Emergent BioSolutions(US:EBS)2021-07-29 16:00Part I. Financial Information This section provides unaudited condensed consolidated financial statements, management's analysis of financial condition, market risk disclosures, and internal controls assessment Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Emergent BioSolutions Inc. as of June 30, 2021, including balance sheets, statements of operations, comprehensive income, cash flows, and changes in stockholders' equity, with accompanying notes on operations, accounting policies, revenue recognition, debt, and legal contingencies Condensed Consolidated Balance Sheet Highlights (as of June 30, 2021) | Account | June 30, 2021 (in millions) | December 31, 2020 (in millions) | | :--- | :--- | :--- | | Total Assets | $2,915.2 | $2,883.0 | | Cash and cash equivalents | $447.5 | $621.0 | | Inventories, net | $386.4 | $307.0 | | Total current assets | $1,162.1 | $1,195.0 | | Total Liabilities | $1,371.5 | $1,436.0 | | Debt, current portion | $28.8 | $33.0 | | Debt, net of current portion | $825.2 | $841.0 | | Total Stockholders' Equity | $1,543.7 | $1,447.0 | Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended June 30, 2021 (in millions) | Three Months Ended June 30, 2020 (in millions) | Six Months Ended June 30, 2021 (in millions) | Six Months Ended June 30, 2020 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $397.5 | $394.7 | $740.5 | $587.0 | | Product sales, net | $181.2 | $298.5 | $319.1 | $446.0 | | CDMO services | $190.9 | $72.6 | $374.7 | $94.0 | | Income from operations | $14.5 | $126.0 | $109.9 | $114.0 | | Net Income | $4.6 | $92.7 | $74.3 | $80.0 | | Diluted EPS | $0.09 | $1.73 | $1.37 | $1.50 | Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30) | Cash Flow Activity | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(24.6) | $185.7 | | Net cash used in investing activities | $(123.1) | $(69.3) | | Net cash used in financing activities | $(26.0) | $(15.3) | | Net change in cash | $(173.8) | $101.0 | - The company recorded an inventory write-off of $41.5 million at its Bayview facility during the three and six months ended June 30, 2021, due to unusable raw materials and in-process batches, charged to cost of product sales and CDMO services49 - The company is involved in several legal proceedings, including class action lawsuits alleging materially false and misleading information about its COVID-19 vaccine manufacturing capabilities, a stockholder derivative lawsuit, and inquiries from multiple government bodies106108109 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a significant shift in revenue composition for the first half of 2021, with total revenue growing 26% year-over-year driven by a substantial increase in Contract Development and Manufacturing (CDMO) services related to the COVID-19 pandemic, offsetting a 29% decline in product sales, while operating income saw a slight decline due to increased cost of services and higher SG&A expenses, and the company's cash position decreased due to negative working capital changes and increased capital expenditures Revenue Breakdown (Six Months Ended June 30) | Revenue Source | 2021 (in millions) | 2020 (in millions) | % Change | | :--- | :--- | :--- | :--- | | NARCAN Nasal Spray | $180.4 | $145.0 | 24% | | Anthrax vaccines | $106.5 | $184.2 | (42)% | | ACAM2000 | $0.0 | $70.0 | (100)% | | Other product sales | $32.2 | $47.5 | (32)% | | Total product sales, net | $319.1 | $446.7 | (29)% | | CDMO services | $374.7 | $94.3 | 297% | | Contracts and grants | $46.7 | $46.2 | 1% | | Total Revenues | $740.5 | $587.2 | 26% | - The significant increase in CDMO services revenue for Q2 and H1 2021 is attributed to the public-private partnership with BARDA and arrangements with innovators to address the COVID-19 pandemic, initiated in mid-2020151 - Cost of product sales and CDMO services increased primarily due to higher volume of CDMO services for COVID-19 and a $41.5 million inventory write-off at the Bayview facility for unusable raw materials and in-process batches156 - Net cash used in operating activities was $24.6 million for the first six months of 2021, a sharp contrast to the $185.7 million provided by operations in the same period of 2020, driven by negative working capital changes, including inventory accumulation and increased receivables167168 - Cash used in investing activities increased to $123.1 million from $69.3 million year-over-year, largely due to infrastructure and equipment investments to expand capacity and capabilities at the Rockville and Bayview facilities169170 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates and foreign currency exchange rates, managing interest rate risk through a mix of fixed and variable rate debt and derivative instruments, and foreign currency risk primarily from the Euro, Canadian dollar, Swiss franc, and British pound through hedging transactions or incurring local currency operating expenses - The company has debt with both fixed and variable interest rates, with the impact of interest rate changes on variable debt managed through interest rate swap arrangements181 - A hypothetical one percentage point increase in the eurocurrency rate as of June 30, 2021, would increase the company's annual interest expense by approximately $0.6 million181 - The company has exposure to foreign currency fluctuations, primarily with the Euro, Canadian dollar, Swiss franc, and British pound, and manages this risk through hedging or incurring expenses in local currencies181 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of June 30, 2021, concluding that these controls were effective at a reasonable assurance level, with no material changes in internal control over financial reporting during the quarter - As of June 30, 2021, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level181 - No changes occurred during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting181 Part II. Other Information This section covers legal proceedings, key risk factors, equity sales, defaults, mine safety, other disclosures, and filed exhibits Item 1. Legal Proceedings This section refers to Note 14 of the financial statements, detailing ongoing legal matters including securities class action lawsuits and a stockholder derivative suit related to the company's COVID-19 vaccine manufacturing, responses to government inquiries, and patent litigation concerning generic versions of NARCAN® Nasal Spray - The company is facing multiple class action and stockholder derivative lawsuits related to its capabilities to manufacture COVID-19 vaccine bulk drug substance106108 - Emergent is involved in ongoing patent infringement litigation against Teva Pharmaceuticals regarding generic versions of both 4mg and 2mg NARCAN® Nasal Spray111114116 Item 1A. Risk Factors This section outlines significant risks to the company's business, including the material adverse impact of the COVID-19 pandemic, heavy reliance on U.S. government contracts, manufacturing compliance issues, challenges in product development and commercialization, extensive regulatory oversight, potential competition for key products, and various financial, legal, and reputational risks - Global Pandemic Risk: The COVID-19 pandemic poses risks of manufacturing disruptions, supply chain interruptions, and decreased demand for travel health vaccines189 - Government Contracting Risk: A substantial portion of revenue is derived from USG procurement of AV7909 and ACAM2000, and reduced demand or funding for these products would materially harm the business195 - Manufacturing Risk: An inability to maintain quality and manufacturing compliance at the Baltimore Bayview facility could hinder production of Johnson & Johnson's COVID-19 vaccine, following an FDA inspection that identified cross-contamination and other issues209 - Competitive Risk: NARCAN® Nasal Spray faces potential competition from both new branded products (like Kloxxado) and generic versions, with ongoing ANDA litigation against Teva274277 - Legal and Reputational Risk: The company faces pending class action and derivative lawsuits regarding its vaccine production quality controls and has been subject to criticism from media and government, which could harm its reputation and stock price296299303304 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities, no specific use of proceeds to report, and no purchases of equity securities by the company during the reporting period - The company reports no unregistered sales of equity securities, use of proceeds, or purchases of its equity securities for the period321322323 Item 3. Defaults Upon Senior Securities The company reports that this item is not applicable, indicating no defaults upon senior securities occurred during the period - Not applicable; no defaults upon senior securities were reported324 Item 4. Mine Safety Disclosures The company reports that this item is not applicable - Not applicable324 Item 5. Other Information The company reports that this item is not applicable, indicating no other material information was required to be disclosed for the period - Not applicable324 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, as required by Item 601 of Regulation S-K, including modifications to government contracts, CEO and CFO certifications, and financial data formatted in iXBRL - The exhibits filed with this report include various modifications to contracts with BARDA and AstraZeneca, as well as required CEO and CFO certifications325328