $0.0 | NM | $74.9 | $0.0 | NM | | Net loss | $(261.3) | $(56.4) | NM | $(444.3) | $(60.1) | NM | | Net loss per common share (Basic) | $(5.15) | $(1.13) | NM | $(8.80) | $(1.19) | NM | Condensed Consolidated Statements of Comprehensive Loss—Three and Six Months Ended June 30, 2023 and 2022 The company reported a comprehensive loss of $(263.9) million for the three months ended June 30, 2023, and $(449.0) million for the six months ended June 30, 2023, significantly wider than the prior year periods, primarily driven by the net loss and negative other comprehensive income adjustments Comprehensive Loss Key Metrics | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net loss | $(261.3) | $(56.4) | $(444.3) | $(60.1) | | Total other comprehensive income (loss), net of tax | $(2.6) | $3.2 | $(4.7) | $10.0 | | Comprehensive loss, net of tax | $(263.9) | $(53.2) | $(449.0) | $(50.1) | Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2023 and 2022 For the six months ended June 30, 2023, the company experienced a significant increase in cash used in operating activities and financing activities, partially offset by cash provided by investing activities due to the sale of its travel health business Cash Flow Activities | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :------------------- | | Net cash used in operating activities | $(298.4) | $(52.9) | $(245.5) | | Net cash provided by (used in) investing activities | $242.6 | $(64.3) | $306.9 | | Net cash used in financing activities | $(497.4) | $(101.2) | $(396.2) | | Net change in cash, cash equivalents and restricted cash | $(554.0) | $(218.0) | $(336.0) | | Cash, cash equivalents and restricted cash, end of period | $88.6 | $358.3 | $(269.7) | Condensed Consolidated Statements of Changes in Stockholders' Equity—Three and Six Months Ended June 30, 2023 and 2022 Total stockholders' equity decreased from $1,383.0 million at December 31, 2022, to $956.3 million at June 30, 2023, primarily due to net losses and other comprehensive losses, partially offset by share-based compensation activities and at-the-market stock sales Stockholders' Equity Changes | Metric | Balance at Dec 31, 2022 (in millions) | Balance at Jun 30, 2023 (in millions) | Change (in millions) | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :------------------- | | Total stockholders' equity | $1,383.0 | $956.3 | $(426.7) | | Net loss (6 months) | N/A | $(444.3) | N/A | | Share-based compensation activity (6 months) | N/A | $14.1 | N/A | | At-the-market sale of stock, net (3 months) | N/A | $8.2 | N/A | | Other comprehensive loss, net of tax (6 months) | N/A | $(4.7) | N/A | Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on the company's business, significant accounting policies, recent divestiture, restructuring and impairment charges, and specific financial statement line items such as inventories, property, intangible assets, debt, and revenue recognition Note 1. Nature of the business and organization Emergent BioSolutions Inc. is a global life sciences company focused on Public Health Threats (PHTs) across CBRNE, EID, emerging health crises, and acute/emergency care, operating in two segments: Products and Services - The company focuses on four PHT categories: chemical, biological, radiological, nuclear and explosives ("CBRNE"); emerging infectious diseases ("EID"); emerging health crises; and acute/emergency care[30] - The business is structured into two operating segments: Products (Anthrax-MCM, NARCAN, Smallpox-MCM, Other products) and Services (CDMO services)[30] - Key products include NARCAN (naloxone HCl) Nasal Spray, Anthrasil, BioThrax, CYFENDUS, Raxibacumab, ACAM2000, CNJ-016, TEMBEXA, BAT, Ebanga, RSDL, and Trobigard[32][34][39] Note 2. Summary of significant accounting policies The financial statements are prepared in accordance with U.S. GAAP for interim information, with a significant accounting policy change allowing pre-launch inventory capitalization when regulatory approval is probable and future economic benefit is expected - Pre-launch inventory costs are capitalized when regulatory approval is probable, future economic benefit is expected, and material uncertainties are significantly reduced[43] - The company uses a three-tier fair value hierarchy for measurements: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[46] Note 3. Divestiture On May 15, 2023, the company completed the sale of its travel health business to Bavarian Nordic for $270.0 million cash, plus potential milestone and earn-out payments up to $110.0 million, resulting in a pre-tax gain of $74.9 million - Sale of travel health business to Bavarian Nordic completed on May 15, 2023[48] Divestiture Details | Item | Amount (in millions) | | :-------------------------------- | :------------------- | | Cash purchase price | $270.0 | | Potential milestone payments | Up to $80.0 | | Potential earn-out payments | Up to $30.0 | | Pre-tax gain on sale | $74.9 | Note 4. Restructuring and impairment charges The company recognized a non-cash impairment charge of $306.7 million on long-lived assets within its CDMO reporting unit due to deteriorating performance and revised forecasts, alongside $9.6 million in charges for a January 2023 organizational restructuring Impairment Charge by Asset Class (3 Months Ended Jun 30, 2023) | Impairment Charge by Asset Class (3 Months Ended Jun 30, 2023) | Amount (in millions) | | :------------------------------------------------------------- | :------------------- | | Buildings, building improvements and leasehold improvements | $81.5 | | Furniture and equipment | $117.5 | | Software | $0.3 | | Construction-in-progress | $107.4 | | Total impairment on long-lived assets | $306.7 | - January 2023 organizational restructuring plan eliminated approximately 5% of total headcount, incurring $9.6 million in charges for the six months ended June 30, 2023[56][58] Note 5. Inventories, net Net inventories remained relatively stable, increasing slightly from $351.8 million at December 31, 2022, to $354.3 million at June 30, 2023, with a shift from finished goods to work-in-process Inventory Components | Inventory Component | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change (in millions) | | :------------------ | :------------------------- | :------------------------- | :------------------- | | Raw materials and supplies | $143.4 | $140.3 | $(3.1) | | Work-in-process | $116.2 | $149.3 | $33.1 | | Finished goods | $92.2 | $64.7 | $(27.5) |\ | Total inventories, net | $351.8 | $354.3 | $2.5 | Note 6. Property, plant and equipment, net Net property, plant and equipment significantly decreased from $817.6 million at December 31, 2022, to $395.5 million at June 30, 2023, primarily due to a $306.7 million non-cash impairment charge on CDMO long-lived assets and the sale of assets with the travel health business Property, Plant and Equipment by Category | Asset Category | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change (in millions) | | :--------------------------------------- | :------------------------- | :------------------------- | :------------------- | | Land and improvements | $54.9 | $30.0 | $(24.9) | | Buildings, building improvements and leasehold improvements | $327.9 | $226.4 | $(101.5) | | Furniture and equipment | $567.5 | $412.3 | $(155.2) | | Software | $65.6 | $64.7 | $(0.9) | | Construction-in-progress | $185.5 | $53.5 | $(132.0) | | Total property, plant and equipment, net | $817.6 | $395.5 | $(422.1) | - A non-cash impairment charge of $306.7 million was recorded during the three months ended June 30, 2023, related to certain CDMO long-lived assets[60] Note 7. Intangible assets and goodwill Net intangible assets decreased from $728.8 million at December 31, 2022, to $592.8 million at June 30, 2023, primarily due to the sale of $102.9 million of intangible assets with the travel health business, while goodwill remained stable at $218.2 million Intangible Assets and Goodwill | Asset Category | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change (in millions) | | :------------------- | :------------------------- | :------------------------- | :------------------- | | Products | $728.8 | $592.8 | $(136.0) | | Total intangible assets | $728.8 | $592.8 | $(136.0) | | Goodwill | $218.2 | $218.2 | $0.0 | - $102.9 million of intangible assets were sold as part of the travel health business divestiture[62] - Goodwill of $218.2 million is entirely attributable to the Products segment, with a fair value approximately 14% in excess of its carrying value as of June 30, 2023, but future impairments are possible[63] Note 8. Fair value measurements The company's fair value measurements primarily include money market accounts (Level 1) and contingent consideration (Level 3), with money market accounts decreasing significantly from $320.8 million to $20.1 million Fair Value Measurements | Asset/Liability | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Fair Value Level | | :---------------------- | :------------------------- | :------------------------- | :--------------- | | Money market accounts | $320.8 | $20.1 | Level 1 | | Time deposits | $170.7 | $0.0 | Level 2 | | Derivative instruments | $8.5 | $0.0 | Level 2 | | Contingent consideration| $6.8 | $7.4 | Level 3 | - The fair value of 3.875% Senior Unsecured Notes due 2028 increased from $225.1 million to $252.9 million, determined using Level 2 inputs[69] Note 9. Derivative instruments and hedging activities The company terminated its $350.0 million notional value interest rate swap transactions during Q2 2023, discontinuing hedge accounting, with the remaining accumulated other comprehensive income of $3.5 million to be amortized to earnings - Terminated $350.0 million notional value interest rate swap transactions during Q2 2023, discontinuing hedge accounting[71] - Remaining accumulated other comprehensive income of $3.5 million (pre-tax) from terminated swaps will be amortized to earnings[71] Interest Rate Swaps Gain (Loss) Reclassified to Interest Expense | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :----------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Interest rate swaps gain (loss) reclassified to Interest expense | $2.9 | $(0.9) | $5.3 | $(2.3) | Note 10. Debt Total debt decreased from $1,413.8 million at December 31, 2022, to $909.3 million at June 30, 2023, primarily due to significant principal payments, and the company amended its Senior Secured Credit Facilities, extending maturity to May 2025 and requiring a $75.0 million capital raise by April 30, 2024 Debt Components | Debt Component | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change (in millions) | | :------------------------------------ | :------------------------- | :------------------------- | :------------------- | | Term loan due 2025 | $362.8 | $206.1 | $(156.7) | | Revolver loan due 2025 | $598.0 | $250.2 | $(347.8) | | 3.875% Senior Unsecured Notes due 2028| $450.0 | $450.0 | $0.0 | | Total debt | $1,413.8 | $909.3 | $(504.5) | | Current portion of long-term debt, net| $957.3 | $455.2 | $(502.1) | - Senior Secured Credit Facilities maturity extended to May 15, 2025, and Revolving Credit Facility commitments reduced from $600.0 million to $300.0 million[78] - Required to raise at least $75.0 million through equity or unsecured indebtedness by April 30, 2024, and make quarterly principal payments of approximately $3.9 million on the Term Loan Facility[79][208] Note 11. Stock-based compensation and stockholders' equity Stock-based compensation expense for the six months ended June 30, 2023, was $15.1 million, a decrease from $22.2 million in the prior year, and the company sold 1.1 million shares of common stock under its ATM Program for $9.1 million gross proceeds during Q2 2023 Stock-based Compensation Expense | Stock-based Compensation Expense | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total stock-based compensation expense | $8.3 | $12.3 | $15.1 | $22.2 | - Sold 1.1 million shares of common stock under the ATM Program for gross proceeds of $9.1 million during the three months ended June 30, 2023, with $140.9 million remaining available[85] Accumulated Other Comprehensive Income (Loss), Net of Tax | Accumulated Other Comprehensive Income (Loss), Net of Tax | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | | :-------------------------------------------------------- | :------------------------- | :------------------------- | | Balance | $3.1 | $(1.6) | Note 12. Loss per common share Basic and diluted net loss per common share for the six months ended June 30, 2023, was $(8.80), significantly higher than $(1.19) in the prior year, reflecting the increased net loss Loss per Common Share | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss per common share - basic | $(5.15) | $(1.13) | $(8.80) | $(1.19) | | Net loss per common share - diluted | $(5.15) | $(1.13) | $(8.80) | $(1.19) |\ | Weighted average shares outstanding - basic | 50.7 | 50.0 | 50.5 | 50.3 | Note 13. Revenue recognition Total revenues for the three months ended June 30, 2023, increased by 39% to $337.9 million, driven by product sales and CDMO services, but decreased by 9% to $503.0 million for the six months due to declines in product sales, CDMO, and contracts/grants Revenue by Source | Revenue Source | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (%) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (%) | | :---------------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :---------------------------------------- | :---------------------------------------- | :--------- | | Product sales, net | $302.2 | $237.2 | 27.4% | $445.6 | $474.3 | (6.1%) | | Total CDMO revenues | $29.1 | $(1.8) | NM | $44.3 | $59.0 | (24.9%) | | Contracts and grants | $6.6 | $7.3 | (9.7%) | $13.1 | $16.9 | (22.5%) | | Total revenues | $337.9 | $242.7 | 39.2% | $503.0 | $550.2 | (8.5%) | - The company is in an ongoing dispute with Janssen Pharmaceuticals, Inc. regarding a terminated manufacturing services agreement, with $154.0 million in long-term assets related to the agreement as of June 30, 2023[93][95] - Future contract value on unsatisfied performance obligations is approximately $452.0 million, with $443.2 million expected to be recognized within the next 24 months[97] Note 14. Leases The company's operating lease costs for the six months ended June 30, 2023, were $2.4 million, a decrease from $3.4 million in the prior year, with corresponding decreases in operating lease right-of-use assets and liabilities Lease Metrics | Lease Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total operating lease cost | $2.4 | $3.4 | | Operating lease right-of-use assets | $15.7 | N/A | | Total operating lease liabilities | $16.7 | N/A | Note 15. Income taxes The income tax provision increased significantly to $33.0 million for the six months ended June 30, 2023, compared to a benefit of $(26.5) million in the prior year, primarily due to a valuation allowance charge Income Tax Provision (Benefit) | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Income tax provision (benefit) | $11.1 | $(26.4) | $33.0 | $(26.5) | - The estimated effective annual tax rate for 2023 is (8%), down from 29% in 2022, primarily due to a $127.5 million valuation allowance charge recorded in 2022 against deferred tax assets[103][105] Note 16. Litigation The company is involved in several securities class action and shareholder derivative lawsuits related to alleged false statements about its CDMO manufacturing capabilities, with ongoing government inquiries from the Department of Justice, SEC, and other offices - Multiple putative class action lawsuits and shareholder derivative lawsuits are ongoing, alleging false and misleading statements about the company's CDMO manufacturing capabilities[107][108][109][110] - The company has received and is cooperating with inquiries and subpoenas from the Department of Justice, SEC, Maryland Attorney General's Office, New York Attorney General's Office, and Congressional committees regarding these matters[111] Note 17. Segment information The company operates in two reportable segments: Products and Services (CDMO), with Products revenue increasing by 27% for Q2 2023 but decreasing by 6% for H1 2023, while Services revenue significantly improved in Q2 2023 but decreased 25% for H1 2023 Segment Revenue | Segment Revenue | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (%) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (%) | | :-------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :---------------------------------------- | :---------------------------------------- | :--------- | | Products | $302.2 | $237.2 | 27% | $445.6 | $474.3 | (6%) | | Services | $29.1 | $(1.8) | NM | $44.3 | $59.0 | (25%) | | Total segment revenues | $331.3 | $235.4 | 41% | $489.9 | $533.3 | (8%) | Segment Gross Margin | Segment Gross Margin | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (%) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (%) | | :------------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :---------------------------------------- | :---------------------------------------- | :--------- | | Products gross margin | $167.3 | $146.2 | 14% | $207.8 | $303.0 | (31%) | | Services gross margin | $(26.6) | $(80.6) | 67% | $(63.6) | $(95.4) | 33% | Note 18. Subsequent events Post-period events include FDA approval of CYFENDUS, a 10-year BARDA contract for Ebanga valued up to $704 million, and an August 2023 organizational restructuring plan to reduce the workforce by approximately 400 employees - FDA approved CYFENDUS for post-exposure prophylaxis of anthrax disease on July 20, 2023[117] - Awarded a 10-year BARDA contract for Ebanga treatment for Ebola, valued up to approximately $704 million if all option periods are exercised[118] - Announced an August 2023 organizational restructuring plan, including a reduction of approximately 400 employees, with estimated charges of $19.0 million to $21.0 million in Q3 2023[119][120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the company's business, financial performance, and liquidity, detailing revenue and expense trends, segment results, and the company's financial condition, highlighting a significant net loss, impairment charges, and ongoing liquidity challenges BUSINESS OVERVIEW Emergent BioSolutions is a global life sciences company focused on Public Health Threats (PHTs) with a portfolio of 12 products, a development pipeline, and CDMO services, structured into Products and Services segments, with recent strategic activities including restructuring, divestiture, and new product approvals - The company's core business focuses on preparedness and response solutions for Public Health Threats (PHTs) across CBRNE, EID, public health crises, and acute/emergency care[123][124] - Operates two segments: Products (Anthrax-MCM, NARCAN, Smallpox-MCM, Other) and Services (CDMO)[125] - Strategic activities include a January 2023 restructuring (5% headcount reduction), sale of travel health business to Bavarian Nordic for $270 million cash, FDA approval of CYFENDUS, and a $704 million BARDA contract for Ebanga[131][132][133][135][136] - Recognized a non-cash impairment charge of $306.7 million on long-lived assets within the CDMO reporting unit due to performance deterioration[137][138] FINANCIAL OPERATIONS OVERVIEW The company generates revenue from product sales, CDMO services, and contracts/grants, with revenue and profitability subject to quarterly variability due to timing of production and large-scale contracts, while R&D expenses are expensed as incurred and depend on clinical trial results and funding - Product revenues are generated from marketed products and procured product candidates, with the U.S. Government ("USG") being the largest purchaser of Government - MCM products for the Strategic National Stockpile ("SNS")[142] - CDMO services revenue comes from development, drug substance, drug product manufacturing, and packaging for pharmaceutical, biotechnology, and government clients[142] - R&D expenses are expensed as incurred and are influenced by clinical trial results, R&D reimbursement availability, and the number/duration of product candidates and clinical programs[147][148] CRITICAL ACCOUNTING POLICIES AND ESTIMATES The company's financial statements rely on estimates, judgments, and assumptions, particularly for revenue recognition, inventory valuation, and impairment assessments, with no significant changes to critical accounting policies during the six months ended June 30, 2023, except for the pre-launch inventory policy - The preparation of financial statements requires estimates, judgments, and assumptions that affect reported amounts[152] - No significant changes to critical accounting policies and estimates were made during the six months ended June 30, 2023, except for the pre-launch inventory policy (as discussed in Note 2)[152][153] RESULTS OF OPERATIONS For the three months ended June 30, 2023, total revenues increased by 39% to $337.9 million, but for the six months, total revenues decreased by 9% to $503.0 million, with a net loss of $(261.3) million and $(444.3) million respectively, largely due to a $306.7 million impairment charge and increased interest expense Financial Performance Highlights | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (%) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :---------------------------------------- | :---------------------------------------- | :--------- | | Total revenues | $337.9 | $242.7 | 39% | $503.0 | $550.2 | (9%) | | Loss from operations | $(292.9) | $(72.0) | NM | $(441.0) | $(65.6) | NM | | Net loss | $(261.3) | $(56.4) | NM | $(444.3) | $(60.1) | NM | | Impairment of long-lived assets | $306.7 | $0.0 | NM | $306.7 | $0.0 | NM | | Interest expense | $(28.6) | $(7.8) | 267% | $(46.5) | $(16.0) | 191% | | Gain on sale of business | $74.9 | $0.0 | NM | $74.9 | $0.0 | NM | Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022 Total revenues increased by $95.2 million (39%) to $337.9 million, driven by increases in Products ($65.0 million) and Services ($30.9 million) revenue, while a $306.7 million impairment charge on CDMO long-lived assets significantly impacted operating loss, and R&D expenses decreased by 48% as interest expense surged by 267% Q2 2023 vs Q2 2022 Financial Comparison | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :--------- | | Total revenues | $337.9 | $242.7 | $95.2 | 39% | | Products revenue | $302.2 | $237.2 | $65.0 | 27% | | Services revenue | $29.1 | $(1.8) | $30.9 | NM | | Consolidated gross margin | $140.7 | $65.6 | $75.1 | 114% | | Impairment of long-lived assets | $306.7 | $0.0 | $306.7 | NM | | Research and development | $26.0 | $49.8 | $(23.8) | (48%) | | Interest expense | $(28.6) | $(7.8) | $(20.8) | 267% | | Gain on sale of business | $74.9 | $0.0 | $74.9 | NM | Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Total revenues decreased by $47.2 million (9%) to $503.0 million, driven by declines in product sales, services revenue, and contracts/grants, while a $306.7 million impairment charge on long-lived assets and a 191% increase in interest expense significantly contributed to the net loss, and R&D expenses decreased by 31% H1 2023 vs H1 2022 Financial Comparison | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :--------- | | Total revenues | $503.0 | $550.2 | $(47.2) | (9%) | | Total product sales | $445.6 | $474.3 | $(28.7) | (6%) | | Services revenue | $44.3 | $59.0 | $(14.7) | (25%) | | Consolidated gross margin | $144.2 | $207.6 | $(63.4) | (31%) | | Impairment of long-lived assets | $306.7 | $0.0 | $306.7 | NM | | Research and development | $66.6 | $96.2 | $(29.6) | (31%) | | Interest expense | $(46.5) | $(16.0) | $(30.5) | 191% | | Gain on sale of business | $74.9 | $0.0 | $74.9 | NM | SEGMENT RESULTS The Products segment saw a 27% revenue increase for Q2 2023 but a 6% decrease for H1 2023, primarily due to timing of Anthrax MCM sales and increased NARCAN and Smallpox MCM sales, while the Services segment's revenue significantly improved in Q2 2023 from a prior-year reversal but decreased 25% for H1 2023 due to reduced production activities Segment Performance Highlights | Segment | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (%) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (%) | | :------ | :---------------------------------------- | :---------------------------------------- | :--------- | :---------------------------------------- | :---------------------------------------- | :--------- | | Products Revenues | $302.2 | $237.2 | 27% | $445.6 | $474.3 | (6%) | | Services Revenues | $29.1 | $(1.8) | NM | $44.3 | $59.0 | (25%) | | Products Gross Margin | $167.3 | $146.2 | 14% | $207.8 | $303.0 | (31%) | | Services Gross Margin | $(26.6) | $(80.6) | 67% | $(63.6) | $(95.4) | 33% | PRODUCTS SEGMENT The Products segment experienced a 27% increase in revenue for the three months ended June 30, 2023, driven by strong NARCAN and Smallpox MCM sales, despite a significant drop in Anthrax MCM, but for the six-month period, revenue decreased by 6% due to lower Anthrax MCM sales, impacting gross margin percentage Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022 Anthrax MCM sales decreased by 78% to $21.2 million due to timing, while NARCAN sales increased by 32% to $133.9 million, and Smallpox MCM sales surged by $107.9 million to $123.9 million due to a $120 million USG option for ACAM2000, with cost of product sales increasing by 48% Product Sales (3 Months) | Product Sales (3 Months) | Jun 30, 2023 (in millions) | Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :----------------------- | :------------------------- | :------------------------- | :--------- | :--------- | | Anthrax MCM | $21.2 | $95.8 | $(74.6) | (78%) | | NARCAN | $133.9 | $101.6 | $32.3 | 32% | | Smallpox MCM | $123.9 | $16.0 | $107.9 | NM | | Other Products | $23.2 | $23.8 | $(0.6) | (3%) | | Cost of product sales | $134.9 | $91.0 | $43.9 | 48% | Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Anthrax MCM sales decreased by 78% to $43.1 million due to timing, while NARCAN sales increased by 20% to $234.3 million, and Smallpox MCM sales increased by $91.7 million to $131.1 million due to the USG's $120 million ACAM2000 option, with cost of product sales increasing by 39% Product Sales (6 Months) | Product Sales (6 Months) | Jun 30, 2023 (in millions) | Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :----------------------- | :------------------------- | :------------------------- | :--------- | :--------- | | Anthrax MCM | $43.1 | $205.2 | $(162.1) | (79%) | | NARCAN | $234.3 | $194.6 | $39.7 | 20% | | Smallpox MCM | $131.1 | $39.4 | $91.7 | NM | | Other Products | $37.1 | $35.1 | $2.0 | 6% | | Cost of product sales | $237.8 | $171.3 | $66.5 | 39% | SERVICES SEGMENT The Services segment saw a significant increase in CDMO services revenue for the three months ended June 30, 2023, recovering from a prior-year revenue reversal, but for the six-month period, CDMO services revenue decreased by 27% due to reduced production activities, leading to an improved gross margin for both periods Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022 CDMO services revenues increased by $23.7 million to $26.4 million, driven by resolution of a customer obligation and work at the Canton facility, contrasting with a prior-year revenue reversal, while CDMO lease revenues also increased by 160% to $2.7 million, and cost of services decreased by 29% CDMO Revenue (3 Months) | CDMO Revenue (3 Months) | Jun 30, 2023 (in millions) | Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :---------------------- | :------------------------- | :------------------------- | :--------- | :--------- | | CDMO services revenues | $26.4 | $2.7 | $23.7 | NM | | CDMO lease revenues | $2.7 | $(4.5) | $7.2 | 160% | | Cost of services | $55.7 | $78.8 | $(23.1) | (29%) | | Services gross margin | $(26.6) | $(80.6) | $54.0 | 67% | Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 CDMO services revenues decreased by 27% to $39.8 million, primarily due to reduced production at the Bayview and Camden facilities following the Janssen Agreement halt, while cost of services decreased by 30% due to reduced production across the CDMO network CDMO Revenue (6 Months) | CDMO Revenue (6 Months) | Jun 30, 2023 (in millions) | Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :---------------------- | :------------------------- | :------------------------- | :--------- | :--------- | | CDMO services revenues | $39.8 | $54.5 | $(14.7) | (27%) | | CDMO lease revenues | $4.5 | $4.5 | $0.0 | 0% | | Cost of services | $107.9 | $154.4 | $(46.5) | (30%) | | Services gross margin | $(63.6) | $(95.4) | $31.8 | 33% | OTHER REVENUE Contracts and grants revenue decreased for both the three and six months ended June 30, 2023, due to changes in the mix and timing of developmental initiatives Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022 Contracts and grants revenue decreased by 10% to $6.6 million for the three months ended June 30, 2023, due to changes in the mix and timing of developmental initiatives Contracts and Grants Revenue (3 Months) | Revenue Type | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :----------- | :---------------------------------------- | :---------------------------------------- | :--------- | :--------- | | Contracts and grants | $6.6 | $7.3 | $(0.7) | (10%) | Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Contracts and grants revenue decreased by 22% to $13.1 million for the six months ended June 30, 2023, due to changes in the mix and timing of developmental initiatives Contracts and Grants Revenue (6 Months) | Revenue Type | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change ($) | Change (%) | | :----------- | :---------------------------------------- | :---------------------------------------- | :--------- | :--------- | | Contracts and grants | $13.1 | $16.9 | $(3.8) | (22%) | FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The company's cash and cash equivalents significantly decreased by 86% to $88.6 million at June 30, 2023, and total borrowings decreased by 36% to $903.2 million, but the company faces substantial doubt about its ability to continue as a going concern due to debt maturities and a required $75.0 million capital raise by April 30, 2024 Financial Condition Highlights | Metric | Jun 30, 2023 (in millions) | Dec 31, 2022 (in millions) | Change (%) | | :------------------------ | :------------------------- | :------------------------- | :--------- | | Cash and cash equivalents | $88.6 | $642.6 | (86%) | | Total borrowings | $903.2 | $1,405.8 | (36%) | | Total working capital | $84.5 | $(19.2) | NM | Principal Sources of Capital Resources Historically, the company has financed operations through cash, cash from operations, development contracts, grants, and borrowings, with $88.6 million in cash and $49.3 million remaining capacity under its Revolving Credit Facility as of June 30, 2023 - Principal sources of capital include existing cash, cash from operations, development contracts, grant funding, and borrowings under credit facilities[205][216] Capital Resources as of Jun 30, 2023 | Metric | Jun 30, 2023 (in millions) | | :---------------------------------------- | :------------------------- | | Unrestricted cash and cash equivalents | $88.6 | | Remaining capacity under Revolving Credit Facility | $49.3 | Going Concern The company has substantial doubt about its ability to continue as a going concern within one year, primarily due to the classification of its debt as current liability and the requirement to raise at least $75.0 million in equity or unsecured indebtedness by April 30, 2024 - Substantial doubt exists about the company's ability to continue as a going concern within one year[207][208][391] - The Credit Agreement Amendment requires the company to raise at least $75.0 million through equity or unsecured indebtedness by April 30, 2024[208][391] At-the-Market Equity Offering Facility The company has an "at-the-market" (ATM) equity offering program to sell up to $150.0 million of common stock, having sold 1.1 million shares for $9.1 million gross proceeds during Q2 2023, with $140.9 million remaining available - Established an ATM Program to sell up to $150.0 million of common stock[211] ATM Program Activity (3 Months Ended Jun 30, 2023) | ATM Program Activity (3 Months Ended Jun 30, 2023) | Value (in millions) | | :------------------------------------------------- | :------------------ | | Shares sold | 1.1 | | Gross proceeds | $9.1 | | Average price per share | $8.22 | | Remaining available for issuance | $140.9 | Cash Flows Net cash used in operating activities increased significantly to $298.4 million for the six months ended June 30, 2023, from $52.9 million in the prior year, primarily due to net loss and negative working capital changes, while investing activities provided $242.6 million, and financing activities used $497.4 million Cash Flow Activity (6 Months Ended Jun 30) | Cash Flow Activity (6 Months Ended Jun 30) | 2023 (in millions) | 2022 (in millions) | Change (in millions) | | :----------------------------------------- | :----------------- | :----------------- | :------------------- | | Operating activities | $(298.4) | $(52.9) | $(245.5) | | Investing activities | $242.6 | $(64.3) | $306.9 | | Financing activities | $(497.4) | $(101.2) | $(396.2) | Debt As of June 30, 2023, the company had $909.3 million in fixed and variable rate debt, requiring significant cash flow for servicing, and failure to comply with covenants could lead to default and acceleration of payments Total Debt (Jun 30, 2023) | Debt (Jun 30, 2023) | Amount (in millions) | | :------------------ | :------------------- | | Total debt | $909.3 | - Debt servicing depends on future performance and is subject to economic, financial, and competitive factors, with failure to comply with covenants (e.g., consolidated net leverage ratio, debt service coverage ratio, minimum EBITDA, minimum liquidity) potentially triggering an event of default and accelerating payments[218][386] Uncertainties and Trends Affecting Funding Requirements Future capital requirements depend on product sales, acquisitions, capital improvements, debt obligations, R&D costs, and funding from partners/governments, with potential additional external financing through equity, debt, or collaborations, though economic conditions may make financing difficult or unfavorable - Future capital requirements are influenced by product sales, acquisitions, capital expenditures, debt payments, R&D costs, and external funding[216] - Potential financing options include equity/debt offerings, bank loans, and collaboration/licensing arrangements, but these may lead to dilution, restrictive covenants, or relinquishing valuable rights[217][218] - Economic conditions, market volatility, and the lingering impacts of COVID-19 may hinder obtaining financing on attractive terms[219] Unused Credit Capacity As of June 30, 2023, the company had $49.3 million in unused capacity under its Revolving Credit Facility, a significant decrease from $0.7 million at December 31, 2022, due to reduced total capacity and outstanding indebtedness Unused Credit Capacity | Metric | Jun 30, 2023 (in millions) | Dec 31, 2022 (in millions) | | :------------------------ | :------------------------- | :------------------------- | | Total Capacity | $300.0 | $600.0 | | Outstanding Indebtedness | $250.2 | $598.0 | | Unused Capacity | $49.3 | $0.7 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign currency market risks, having terminated interest rate swaps in June 2023, and a hypothetical 1% increase in the eurocurrency rate would increase annual interest expense by approximately $4.6 million - The company is exposed to interest rate and foreign currency market risks[222] - Terminated interest rate swaps in June 2023; a hypothetical 1% increase in the eurocurrency rate would increase annual interest expense by approximately $4.6 million[223][224] - Foreign currency exchange rate risk is managed through hedging and incurring operating expenses in local currency, primarily for Euro, Canadian dollar, Swiss franc, and British pound[225] Item 4. Controls and Procedures As of June 30, 2023, management, including the interim CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level, with no material changes in internal control over financial reporting during the three months ended June 30, 2023 - Disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2023[226] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2023[227] Part II. Other Information This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The company refers to Note 16, "Litigation," in Part I, Item 1, for details on legal proceedings - Refer to Note 16, "Litigation" for information on legal proceedings[228] Item 1A. Risk Factors The company faces a broad range of risks, including government contracting uncertainties, manufacturing compliance and disruption, product development and commercialization challenges, regulatory hurdles, intense competition, intellectual property protection, reliance on third-party suppliers, legal and reputational issues, significant debt and liquidity concerns, and stock price volatility - Key risks include reduced government funding for medical countermeasures, inability to secure follow-on contracts, and challenges in meeting quality and compliance in manufacturing operations[230][231] - Product development and commercialization risks involve uncertain clinical trial outcomes, failure to obtain regulatory approval, and gaining market acceptance for products like NARCAN[230][231] - Financial risks include maintaining sufficient cash flow to service substantial debt, obtaining additional funding to continue as a going concern, and complying with debt covenants[233] - Legal and reputational risks stem from unfavorable results of litigation and government investigations, potential cybersecurity incidents, and product liability exposure[232][233] RISK FACTOR SUMMARY This section provides a high-level overview of the company's key risk categories, including government contracting, manufacturing, product development and commercialization, regulatory and compliance, competitive and political, intellectual property, reliance on third parties, legal and reputational, financial, and risks related to strategic acquisitions/divestitures and common stock ownership - Summarizes risks across government contracting, manufacturing, product development, regulatory, competitive, intellectual property, third-party reliance, legal/reputational, financial, and strategic acquisition/divestiture categories[230][231][232][233] GOVERNMENT CONTRACTING RISKS The company heavily relies on USG funding and procurement for its medical countermeasures (MCMs), particularly CYFENDUS, BioThrax, and ACAM20