As filed with the Securities and Exchange Commission on
October 30, 2006.
Registration No.
333-136622
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT
NO. 5 TO
FORM S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
EMERGENT
BIOSOLUTIONS INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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2834
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14-1902018
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code No.)
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(I.R.S. Employer
Identification No.)
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300
Professional Drive, Suite 250
Gaithersburg,
Maryland 20879
(301) 944-0290
(Address,
including zip code, and telephone number,
including
area code, of registrants principal executive
offices)
Fuad
El-Hibri
Chief
Executive Officer
Emergent
BioSolutions Inc.
300
Professional Drive, Suite 250
Gaithersburg,
Maryland 20879
(301) 944-0290
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
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David E. Redlick, Esq.
Wilmer Cutler Pickering
Hale and Dorr LLP
1875 Pennsylvania Avenue, NW
Washington, DC 20006
(202) 663-6000
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Daniel J.
Abdun-Nabi, Esq.
General Counsel
Emergent BioSolutions Inc.
300 Professional Drive, Suite 250
Gaithersburg, Maryland 20879
(301) 944-0290
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James A. Lebovitz, Esq.
Brian D. Short, Esq.
Dechert LLP
2929 Arch Street
Philadelphia, Pennsylvania 19104
(215) 994-4000
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Approximate
date of commencement of proposed sale to the
public:
As
soon as practicable after this Registration Statement is
declared effective.
If any of
the securities being registered on this form are offered on a
delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the Securities
Act), please check the following box.
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If this form
is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering.
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If this form
is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If this form
is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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CALCULATION
OF REGISTRATION FEE
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Proposed
Maximum
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Proposed
Maximum
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Amount of
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Title of Each
Class of
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Amount to be
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Offering Price
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Aggregate
Offering
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Registration
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Securities to be
Registered
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Registered(1)
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Per
Share(2)
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Price(2)
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Fee(3)
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Common stock, $0.001 par value per
share
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5,750,000
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$16.00
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$92,000,000
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$9,844
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Series A junior participating
preferred stock purchase rights(4)
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(1)
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Includes
750,000 shares of common stock that may be purchased by the
underwriters to cover over-allotments, if any.
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(2)
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Estimated
solely for the purpose of computing the registration fee
pursuant to Rule 457(a) under the Securities Act.
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(3)
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Calculated
pursuant to Rule 457(a) based on an estimate of the
proposed maximum aggregate offering price. This amount has been
paid previously.
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(4)
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Each share
of common stock includes one series A junior participating
preferred stock purchase right pursuant to a rights agreement to
be entered into between the Registrant and the rights agent. The
series A junior participating preferred stock purchase
rights will initially trade together with the common stock. The
value attributable to the series A junior participating
preferred stock purchase rights, if any, is reflected in the
offering price of the common stock.
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The
Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities, and we are not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
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Subject to
completion, dated October 30, 2006
Prospectus
5,000,000 shares
Common stock
This is an initial public offering of common stock by Emergent
BioSolutions Inc. No public market currently exists for our
common stock. We are offering 5,000,000 shares of our
common stock. The estimated initial public offering price is
between $14.00 and $16.00 per share.
Our common stock has been authorized for listing on the New York
Stock Exchange under the symbol EBS.
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Per
share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and
commissions
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$
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$
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Proceeds to Emergent, before
expenses
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$
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$
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The underwriters have an option for a period of 30 days to
purchase up to 480,000 additional shares of common stock from
the selling stockholders identified in this prospectus and up to
270,000 additional shares of common stock from us to cover
over-allotments. We will not receive any proceeds from the sale
of shares by the selling stockholders.
Investing in our common stock involves a high degree of risk.
See Risk factors beginning on page 9.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares on or
about ,
2006.
JPMorgan
Cowen and Company
HSBC
,
2006
Table of
contents
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Page
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Prospectus summary
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1
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Risk factors
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9
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Special note regarding
forward-looking statements
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45
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Use of proceeds
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46
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Dividend policy
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48
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Capitalization
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49
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Dilution
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51
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Selected consolidated financial
data
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53
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Managements discussion and
analysis of financial condition and results of operations
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55
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Business
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81
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Management
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131
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Certain relationships and related
party transactions
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151
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Principal and selling stockholders
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157
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Description of capital stock
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164
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Shares eligible for future
sale
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172
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Underwriting
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175
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Legal matters
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181
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Experts
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181
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Where you can find more information
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181
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Index to financial statements
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F-1
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You should rely only on the information contained in this
prospectus or to which we have referred you. We and the selling
stockholders have not authorized anyone to provide you with
different information. We and the selling stockholders are
offering to sell, and are seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of the
common stock. Our business, financial conditions, results of
operations and prospects may have changed since that date.
No action is being taken in any jurisdiction outside the
United States to permit a public offering of the common stock or
possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in any jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to that jurisdiction.
Prospectus
summary
This summary highlights information contained elsewhere in
this prospectus. This summary may not contain all of the
information that is important to you. Before investing in our
common stock, you should read this prospectus carefully in its
entirety, especially the risks of investing in our common stock
that we discuss under Risk factors, and our
financial statements and related notes beginning on
page F-1.
Our
business
We are a biopharmaceutical company focused on the development,
manufacture and commercialization of immunobiotics.
Immunobiotics are pharmaceutical products, such as vaccines and
immune globulins, that induce or assist the bodys immune
system to prevent or treat disease. We operate in two business
segments: biodefense and commercial. In our biodefense business,
we develop and commercialize immunobiotics for use against
biological agents that are potential weapons of bioterrorism. In
our commercial business, we develop immunobiotics for use
against infectious diseases with significant unmet or
underserved medical needs.
BioThrax.
We manufacture and market
BioThrax
®
,
also referred to as anthrax vaccine adsorbed, the only anthrax
vaccine approved by the U.S. Food and Drug Administration,
or FDA. Our total revenues from BioThrax sales were
$55.5 million in 2003, $81.0 million in 2004,
$127.3 million in 2005 and $61.3 million in the nine
months ended September 30, 2006. The U.S. Department
of Defense, or DoD, and the U.S. Department of Health and
Human Services, or HHS, have been the principal customers for
BioThrax. Since 1998, we have been a party to two supply
agreements for BioThrax with the DoD. Pursuant to these
contracts, we have supplied over nine million doses of BioThrax
through September 2006 to the DoD for immunization of military
personnel. Since March 1998, the DoD has vaccinated more than
1.5 million military personnel with more than
5.7 million doses of BioThrax. Our current contract with
the DoD provides for the supply of a minimum of approximately
1.5 million additional doses of BioThrax to the DoD through
September 2007. In April 2006, the DoD issued a notice that
it intends to negotiate a sole source fixed price contract for
the purchase of up to an additional 11 million doses of
BioThrax over one base contract year plus four option years. In
May 2005, we entered into an agreement to supply five million
doses of BioThrax to HHS for placement into the strategic
national stockpile for a fixed price of $123 million. We
completed delivery of all five million doses by February 2006,
seven months earlier than required. In May 2006, we entered into
a contract modification with HHS for the delivery of an
additional five million doses of BioThrax to HHS by May 2007 for
a fixed price of $120 million. We have delivered
approximately one million doses of BioThrax under this contract
modification through September 2006.
The National Institutes of Health, or NIH, originally approved
the manufacture and sale of BioThrax in 1970. In December 2005,
in reaffirming the approval of BioThrax, the FDA concluded that
BioThrax is safe and effective for the prevention of anthrax
infection by all routes of exposure, including inhalation. A
study published in 2002 by the Institute of Medicine, which is a
component of The National Academy of Sciences, supports the FDA
ruling. In its study, the Institute of Medicine found that
BioThrax is an effective vaccine for protection against anthrax,
including inhalational anthrax, caused by any known or plausible
engineered strains.
Biodefense market opportunity.
The biodefense market
for immunobiotics has grown dramatically as a result of the
increased awareness of the threat of global terror activity in
the wake of the September 11, 2001 terrorist attacks and
the October 2001 anthrax letter attacks. The letter attacks
involved the delivery of mail contaminated with anthrax spores
to government officials and members of the media in the United
States. As a result of the letter attacks, 22 people became
infected with anthrax, including 11 with inhalational anthrax,
and five people died.
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The U.S. government is the principal source of worldwide
biodefense spending. Most U.S. government spending on
biodefense programs results from procurement of countermeasures
by HHS, the Centers for Disease Control and Prevention, or CDC,
and the DoD and development funding from the National Institute
of Allergy and Infectious Diseases of NIH, or NIAID, and the
DoD. In 2004, the Project BioShield Act became law, providing
$5.6 billion in appropriations over ten years and
authorizing the procurement of countermeasures for biological,
chemical, radiological and nuclear attacks.
Biodefense product development.
In addition to
BioThrax, our biodefense product portfolio includes three
biodefense product candidates in preclinical development and a
next generation anthrax vaccine program with product candidates
in preclinical and Phase I clinical development. We are
developing all of our biodefense product candidates to address
category A biological agents, which are the class of biological
agents that the CDC has identified as the greatest possible
threat to public health. Our biodefense product candidates in
preclinical development are:
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Anthrax immune globulin
for post-exposure
treatment of anthrax infection, which we are developing in part
with funding from NIAID;
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Botulinum immune globulin
for post-exposure
treatment of illness caused by botulinum toxin, which we are
developing based on a new botulinum toxoid vaccine that we are
developing in collaboration with the U.K. Health Protection
Agency, or HPA; and
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Recombinant bivalent botulinum vaccine
a
prophylaxis for illness caused by botulinum toxin, which we also
are developing in collaboration with HPA.
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We are evaluating several potential product candidates in
connection with development of a next generation anthrax
vaccine, featuring attributes such as self administration and a
longer shelf life. In September 2006, we submitted three
separate proposals in response to a request for proposals issued
by NIAID in June 2006 for the advanced development and testing
of next generation anthrax vaccine candidates. One of our
proposals relates to a vaccine candidate that has completed a
Phase I clinical trial.
Commercial market opportunity.
Vaccines have long
been recognized as a safe and cost-effective method for
preventing infection caused by various bacteria and viruses.
Because of an increased emphasis on preventative medicine in
industrialized countries, vaccines are now well recognized as an
important part of public health management strategies. According
to Frost & Sullivan, a market research organization,
from 2002 to 2005, annual worldwide vaccine sales increased from
$6.7 billion to $9.9 billion, a compound annual growth
rate of approximately 14%. Frost & Sullivan estimates
that the worldwide sales of vaccines will grow at a compound
annual rate of approximately 10.5% from 2005 through 2012.
Commercial product development.
Our commercial product
portfolio includes two product candidates in Phase II
clinical development, one vaccine candidate in Phase I
clinical development and two vaccine candidates in preclinical
development. Our commercial product candidates in clinical
development are:
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Typhoid vaccine
a single dose, drinkable
vaccine, for which we have completed a Phase I clinical
program, including trials in the United States, the United
Kingdom and Vietnam, and expect to initiate a Phase II
clinical trial in Vietnam in the fourth quarter of 2006;
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Hepatitis B therapeutic vaccine
a multiple
dose, drinkable vaccine for treatment of chronic carriers of
hepatitis B infection, for which we have completed a
Phase I clinical trial in the United Kingdom and expect to
initiate a Phase II clinical trial in the United Kingdom in
the fourth quarter of 2006; and
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Group B streptococcus vaccine
a multiple
dose, injectable vaccine for administration to women of
childbearing age for protection of the fetus and newborn babies,
for which we have completed a Phase I clinical trial in the
United Kingdom.
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2
Our commercial product candidates in preclinical development are
a chlamydia vaccine and a meningitis B vaccine.
The Wellcome Trust provided funding for our Phase I
clinical trial of our typhoid vaccine candidate in Vietnam and
has agreed to provide funding for our Phase II clinical
trial of this vaccine candidate in Vietnam. In May 2006, we
entered into a license and co-development agreement with Sanofi
Pasteur, the vaccines business of
Sanofi-Aventis,
under which we granted Sanofi Pasteur an exclusive, worldwide
license under our proprietary technology to develop and
commercialize a meningitis B vaccine candidate.
Our strategy.
Our goal is to become a worldwide
leader in developing, manufacturing and commercializing
immunobiotics that target diseases with significant unmet or
underserved medical needs. Key elements of our strategy to
achieve this goal are to:
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maximize the commercial potential of BioThrax;
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continue to develop a balanced portfolio of immunobiotic
products;
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focus on core capabilities in product development and
manufacturing;
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build a large scale manufacturing infrastructure;
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selectively establish collaborations; and
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seek governmental and other third party grants and support.
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Our history.
We commenced operations in September
1998 through an acquisition from the Michigan Biologic Products
Institute of rights to BioThrax, vaccine manufacturing
facilities at a multi-building campus on approximately
12.5 acres in Lansing, Michigan and vaccine development and
production know-how. We acquired our pipeline of commercial
vaccine candidates through our acquisition of Microscience
Limited in 2005 and our acquisition of substantially all of the
assets of Antex Biologics, Inc. in 2003.
Risks associated
with our business
Our business is subject to numerous risks, as more fully
described in the section entitled Risk factors
immediately following this prospectus summary, including the
following:
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We have derived substantially all of our revenue from sales of
BioThrax under contracts with the DoD and HHS.
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Our ongoing U.S. government contracts do not necessarily
increase the likelihood that we will secure future comparable
contracts with the U.S. government.
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We expect that a significant portion of the business that we
will seek in the near future, in particular for BioThrax, will
be under government contracts that present a number of risks
that are not typically present in the commercial contracting
process.
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Our U.S. government contracts for BioThrax require annual
funding decisions by the government and are subject to
unilateral termination and modification by the government.
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We may fail to achieve significant sales of BioThrax to
customers in addition to the U.S. government, which would
harm our growth opportunities.
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We may not be able to sustain or increase profitability.
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We are spending significant amounts for the expansion of our
manufacturing facilities.
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We may not be able to manufacture BioThrax consistently in
accordance with FDA specifications.
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Other than BioThrax, all of our product candidates are
undergoing clinical trials or are in early stages of
development, and failure is common and can occur at any stage of
development.
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None of our product candidates other than BioThrax has received
regulatory approval.
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Our corporate
information
We were incorporated as BioPort Corporation under the laws of
Michigan in May 1998. In June 2004, we completed a corporate
reorganization in which Emergent BioSolutions Inc., a Delaware
corporation formed in December 2003, issued shares of
class A common stock to stockholders of BioPort in exchange
for an equal number of outstanding shares of common stock of
BioPort. As a result of this reorganization, BioPort became a
wholly owned subsidiary of Emergent. We subsequently renamed
BioPort as Emergent BioDefense Operations Lansing Inc.
Our principal executive offices are located at 300 Professional
Drive, Suite 250, Gaithersburg, Maryland 20879, and
our telephone number is
(301) 944-0290.
Our website address is www.emergentbiosolutions.com. We have
included our website address as an inactive textual reference
only. The information contained on, or that can be accessed
through, our website is not a part of this prospectus.
In this prospectus, unless otherwise stated or the context
otherwise requires, references to Emergent,
we, us, our and similar
references refer to Emergent BioSolutions Inc.
BioThrax
®
and
spi
-Vec
®
are our registered trademarks. Other trademarks, trade names or
service marks appearing in this prospectus are the property of
their respective owners.
4
The
offering
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Common stock offered by us
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5,000,000 shares
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Common stock to be outstanding after this offering
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27,420,404 shares
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Over-allotment option
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750,000 shares
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The underwriters have an option for a period of up to 30 days to
purchase up to 480,000 additional shares of common stock from
the selling stockholders and up to 270,000 additional shares of
common stock from us to cover over-allotments.
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Preferred stock purchase rights
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Each share of common stock offered hereby will have associated
with it one preferred stock purchase right under a rights
agreement that we will enter into in connection with this
offering. The preferred stock purchase rights will initially
trade together with the common stock. See Description of
capital stock Stockholder rights plan.
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Use of proceeds
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We expect to use the net proceeds from this offering to fund
development of our biodefense and commercial product candidates,
a portion of the construction, validation and qualification
costs for our new manufacturing facility in Lansing, Michigan
and initial engineering design and utility build out of our
manufacturing facilities in Frederick, Maryland and the balance
for general corporate purposes. See Use of proceeds.
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We will not receive any proceeds from the sale of shares of
common stock by the selling stockholders as a result of the
exercise by the underwriters of their over-allotment option.
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Risk factors
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See Risk factors and other information in this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock.
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New York Stock Exchange symbol
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EBS
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The number of shares of our common stock to be outstanding
immediately after this offering is based on
22,420,404 shares outstanding as of October 20, 2006, and
excludes:
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3,109,932 shares of common stock issuable upon the exercise
of stock options outstanding as of October 20, 2006 at a
weighted average exercise price of $2.54 per share;
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369,319 additional shares of common stock reserved for issuance
under our employee stock option plan as of October 20,
2006; and
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503,500 additional shares of common stock that will be reserved
for issuance under our 2006 stock incentive plan immediately
prior to completion of this offering.
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5
Unless otherwise indicated, all information in this prospectus
assumes:
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no exercise of the outstanding options described above; and
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no exercise by the underwriters of their option to purchase up
to 750,000 additional shares of common stock to cover
over-allotments.
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Except in our financial statements included in this prospectus,
in the table set forth under Capitalization, in
Certain relationships and related party transactions
or where otherwise expressly indicated, all information in this
prospectus assumes that, prior to the completion of this
offering, our previously existing class A common stock has
been reclassified as common stock, all previously outstanding
shares of class B common stock have been converted into
shares of common stock and each outstanding option to purchase
class B common stock has become an option to purchase
common stock.
In addition, unless otherwise indicated, all information in this
prospectus gives effect to a
2.8771-for-one
stock split of our common stock that was effected on
October 27, 2006.
6
Summary
consolidated financial data
You should read the following summary consolidated financial
data together with our consolidated financial statements and the
related notes appearing at the end of this prospectus and the
Managements discussion and analysis of financial
condition and results of operations section of this
prospectus.
The summary consolidated financial data for the years ended
December 31, 2003, 2004 and 2005 have been derived from our
historical audited consolidated financial statements. The
summary consolidated financial data for the nine-month periods
ended September 30, 2005 and 2006 and as of
September 30, 2006 have been derived from our unaudited
consolidated financial statements. The unaudited summary
consolidated financial data include, in the opinion of our
management, all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of our
financial position and results of operations for these periods.
Our historical results for any prior period are not necessarily
indicative of results to be expected in any future period, and
our results for any interim period are not necessarily
indicative of results for a full fiscal year. The as adjusted
consolidated balance sheet data set forth below give effect to
the sale by us of 5,000,000 shares of common stock in this
offering at an assumed initial public offering price of
$15.00 per share, which is the midpoint of the price range
set forth on the cover page of this prospectus, after deducting
estimated underwriting discounts and commissions and offering
expenses payable by us.
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Year ended
December 31,
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Nine months ended
September 30,
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(in thousands,
except share and per share data)
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2003
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2004
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2005
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2005
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2006
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Statements of operations
data:
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Revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
55,536
|
|
|
$
|
81,014
|
|
|
$
|
127,271
|
|
|
$
|
85,807
|
|
|
$
|
61,263
|
|
Contracts and grants
|
|
|
233
|
|
|
|
2,480
|
|
|
|
3,417
|
|
|
|
1,093
|
|
|
|
4,580
|
|
|
|
|
|
|
|
Total revenues
|
|
|
55,769
|
|
|
|
83,494
|
|
|
|
130,688
|
|
|
|
86,900
|
|
|
|
65,843
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
22,342
|
|
|
|
30,102
|
|
|
|
31,603
|
|
|
|
23,147
|
|
|
|
11,645
|
|
Research and development
|
|
|
6,327
|
|
|
|
10,117
|
|
|
|
18,381
|
|
|
|
9,632
|
|
|
|
26,640
|
|
Selling, general &
administrative
|
|
|
19,547
|
|
|
|
30,323
|
|
|
|
42,793
|
|
|
|
28,924
|
|
|
|
32,952
|
|
Purchased in-process research and
development
|
|
|
1,824
|
|
|
|
|
|
|
|
26,575
|
|
|
|
26,575
|
|
|
|
477
|
|
Settlement of State of Michigan
obligation
|
|
|
|
|
|
|
(3,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50,040
|
|
|
|
66,723
|
|
|
|
109,352
|
|
|
|
78,278
|
|
|
|
71,714
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
5,729
|
|
|
|
16,771
|
|
|
|
21,336
|
|
|
|
8,622
|
|
|
|
(5,871
|
)
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
100
|
|
|
|
65
|
|
|
|
485
|
|
|
|
338
|
|
|
|
405
|
|
Interest expense
|
|
|
(293
|
)
|
|
|
(241
|
)
|
|
|
(767
|
)
|
|
|
(575
|
)
|
|
|
(778
|
)
|
Other income (expense), net
|
|
|
168
|
|
|
|
6
|
|
|
|
55
|
|
|
|
(24
|
)
|
|
|
291
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(25
|
)
|
|
|
(170
|
)
|
|
|
(227
|
)
|
|
|
(261
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
Income (loss) before provision for
(benefit from) income taxes
|
|
|
5,704
|
|
|
|
16,601
|
|
|
|
21,109
|
|
|
|
8,361
|
|
|
|
(5,953
|
)
|
Provision for (benefit from) income
taxes
|
|
|
1,250
|
|
|
|
5,129
|
|
|
|
5,325
|
|
|
|
2,109
|
|
|
|
(2,617
|
)
|
Net income (loss)
|
|
$
|
4,454
|
|
|
$
|
11,472
|
|
|
$
|
15,784
|
|
|
$
|
6,252
|
|
|
$
|
(3,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per
share basic
|
|
$
|
0.24
|
|
|
$
|
0.61
|
|
|
$
|
0.77
|
|
|
$
|
0.31
|
|
|
$
|
(0.15
|
)
|
Earnings (loss) per
share diluted
|
|
$
|
0.22
|
|
|
$
|
0.56
|
|
|
$
|
0.69
|
|
|
$
|
0.28
|
|
|
$
|
(0.15
|
)
|
Weighted average number of
shares basic
|
|
|
18,904,992
|
|
|
|
18,919,850
|
|
|
|
20,533,471
|
|
|
|
19,930,498
|
|
|
|
22,370,191
|
|
Weighted average number of
shares diluted
|
|
|
20,316,752
|
|
|
|
20,439,252
|
|
|
|
22,751,733
|
|
|
|
22,048,412
|
|
|
|
22,370,191
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2006
|
|
(in
thousands)
|
|
Actual
|
|
|
As
adjusted
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,906
|
|
|
$
|
86,206
|
|
Working capital
|
|
|
18,726
|
|
|
|
85,026
|
|
Total assets
|
|
|
130,831
|
|
|
|
197,131
|
|
Total long-term liabilities
|
|
|
35,606
|
|
|
|
35,606
|
|
Total stockholders equity
|
|
|
56,759
|
|
|
|
123,059
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $15.00 per share would increase
(decrease) the as adjusted amount of each of cash and cash
equivalents, working capital, total assets and total
stockholders equity by $4.7 million, assuming that
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions.
8
Risk
factors
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks and uncertainties
described below together with all of the other information
included in this prospectus, including the financial statements
and related notes appearing at the end of this prospectus,
before deciding to invest in our common stock. If any of the
following risks actually occurs, our business, prospects,
financial condition and operating results could be materially
harmed. In that event, the market price of our common stock
could decline and you could lose part or all of your
investment.
Risks related to
our dependence on U.S. government contracts for
BioThrax
We have
derived substantially all of our revenue from sales of our
BioThrax anthrax vaccine, our only marketed product, under
contracts with the U.S. Department of Defense and the
U.S. Department of Health and Human Services. If we are
unable to obtain new contracts with and deliver BioThrax to
these customers, our business, financial condition and operating
results could be materially harmed.
We have derived and expect for the foreseeable future to
continue to derive substantially all of our revenue from sales
of BioThrax, our FDA approved anthrax vaccine and our only
marketed product. We currently supply BioThrax to the DoD for
immunization of military personnel and to HHS for placement into
the strategic national stockpile. In 2005 and the nine months
ended September 30, 2006, we derived substantially all of
our revenue from our BioThrax contracts with the DoD and HHS.
Our current contract with the DoD provides for the supply of
BioThrax to the DoD through September 2007. Although the DoD has
issued a notice that it intends to pursue a sole source fixed
price contract to purchase up to an additional 11 million
doses of BioThrax over one base contract year plus four option
years, the DoD has not issued a formal request for proposals for
such a contract. We may not be awarded a follow-on contract on
favorable terms or at all. For example, the DoDs minimum
purchase obligations under any follow-on contract could be less
than under our current contract with the DoD. We have delivered
all of the five million doses of BioThrax that HHS agreed to
purchase under a contract that we entered into with HHS in May
2005. In May 2006, we entered into a contract modification with
HHS for the delivery of an additional five million doses of
BioThrax to HHS by May 2007. Our ongoing contracts do not
necessarily increase the likelihood that we will secure future
comparable contracts with the U.S. government. The success
of our business and our operating results for the foreseeable
future are substantially dependent on the number of doses of
BioThrax that the U.S. government purchases from us.
Our business
may be harmed as a result of the government contracting process,
which is a competitive bidding process that involves risks not
present in the commercial contracting process.
We expect that a significant portion of the business that we
will seek in the near future will be under government contracts
or subcontracts awarded through competitive bidding. Competitive
bidding for government contracts presents a number of risks that
are not typically present in the commercial contracting process,
including:
|
|
|
the need to devote substantial time and attention of management
and key employees to the preparation of bids and proposals for
contracts that may not be awarded to us;
|
|
|
the need to accurately estimate the resources and cost structure
that will be required to perform any contract that we might be
awarded; and
|
|
|
the expenses that we might incur and the delays that we might
suffer if our competitors protest or challenge contract awards
made to us pursuant to competitive bidding, and the risk that
any such
|
9
|
|
|
protest or challenge could result in the resubmission of bids
based on modified specifications, or in termination, reduction
or modification of the awarded contract.
|
The U.S. government may choose to award future contracts
for the supply of anthrax vaccines and other biodefense product
candidates that we are developing to our competitors instead of
to us. If we are unable to win particular contracts, we may not
be able to operate in the market for products that are provided
under those contracts for a number of years. For example, in
November 2004, HHS awarded VaxGen, Inc., one of our competitors
in the anthrax vaccine market, a contract for the supply of
75 million doses of a recombinant protective antigen
anthrax vaccine for inclusion in the strategic national
stockpile. If VaxGen is able to deliver product under its
contract, HHS may eliminate or reduce future orders for other
anthrax vaccines, including BioThrax. If any other company is
successful in developing a next generation anthrax vaccine,
U.S. government customers may purchase only the next
generation vaccine and not BioThrax.
If we are unable to consistently win new contract awards over an
extended period, or if we fail to anticipate all of the costs
and resources that will be required to secure such contract
awards, our growth strategy and our business, financial
condition, and operating results could be materially adversely
affected.
Our
U.S. government contracts for BioThrax require annual
funding decisions by the government. The failure to fund one or
more of these contracts could cause our financial condition and
operating results to suffer materially.
Our principal customer for BioThrax, our only marketed product,
is the U.S. government. We sell to the U.S. government
under contracts with the DoD and HHS. In addition, we anticipate
that the U.S. government will be the principal customer for
any other biodefense products that we successfully develop.
Accordingly, we are subject to a range of risks arising out of
being a contractor to the U.S. government under
U.S. government programs.
Over its lifetime, a U.S. government program may be
implemented through the award of many different individual
contracts and subcontracts. The funding of government programs
is subject to Congressional appropriations. Congress generally
appropriates funds on a fiscal year basis even though a program
may continue for several years. For example, our DoD contracts
for BioThrax have been structured with one base year during
which the DoD agrees to purchase a minimum number of doses of
BioThrax with options for the DoD to purchase further quantities
in future years. We expect that any future contract that we
enter into with the DoD will be structured in a similar manner.
Government programs are often only partially funded initially,
and additional funds are committed only as Congress makes
further appropriations. The termination of a program or failure
to commit funds to a program would result in a loss of
anticipated future revenues attributable to that program, which
could materially harm our business. Our government customers are
subject to stringent budgetary constraints and political
considerations. If annual levels of government expenditures and
authorizations for biodefense decrease or shift to programs in
areas where we do not offer products or are not developing
product candidates, our business, revenues and operating results
may suffer.
The success of
our business with the U.S. government depends on our
compliance with additional regulations and obligations under our
U.S. government contracts.
Our business with the U.S. government is subject to
specific procurement regulations and a variety of other legal
compliance obligations. These obligations include those related
to:
|
|
|
procurement integrity;
|
|
|
export control;
|
10
|
|
|
government security regulations;
|
|
|
employment practices;
|
|
|
protection of the environment;
|
|
|
accuracy of records and the recording of costs; and
|
|
|
foreign corrupt practices.
|
In addition, before awarding us any future contracts, the
U.S. government could require that we respond
satisfactorily to a request to substantiate our commercial
viability and industrial capabilities. Compliance with these
obligations increases our performance and compliance costs.
Failure to comply with these regulations and requirements could
lead to suspension or debarment, for cause, from government
contracting or subcontracting for a period of time. The
termination of a government contract or relationship as a result
of our failure to satisfy any of these obligations would have a
negative impact on our operations and harm our reputation and
ability to procure other government contracts in the future.
The pricing
under our fixed price government contracts is based on estimates
of the time, resources and expenses required to deliver the
specified doses of BioThrax. If our estimates are not accurate,
we may not be able to earn an adequate return under these
contracts.
Our current contracts for the supply of BioThrax with the DoD
and HHS are fixed price contracts. In addition, we expect that
our future contracts with the U.S. government for
biodefense product candidates that we successfully develop may
be fixed price contracts. Under a fixed price contract, we are
required to deliver our products at a fixed price regardless of
the actual costs we incur and absorb any costs in excess of the
fixed price. Estimating costs that are related to performance in
accordance with contract specifications is difficult. Our
failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a fixed price
contract could reduce the profitability of a fixed price
contract or cause a loss.
Unfavorable
provisions in government contracts may harm our business,
financial condition and operating results.
Government contracts customarily contain provisions that give
the government substantial rights and remedies, many of which
are not typically found in commercial contracts, including
provisions that allow the government to:
|
|
|
terminate existing contracts, in whole or in part, for any
reason or no reason;
|
|
|
reduce or modify contracts or subcontracts;
|
|
|
cancel multi-year contracts and related orders if funds for
contract performance for any subsequent year become unavailable;
|
|
|
decline to exercise an option to renew a contract;
|
|
|
exercise an option to purchase only the minimum amount specified
in a contract;
|
|
|
decline to exercise an option to purchase the maximum amount
specified in a contract;
|
|
|
claim rights in products, including intellectual property,
developed under the contract;
|
|
|
suspend or debar the contractor from doing business with the
government or a specific government agency;
|
11
|
|
|
pursue criminal or civil remedies under the False Claims Act and
False Statements Act; and
|
|
|
control or prohibit the export of products.
|
Generally, government contracts, including our
U.S. government contracts for BioThrax, contain provisions
permitting unilateral termination or modification, in whole or
in part, at the governments convenience. Under general
principles of government contracting law, if the government
terminates a contract for convenience, the terminated company
may recover only its incurred or committed costs, settlement
expenses and profit on work completed prior to the termination.
If the government terminates a contract for default, the
defaulting company is entitled to recover costs incurred and
associated profits on accepted items only and may be liable for
excess costs incurred by the government in procuring undelivered
items from another source. One or more of our government
contracts could be terminated under these circumstances.
Some government contracts grant the government the right to use,
for or on behalf of the U.S. government, any technologies
developed by the contractor under the government contract. If we
were to develop technology under a contract with such a
provision, we might not be able to prohibit third parties,
including our competitors, from using that technology in
providing products and services to the government.
Ongoing legal
proceedings or any future similar lawsuits could limit future
purchases of BioThrax by the U.S. government.
The results of ongoing or future legal proceedings could reduce
demand for BioThrax by the U.S. government. Prior to the
issuance of an order in December 2005 by the FDA and an
appellate court ruling in February 2006, the DoD had been
enjoined by a court order from administering BioThrax on a
mandatory basis without informed consent of the recipient or a
Presidential waiver. Although we are not a party to this
lawsuit, if further proceedings or any similar lawsuits result
in another injunction or otherwise restrict the administration
of BioThrax by the DoD, the amount of future purchases of
BioThrax by the DoD could be limited. In October 2006, the DoD
announced that it is resuming a mandatory vaccination program
for BioThrax for designated military personnel and
emergency-essential and comparable civilian personnel. Lawsuits
brought against us by third parties, even if not successful,
require us to spend time and money defending the related
litigation. Furthermore, contractual indemnification provisions
and statutory liability protections may not fully protect us
from all related liabilities.
Risks related to
our financial position and need for additional
financing
We have a
limited operating history and may not maintain profitability in
future periods or on a consistent basis.
We have a limited operating history. We commenced operations in
1998, and the FDA approved the manufacture of BioThrax at our
renovated facilities in Lansing, Michigan in December 2001.
Although we were profitable for each of the last three fiscal
years, we have not been profitable for every quarter during that
time. In addition, we were not profitable for the nine months
ended September 30, 2006. We may not be able to achieve
consistent profitability on a quarterly basis or sustain or
increase profitability on an annual basis. Our profitability is
substantially dependent on revenues from BioThrax product sales.
Revenues from BioThrax product sales have fluctuated
significantly in recent quarters and may continue to fluctuate
significantly from quarter to quarter based on the timing of our
fulfilling orders from the U.S. government. If we are
unable to maintain profitability on a consistent basis, the
market price of our common stock may decline, and you could lose
part or all of your investment.
12
Our
indebtedness may limit cash flow available to invest in the
ongoing needs of our business.
As of September 30, 2006, we had $36.5 million
principal amount of debt outstanding and remaining borrowing
availability of $7.8 million under our revolving lines of
credit. Our business plan also contemplates that we will raise
$10 million to $20 million of additional external debt
financing to fund our facility expansion in Lansing, Michigan
and to provide additional financial flexibility. We also may
incur additional indebtedness beyond such amount.
Our leverage could have significant adverse consequences,
including:
|
|
|
requiring us to dedicate a substantial portion of any cash flow
from operations to the payment of interest on, and principal of,
our debt, which will reduce the amounts available to fund
working capital, capital expenditures, product development
efforts and other general corporate purposes;
|
|
|
increasing the amount of interest that we have to pay on debt
with variable interest rates if market rates of interest
increase;
|
|
|
increasing our vulnerability to general adverse economic and
industry conditions;
|
|
|
limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we
compete; and
|
|
|
placing us at a competitive disadvantage compared to our
competitors that have less debt.
|
We may not have sufficient funds or may be unable to arrange for
additional financing to pay the amounts due under our existing
debt. In addition, a failure to comply with the covenants under
our existing debt instruments could result in an event of
default under those instruments. In the event of an acceleration
of amounts due under our debt instruments as a result of an
event of default, we may not have sufficient funds or may be
unable to arrange for additional financing to repay our
indebtedness or to make any accelerated payments, and the
lenders could seek to enforce security interests in the
collateral securing such indebtedness. Because of the covenants
under our existing debt instruments and the pledge of our
existing assets as collateral, we have a limited ability to
obtain additional debt financing.
We expect to
require additional funding and may be unable to raise capital
when needed, which would harm our business, financial condition
and operating results.
We expect our development expenses to increase in connection
with our ongoing activities, particularly as we conduct
additional and later stage clinical trials for our product
candidates. In addition, we incur significant commercialization
expenses for BioThrax product sales, marketing and
manufacturing. We expect these commercialization expenses to
increase in the future as we seek to broaden the market for
BioThrax and if we receive marketing approval for additional
products. We also are committed to substantial capital
expenditures in connection with our facility expansion in
Lansing, Michigan. We expect the construction of the facility to
cost approximately $75 million, including approximately
$55 million for the building and associated capital
equipment, with the balance related to validation and
qualification activities required for regulatory approval and
initiation of manufacturing. We anticipate that we will incur up
to approximately $35 million for these purposes during
2006, of which we had incurred approximately $21 million
through September 2006. In addition, we expect to incur
substantial capital expenditures in connection with our planned
build out of two buildings in Frederick, Maryland as future
manufacturing facilities. We anticipate that we will incur up to
$1 million related to initial engineering design and
preliminary utility build out for these facilities during 2006,
of which we had incurred approximately $234,000 through
September 30, 2006. Because we are in the preliminary
planning stages of our Frederick build out, we cannot reasonably
estimate the timing and costs that will be necessary to complete
this project. If we proceed with this project, we expect the
costs to be substantial and to likely require external sources
of funds to finance the project.
13
We expect to continue to fund a significant portion of our
development and commercialization costs for our product
candidates with internally generated funds from sales of
BioThrax. If we do not obtain future contracts with, and deliver
BioThrax to, the DoD and HHS, we may be forced to find
additional sources of funding and to do so earlier than we
currently anticipate. Our business plan currently contemplates
that we will raise $10 million to $20 million of
additional external debt financing to fund our facility
expansion in Lansing and to provide additional financial
flexibility. We may not be able to obtain this financing or
otherwise be able to raise capital when needed or on attractive
terms, which would force us to delay, reduce the scope of or
eliminate our research and development programs or reduce our
planned commercialization efforts.
As of September 30, 2006, we had $19.9 million of cash
and cash equivalents. We believe that the net proceeds from this
offering, together with our existing cash and cash equivalents,
revenues from BioThrax product sales and other committed sources
of funds, will be sufficient to enable us to fund our
anticipated operating expenses and capital expenditure and debt
service requirements for at least the next 24 months. Our
future capital requirements will depend on many factors,
including:
|
|
|
the level and timing of BioThrax product sales and cost of
product sales;
|
|
|
the timing of, and the costs involved in, constructing our new
manufacturing facility in Lansing, Michigan and the build out of
our manufacturing facilities in Frederick, Maryland;
|
|
|
the scope, progress, results and costs of our preclinical and
clinical development activities;
|
|
|
the costs, timing and outcome of regulatory review of our
product candidates;
|
|
|
the number of, and development requirements for, other product
candidates that we may pursue;
|
|
|
the costs of commercialization activities, including product
marketing, sales and distribution;
|
|
|
the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other patent-related
costs, including litigation costs and the results of such
litigation;
|
|
|
the extent to which we acquire or invest in businesses, products
and technologies;
|
|
|
our ability to obtain development funding from government
entities and non-government and philanthropic organizations; and
|
|
|
our ability to establish and maintain collaborations, such as
our collaboration with Sanofi Pasteur.
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To the extent our capital resources are insufficient to meet our
future capital requirements, we will need to finance our cash
needs through public or private equity offerings, debt
financings or corporate collaboration and licensing
arrangements. In addition to purchase obligations and orders
under our contracts with the DoD and HHS for BioThrax sales, our
only committed external sources of funds are remaining borrowing
availability under our revolving lines of credit, development
funding under our collaboration agreement with Sanofi Pasteur,
funding from NIAID for animal efficacy studies of our anthrax
immune globulin candidate and funding from the Wellcome Trust
for our Phase II clinical trial of our typhoid vaccine
candidate in Vietnam. Our ability to borrow additional amounts
under our loan agreements is subject to our satisfaction of
specified conditions. Additional equity or debt financing,
grants, or corporate collaboration and licensing arrangements,
may not be available on acceptable terms, if at all.
If we raise additional funds by issuing equity securities, our
stockholders may experience dilution. Debt financing, if
available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures
or declaring
14
dividends. Any debt financing or additional equity that we raise
may contain terms, such as liquidation and other preferences,
that are not favorable to us or our stockholders. If we raise
additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to
relinquish valuable rights to our technologies or product
candidates or grant licenses on terms that may not be favorable
to us.
Risks related to
manufacturing and manufacturing facilities
We have
initiated a manufacturing facility expansion program. Delays in
completing and receiving regulatory approvals for these
manufacturing facility projects could limit our potential
revenues and growth.
We are spending significant amounts for the construction of a
new 50,000 square foot manufacturing facility on our
Lansing, Michigan campus, which is being designed to enable us
to manufacture BioThrax on a large scale for our existing and
potential future customers. We are also constructing this new
facility to accommodate large scale commercial manufacturing of
multiple vaccine products, subject to complying with appropriate
change-over procedures. We expect the construction of the
facility to cost approximately $75 million, including
approximately $55 million for the building and associated
capital equipment, with the balance related to validation and
qualification activities required for regulatory approval and
initiation of manufacturing. We anticipate that we will incur up
to approximately $35 million for these purposes during
2006, of which we had incurred approximately $21 million
through September 30, 2006. In addition, we own two
buildings in Frederick, Maryland that we plan to build out as
future manufacturing facilities. We anticipate that we will
incur up to $1 million related to initial engineering
design and preliminary utility build out for these facilities
during 2006, of which we had incurred approximately $234,000
through September 30, 2006. Because we are in the
preliminary planning stages of our Frederick build out, we
cannot reasonably estimate the timing and costs that will be
necessary to complete this project. If we proceed with this
project, we expect the costs to be substantial and to likely
require external sources of funds to finance the project.
Constructing and preparing a facility for commercial vaccine
manufacturing is a significant project. For example,
constructing the new Lansing facility with increased
manufacturing capacity requires that we scale up both
fermentation and downstream processing compared to levels at our
existing production facility. These projects may result in
unanticipated delays and cost more than expected due to a number
of factors, including regulatory requirements. The FDA must
approve our new manufacturing facilities before they can be used
to commercially manufacture our products. For example, we are
required to show that the product we manufacture in our new
Lansing facility is comparable to BioThrax manufactured at our
existing facility. The costs and time required to comply with
the FDAs current Good Manufacturing Practice, or cGMP,
regulations, or similar regulatory requirements for sales of our
products outside the United States, may be significant. If
construction or regulatory approval of our new facility in
Lansing is delayed, we may not be able to manufacture sufficient
quantities of BioThrax to allow us to increase sales of BioThrax
to the U.S. government and other customers, which would
limit our opportunities for growth. If construction or
regulatory approval of our new manufacturing facilities at our
Frederick site is delayed, we may not be able to independently
manufacture our commercial product candidates for clinical
trials or commercial sale. Cost overruns associated with
constructing either our Lansing or Frederick facilities could
require us to raise additional funds from external sources. We
may not be able to do so on favorable terms or at all.
15
BioThrax and
our immunobiotic product candidates are difficult to manufacture
on a large scale commercial basis, which could cause us to delay
product launches or experience shortages of
products.
BioThrax and all our product candidates are biologics.
Manufacturing biologic products, especially in large quantities,
is complex. The products must be made consistently and in
substantial compliance with a clearly defined manufacturing
process. Accordingly, it is essential to be able to validate and
control the manufacturing process to assure that it is
reproducible. Slight deviations anywhere in the manufacturing
process, including filling, labeling and packaging and quality
control and testing, may result in lot failures or product
recalls. From time to time, we experience deviations during the
manufacturing process of BioThrax that can affect our release of
the production lot according to our release protocols and other
acceptance criteria. Lot failures or product recalls could cause
us to fail to satisfy customer orders or contractual
commitments, lead to a termination of one or more of our
contracts or result in litigation or regulatory action against
us, any of which could be costly to us and otherwise harm our
business.
For example, in late 2005, our standard product release testing
identified BioThrax production lots for which follow up testing
was required to determine whether we can submit these lots to
the FDA for release for sale. We waited to conduct final release
testing of these lots pending FDA review of an application that
we submitted to amend the BioThrax release specifications. The
FDA approved our amendment to the release specifications in May
2006, and we subsequently reinitiated release testing of these
BioThrax lots. All of these BioThrax lots have since been
released for sale by the FDA. We will not be able to sell any
lots that in the future fail to satisfy release testing
specifications or that are not released for sale by the FDA.
Disruption at,
damage to or destruction of our manufacturing facilities could
impede our ability to manufacture BioThrax, which would harm our
business, financial condition and operating
results.
We currently rely on our manufacturing facilities at a single
location in Lansing, Michigan for the production of BioThrax.
Any interruption in manufacturing operations at this location
could result in our inability to satisfy the product demands of
our customers. A number of factors could cause interruptions,
including:
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equipment malfunctions or failures;
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technology malfunctions;
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work stoppages;
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damage to or destruction of the facility due to natural
disasters;
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regional power shortages;
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product tampering; or
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terrorist activities.
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Any disruption that impedes our ability to manufacture and ship
BioThrax in a timely manner could reduce our revenues and
materially harm our business, financial condition and operating
results.
16
Our business
may be harmed if we do not adequately forecast customer
demand.
The timing and amount of customer demand is difficult to
predict. We may not be able to scale up our production quickly
enough to fill any new customer orders on a timely basis. This
could cause us to lose new business and possibly existing
business. For example, under our BioThrax supply contract with
the DoD, the DoD is obligated to acquire a minimum number of
doses of BioThrax and has the right to acquire up to a maximum
number of doses. If the DoD elects to purchase the maximum
number of doses of BioThrax under the contract, we may not have
sufficient available production capacity at our existing
manufacturing facility in Lansing to allow us to increase sales
of BioThrax to customers other than the U.S. government. In
addition, we may not be able to scale up manufacturing processes
for our product candidates to allow production of commercial
quantities at a reasonable cost or at all. Furthermore, if we
overestimate customer demand, we could incur significant
unrecoverable costs from creating excess capacity. For example,
if we do not maintain and increase sales of BioThrax to the
U.S. government and other customers, we may not be able to
generate an adequate return on the significant amounts that we
are spending for construction of our new manufacturing facility
in Lansing. In addition, if we do not successfully develop and
commercialize any of our product candidates, we may never
require the production capacity that we expect to have available
at our Frederick site.
If third
parties do not manufacture our product candidates in sufficient
quantities and at an acceptable cost or in compliance with
regulatory requirements and specifications, the development and
commercialization of our product candidates could be delayed,
prevented or impaired.
We currently rely on third parties to manufacture the supplies
of our immunobiotic product candidates that we require for
preclinical and clinical development. Any significant delay in
obtaining adequate supplies of our product candidates could
adversely affect our ability to develop or commercialize these
product candidates. Although we recently commissioned a new
pilot plant manufacturing facility on our Lansing campus and
plan to construct a pilot plant in Maryland for production of
preclinical and clinical supplies of our product candidates, we
expect that we will continue to use third parties for these
purposes. In addition, we expect that we will rely on third
parties for a portion of the manufacturing process for
commercial supplies of product candidates that we successfully
develop, including fermentation for some of our vaccine product
candidates, plasma fractionation and purification for our immune
globulin product candidates and contract fill and finish
operations. Our current and anticipated future dependence upon
others for the manufacture of our product candidates may
adversely affect our ability to develop product candidates and
commercialize any products that receive regulatory approval on a
timely and competitive basis.
Our only long-term manufacturing agreements are our agreement
with Talecris Biotherapeutics, Inc., for fractionation and
purification of plasma for our anthrax immune globulin
candidate, and our collaboration with HPA, under which HPA
provides specialized manufacturing capabilities for our
recombinant bivalent botulinum vaccine candidate and the
bivalent botulinum toxoid vaccine that we plan to use as the
basis for our botulinum immune globulin candidate. Third party
manufacturers under our short-term supply agreements are not
obligated to accept any purchase orders we may submit. If any
third party terminates its agreement with us, based on its own
business priorities, or otherwise fails to fulfill our purchase
orders, we would need to rely on alternative sources to satisfy
our requirements. If these alternative suppliers are not
available or are delayed in fulfilling our requirements, we may
not be able to obtain adequate supplies of our product
candidates on a timely basis. A change of manufacturers may
require review from the FDA and satisfaction of comparable
foreign requirements. This review may be costly and time
consuming. There are a limited number of manufacturers that
operate under the FDAs cGMP requirements and that are both
capable of manufacturing for us and willing to do so.
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We currently rely on third parties for regulatory compliance and
quality assurance with respect to the supplies of our product
candidates that they produce for us. We also will rely for these
purposes on any third party that we use for production of
commercial supplies of product candidates that we successfully
develop. Manufacturers are subject to ongoing, periodic,
unannounced inspection by the FDA and corresponding state and
foreign agencies or their designees to ensure strict compliance
with cGMP regulations and other governmental regulations and
corresponding foreign standards. We cannot be certain that our
present or future manufacturers will be able to comply with cGMP
regulations and other FDA regulatory requirements or similar
regulatory requirements outside the United States. We do not
control compliance by manufacturers with these regulations and
standards. If we or these third parties fail to comply with
applicable regulations, sanctions could be imposed on us, which
could significantly and adversely affect supplies of our product
candidates. The sanctions that might be imposed include:
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fines, injunctions and civil penalties;
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refusal by regulatory authorities to grant marketing approval of
our product candidates;
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delays, suspension or withdrawal of regulatory approvals,
including license revocation;
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seizures or recalls of product candidates or products;
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operating restrictions; and
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criminal prosecutions.
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If as a result of regulatory requirements or otherwise we or
third parties are unable to manufacture our product candidates
at an acceptable cost, our product candidates may not be
commercially viable.
Our use of
hazardous materials, chemicals, bacteria and viruses requires us
to comply with regulatory requirements and exposes us to
significant potential liabilities.
Our development and manufacturing processes involve the use of
hazardous materials, including chemicals, bacteria, viruses and
radioactive materials, and produce waste products. Accordingly,
we are subject to federal, state, local and foreign laws and
regulations governing the use, manufacture, distribution,
storage, handling, disposal and recordkeeping of these
materials. In addition to complying with environmental and
occupational health and safety laws, we must comply with special
regulations relating to biosafety administered by the CDC, HHS
and the DoD.
The Public Health Security and Bioterrorism Preparedness and
Response Act and the Agricultural Protection Act require us to
register with the CDC and the Department of Agriculture our
possession, use or transfer of select biological agents or
toxins that could pose a threat to public health and safety, to
animal or plant health or to animal or plant products. This
legislation requires increased safeguards and security measures
for these select agents and toxins, including controlled access
and the screening of entities and personnel, and establishes a
comprehensive national database of registered entities.
We also are subject to export control regulations governing the
export of BioThrax and technology and materials used to develop
and manufacture BioThrax and our product candidates. If we fail
to comply with environmental, occupational health and safety,
biosafety and export control laws, we could be held liable for
fines, penalties and damages that result, and any such liability
could exceed our assets and resources. In addition, we could be
required to cease immediately all use of a select agent or
toxin, and we could be prohibited from exporting our products,
technology and materials.
Our general liability and umbrella insurance policies provide
for coverage up to annual aggregate limits of $12 million
with a deductible of $15,000 per occurrence, but exclude
coverage for liabilities relating to
18
the release of pollutants. We do not currently hold insurance
policies expressly providing for coverage relating to our use of
hazardous materials other than storage tank liability insurance
for our Lansing, Michigan facility with a $1 million annual
aggregate limit and a deductible of $10,000 per claim. The
insurance that we currently hold may not be adequate to cover
all liabilities relating to accidental contamination or injury
as a result of pollution conditions or other extraordinary or
unanticipated events.
If the company
on whom we rely for filling BioThrax vials is unable to perform
these services for us, our business may suffer.
We have outsourced the operation for filling BioThrax into vials
to a single company, Hollister-Stier Laboratories LLC. Our
contract with Hollister-Stier expires on December 31, 2007.
We have not established internal redundancy for our filling
functions and currently have no substitute provider that can
handle our filling needs. If Hollister-Stier is unable to
perform filling services for us or we are unable to enter into a
new contract with Hollister-Stier, we would need to identify and
engage an alternative filling company. Any new contract filling
company will need to obtain FDA approval for filling BioThrax at
its facilities. Identifying and engaging a new contract filling
company and obtaining FDA approval could involve significant
cost and delay. As a result, we might not be able to deliver
BioThrax orders on a timely basis and our revenues could
decrease.
Risks related to
product development
Our business
depends significantly on our success in completing development
and commercializing product candidates that are still under
development. If we are unable to commercialize these product
candidates, or experience significant delays in doing so, our
business will be materially harmed.
We have invested a significant portion of our efforts and
financial resources in the development of our immunobiotic
product candidates. In addition to BioThrax product sales, our
ability to generate near term revenue is particularly dependent
on the success of our anthrax immune globulin candidate, which
is currently in preclinical development. The commercial success
of our product candidates will depend on many factors, including:
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successful completion of preclinical development;
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successful completion of clinical trials;
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receipt of marketing approvals from the FDA and similar foreign
regulatory authorities;
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a determination by the Secretary of HHS that our biodefense
product candidates should be purchased for the strategic
national stockpile prior to FDA approval;
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establishing commercial manufacturing processes or arrangements;
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launching commercial sales of the product, whether alone or in
collaboration with others; and
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acceptance of the product by potential government customers,
physicians, patients, healthcare payors and others in the
medical community.
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We expect to rely on FDA regulations known as the animal rule to
obtain approval for our biodefense product candidates. The
animal rule permits the use of animal efficacy studies together
with human clinical safety and immunogenicity trials to support
an application for marketing approval. These regulations are
relatively new, and we have limited experience in the
application of these rules to the
19
product candidates that we are developing. It is possible that
results from these animal efficacy studies may not be predictive
of the actual efficacy of our immunobiotic product candidates in
humans. In addition, our development plans for our botulinum
immune globulin candidate require the development of a new
botulinum toxoid vaccine that we would use to vaccinate
individuals who would then donate plasma for use in our
botulinum immune globulin candidate. If the development of this
new botulinum toxoid vaccine is delayed or not completed, for
regulatory or other reasons, we may not be able to successfully
develop our botulinum immune globulin candidate.
If we are not successful in completing the development and
commercialization of our immunobiotic product candidates, or if
we are significantly delayed in doing so, our business will be
materially harmed.
We will not be
able to commercialize our product candidates if our preclinical
development efforts are not successful, our clinical trials do
not demonstrate safety or our clinical trials or animal studies
do not demonstrate efficacy.
Before obtaining regulatory approval for the sale of our product
candidates, we must conduct extensive preclinical development,
clinical trials to demonstrate the safety of our product
candidates and clinical or animal trials to demonstrate the
efficacy of our product candidates. Preclinical and clinical
testing is expensive, difficult to design and implement, can
take many years to complete and is uncertain as to outcome.
Success in preclinical testing and early clinical trials does
not ensure that later clinical trials or animal efficacy studies
will be successful, and interim results of a clinical trial or
animal efficacy study do not necessarily predict final results.
A failure of one or more of our clinical trials or animal
efficacy studies can occur at any stage of testing. We may
experience numerous unforeseen events during, or as a result of,
preclinical testing and the clinical trial or animal efficacy
study process that could delay or prevent our ability to receive
regulatory approval or commercialize our product candidates,
including:
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regulators or institutional review boards may not authorize us
to commence a clinical trial or conduct a clinical trial at a
prospective trial site;
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we may decide, or regulators may require us, to conduct
additional preclinical testing or clinical trials, or we may
abandon projects that we expect to be promising, if our
preclinical tests, clinical trials or animal efficacy studies
produce negative or inconclusive results;
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we might have to suspend or terminate our clinical trials if the
participants are being exposed to unacceptable health risks;
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regulators or institutional review boards may require that we
hold, suspend or terminate clinical development for various
reasons, including noncompliance with regulatory requirements;
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the cost of our clinical trials may be greater than we currently
anticipate;
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any regulatory approval we ultimately obtain may be limited or
subject to restrictions or post-approval commitments that render
the product not commercially viable; and
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the effects of our product candidates may not be the desired
effects or may include undesirable side effects or the product
candidates may have other unexpected characteristics.
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If we are required to conduct additional clinical trials or
other testing of our product candidates beyond those that we
currently contemplate, if we are unable to successfully complete
our clinical trials or other testing or if the results of these
trials or tests are not positive, we may:
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be delayed in obtaining marketing approval for our product
candidates;
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not be able to obtain marketing approval; or
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obtain approval for indications that are not as broad as
intended.
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For example, the FDA could require us to conduct additional
clinical development in our botulinum immune globulin program
that we currently do not plan to conduct. We expect to rely on
safety and immunogenicity data from a pentavalent botulinum
toxoid vaccine previously manufactured by the State of Michigan
in the development of a new bivalent botulinum toxoid vaccine
that we plan to use as the basis for our botulinum immune
globulin candidate. We plan to conduct a Phase I clinical
trial to evaluate the safety of the botulinum toxoid vaccine. If
the results are favorable, we expect that the Phase I
clinical trial will provide data sufficient to support an
acceptable dose for the vaccine and the optimal dosing schedule.
As a result, we anticipate that the FDA will not require us to
conduct a Phase II clinical trial for the botulinum toxoid
vaccine before permitting us to initiate a donor stimulation
program for our botulinum immune globulin candidate. However,
the FDA has not approved our plan to proceed directly to a donor
stimulation program without conducting a Phase II clinical
trial for the botulinum toxoid vaccine and may not do so. If the
FDA requires us to conduct a Phase II clinical trial for
the botulinum toxoid vaccine, the development plans for our
botulinum immune globulin candidate will be delayed.
In addition, our development plan for BioThrax as a
post-exposure prophylaxis for anthrax infection contemplates
that we will conduct a nonhuman primate efficacy study in late
2007. However, the timing of our nonhuman primate efficacy study
depends upon the successful development of a nonhuman primate
model by NIAID. If NIAID does not successfully develop a
nonhuman primate model, our development plans for BioThrax as a
post-exposure prophylaxis for anthrax infection will be delayed,
possibly significantly.
Our product development costs will also increase if we
experience delays in testing or approvals. Significant clinical
trial delays also could allow our competitors to bring products
to market before we do and impair our ability to commercialize
our products or product candidates.
Under Project BioShield, the Secretary of HHS can contract to
purchase countermeasures for the strategic national stockpile
prior to FDA approval of the countermeasure in specified
circumstances. Project BioShield also allows the Secretary of
HHS to authorize the emergency use of medical products that have
not yet been approved by the FDA. However, our product
candidates may not be selected by the Secretary under this
authority. Moreover, this authority could result in increased
competition for our products and product candidates, as has
occurred in the case of the HHS procurement contract for
VaxGens anthrax vaccine candidate and as discussed below
under Risks related to
commercialization We face substantial competition,
which may result in others developing or commercializing
products before or more successfully than we do.
Risks related to
commercialization
If we fail to
achieve significant sales of BioThrax to customers in addition
to the U.S. government, our opportunities for growth could
be harmed.
An element of our business strategy is to establish a market for
sales of BioThrax to customers in addition to the
U.S. government. These potential customers include the
U.S. Postal Service, foreign governments, state and local
governments, which we expect will be interested in BioThrax to
protect first responders, such as police, fire and emergency
medical personnel, multinational companies, non-governmental
organizations and hospitals. The market for sales of BioThrax to
customers other than the U.S. government is new and
undeveloped, and we may not be successful in generating
meaningful sales of BioThrax to these potential customers. To
date, we have made only minimal sales to these customers.
21
In particular, we have supplied small amounts of BioThrax
directly to several foreign governments. In 2005, our sales of
BioThrax to customers other than the U.S. government
represented only one percent of our revenue. If we fail to
significantly increase our sales of BioThrax to these customers,
our business and opportunities for growth could be materially
harmed.
Government regulations and the terms of our U.S. government
contracts may make it difficult for us to achieve significant
sales of BioThrax to customers other than the
U.S. government. For example, we are subject to export
control laws imposed by the U.S. government. Although there
are currently only limited restrictions on the export of
BioThrax, the U.S. government may decide, particularly in
the current environment of elevated concerns about global
terrorism, to increase the scope of export prohibitions. These
controls could limit our sales of BioThrax to foreign
governments and other foreign customers.
In addition, the DoD has contractual and statutory rights that
could interfere with sales of BioThrax to customers other than
the U.S. government. For example, our efforts to develop
domestic commercial and international sales may be impeded by
the DoDs right under the Defense Production Act to require
us to deliver more doses than are otherwise specified in our
contract with the DoD. If the DoD required delivery of these
additional doses, it could affect our production schedule and
deplete BioThrax supplies that would otherwise be available for
commercial sales. In addition, the DoD could either sell
BioThrax directly to foreign governments at a lower price than
we may offer or donate BioThrax to foreign governments under the
DoDs Foreign Military Sales program.
Our ability to meet any increased demand that develops for sales
of BioThrax to customers other than the U.S. government
depends on our available production capacity. We use
substantially all of our current production capacity at our
facility in Lansing, Michigan to manufacture BioThrax for sale
to U.S. government customers. We expect to complete
construction of our new manufacturing facility in Lansing in mid
2007. We anticipate that we will initiate large scale
manufacturing of BioThrax for commercial sale at the new
facility in 2008. We anticipate that we will be able to
demonstrate in nonclinical studies that BioThrax manufactured at
our new facility is comparable to BioThrax manufactured at our
existing facility. As a result, we expect that the FDA will not
require us to complete a human bridging trial demonstrating that
BioThrax manufactured at our new facility is bioequivalent to
BioThrax manufactured at our existing facility. However, the FDA
has not approved our plan to rely on nonclinical studies without
conducting a human bridging trial and may not do so. If the FDA
requires us to conduct a human bridging trial, the initiation of
large scale manufacturing of BioThrax for commercial sale at our
new facility will be delayed and we will incur additional
unanticipated costs. Until the new manufacturing facility is
available for commercial use, we will not have sufficient
available production capacity to allow us to significantly
increase sales of BioThrax to customers other than the
U.S. government.
The commercial
success of BioThrax and any products that we may develop will
depend upon the degree of market acceptance by the government,
physicians, patients, healthcare payors and others in the
medical community.
Any products that we bring to the market may not gain or
maintain market acceptance by potential government customers,
physicians, patients, healthcare payors and others in the
medical community. In particular, our biodefense immunobiotic
products and product candidates are subject to the product
criteria that may be specified by potential U.S. government
customers. The product specifications in any government
procurement request may prohibit or preclude us from
participating in the government program if our products or
product candidates do not satisfy the stated criteria. For
example, in 2004, HHS issued a request for proposals for the
supply of anthrax vaccine for the strategic national stockpile.
The HHS request was limited to a recombinant anthrax vaccine.
Recombinant technology comprises
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scientific techniques that allow for the manipulation of genetic
material. Scientists apply these techniques to disease-causing
organisms known as pathogens. Using recombinant technology, it
is possible to delete a virulent gene from a pathogen or isolate
the gene directing the production of the component of a pathogen
known as an antigen and move the antigen into a harmless
organism from which it can be purified and used as a vaccine.
Because BioThrax is not a recombinant vaccine, BioThrax was
precluded from consideration under that procurement program.
A significant portion of future government anthrax vaccine
procurement requests may specify a recombinant anthrax vaccine,
which would limit, possibly significantly, the market for
BioThrax. In June 2006, NIAID issued a request for proposals for
the advanced development and testing of next generation anthrax
vaccine candidates with specified properties, including shelf
life of three years or longer at room temperature, the ability
to generate protective immune response in one or two doses, the
ability to be self administered or rapidly inoculated into large
numbers of people and a superior safety profile to BioThrax.
Although we are evaluating several potential product candidates
in connection with development of a next generation anthrax
vaccine with these properties, one of which has completed a
Phase I clinical trial, and have submitted three separate
proposals in response to the NIAID request for proposals, we may
not be successful in our development efforts or receive any
funding from NIAID.
In addition, notwithstanding favorable findings regarding the
safety and efficacy of BioThrax by the FDA in its final ruling
in December 2005, the U.S. Government Accountability Office
reiterated concerns regarding BioThrax in Congressional
testimony in May 2006 that it had previously identified
beginning in 1999. These concerns include the need for a six
dose regimen and annual booster doses, questions about the
long-term and short-term safety of the vaccine, including how
safety is affected by gender differences, and uncertainty about
the vaccines efficacy.
The use of vaccines carries a risk of adverse health effects
that must be weighed against the expected health benefit of the
product. The adverse reactions that have been associated with
the administration of BioThrax are similar to those observed
following the administration of other adult vaccines and include
local reactions, such as redness, swelling and limitation of
motion in the inoculated arm, and systemic reactions, such as
headache, fever, chills, nausea and general body aches. In
addition, some serious adverse events have been reported to the
vaccine adverse event reporting system database maintained by
the CDC and the FDA with respect to BioThrax. The report of any
such adverse event to the vaccine adverse event reporting system
database is not proof that the vaccine caused such event. These
serious adverse events, including diabetes, heart attacks,
autoimmune diseases, including Guillian Barre syndrome, lupus
and multiple sclerosis, lymphoma and death, have not been
causally linked to the administration of BioThrax.
If any products that we develop do not achieve an adequate level
of acceptance, we may not generate material revenues with
respect to these products. The degree of market acceptance of
our product candidates, if approved for commercial sale, will
depend on a number of factors, including:
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the prevalence and severity of any side effects;
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the efficacy and potential advantages over alternative
treatments;
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the ability to offer our product candidates for sale at
competitive prices;
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relative convenience and ease of administration;
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the willingness of the target patient population to try new
products and of physicians to prescribe these products;
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the strength of marketing and distribution support; and
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sufficient third party coverage or reimbursement.
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Political or
social factors, including related litigation, may delay or
impair our ability to market BioThrax and our biodefense product
candidates and may require us to spend time and money to address
these issues.
Products developed to treat diseases caused by or to combat the
threat of bioterrorism will be subject to changing political and
social environments. The political and social responses to
bioterrorism have been highly charged and unpredictable.
Political or social pressures or changes in the perception of
the risk that military personnel or civilians could be exposed
to biological agents as weapons of bioterrorism may delay or
cause resistance to bringing our products to market or limit
pricing or purchases of our products, which would harm our
business. In addition, substantial delays or cancellations of
purchases could result from protests or challenges from third
parties. Furthermore, lawsuits brought against us by third
parties or activists, even if not successful, require us to
spend time and money defending the related litigation. The need
to address political and social issues may divert our
managements time and attention from other business
concerns.
For example, between 2001 and 2004, members of the military and
various activist groups filed a citizens petition with the
FDA and various lawsuits seeking the revocation of the license
for BioThrax and the termination of the DoD program for the
mandatory administration of BioThrax to military personnel. In
October 2004, a federal court ruled that the FDA, as part of its
review of all biological products approved prior to 1972, had
not properly issued a final order determining that BioThrax is
safe and effective and not misbranded. As a result, the court
issued an injunction prohibiting the DoD from administering
BioThrax to military personnel on a mandatory basis without
informed consent of the recipient or a Presidential waiver.
Although the FDA issued a final order in December 2005
determining that BioThrax is safe and effective and not
misbranded and, as a result, an appellate court ruled in
February 2006 that the injunction was dissolved, these actions
created negative publicity about BioThrax. Similar or other such
lawsuits or publicity campaigns could limit demand for BioThrax
and our biodefense product candidates and harm our future
business. In October 2006, the DoD announced that it is resuming
a mandatory vaccination program for BioThrax for designated
military personnel and emergency-essential and comparable
civilian personnel.
We have a
small marketing and sales group. If we are unable to expand our
sales and marketing capabilities or enter into sales and
marketing agreements with third parties, we may be unable to
generate product sales revenue from sales to customers other
than the U.S. government.
To achieve commercial success for any approved product, we must
either develop a sales and marketing organization or outsource
these functions to third parties. We currently market and sell
BioThrax directly to the DoD and HHS through a small, targeted
marketing and sales group. We plan to continue to do so and
expect that we will use a similar approach for sales to the
U.S. government of any other biodefense product candidates
that we successfully develop. However, to increase our sales of
BioThrax to state and local governments and foreign governments
and create an infrastructure for future sales of other
biodefense products to these customers, we plan to expand our
sales and marketing organization. In addition, we expect to
establish a separate internal organization to market and sell
commercial products for which we retain commercialization or
co-commercialization rights.
We may not be able to attract, hire, train and retain qualified
sales and marketing personnel to build a significant or
effective marketing and sales force for sales of biodefense
product candidates to customers
24
other than the U.S. government or for sales of our
commercial product candidates. If we are not successful in our
efforts to expand our internal sales and marketing capability,
our ability to independently market and sell BioThrax and any
other product candidates that we successfully develop will be
impaired. Expanding our internal sales and marketing capability
will be expensive and time consuming and could delay any product
launch. If the commercial launch of a product candidate for
which we recruit a sales force and establish marketing
capabilities is delayed as a result of FDA requirements or other
reasons, we would incur related expenses too early relative to
the product launch. This may be costly, and our investment would
be lost if we cannot retain our sales and marketing personnel.
We face
substantial competition, which may result in others developing
or commercializing products before or more successfully than we
do.
The development and commercialization of new immunobiotics is
highly competitive. We face competition with respect to
BioThrax, our current product candidates and any products we may
seek to develop or commercialize in the future from major
pharmaceutical companies and biotechnology companies worldwide.
Potential competitors also include academic institutions,
government agencies, and other public and private research
institutions that conduct research, seek patent protection and
establish collaborative arrangements for research, development,
manufacturing and commercialization. Our competitors may develop
products that are safer, more effective, have fewer side
effects, are more convenient or are less costly than any
products that we may develop. Our competitors may also obtain
FDA or other regulatory approval for their products more rapidly
than we may obtain approval for ours. We believe that our most
significant competitors in the area of immunobiotics are a
number of pharmaceutical companies that have vaccine programs,
including GlaxoSmithKline, Sanofi-Aventis, Wyeth, Merck and
Novartis, as well as smaller more focused companies engaged in
immunobiotic development, such as VaxGen, Cangene, Human Genome
Sciences, Acambis, Avant Immunotherapeutics and Avecia Group.
Any immunobiotic product candidate that we successfully develop
and commercialize is likely to compete with currently marketed
products, such as vaccines and therapeutics, including
antibiotics, and with other product candidates that are in
development for the same indications. In many cases, the
currently marketed products have well known brand names, are
distributed by large pharmaceutical companies with substantial
resources and have achieved widespread acceptance among
physicians and patients. In addition, we are aware of product
candidates of third parties that are in development, which, if
approved, would compete against product candidates for which we
receive marketing approval.
Although BioThrax is the only anthrax vaccine approved by the
FDA for the prevention of anthrax infection, we face significant
competition for the supply of this vaccine to the
U.S. government. We believe our most significant competitor
for the supply of BioThrax to the U.S. government is VaxGen. HHS
has awarded VaxGen a contract to supply 75 million doses of
recombinant protective antigen vaccine for the strategic
national stockpile.
We also face significant competition for our biodefense
immunobiotic product candidates. We face significant competition
for NIAID funding for development and testing of a next
generation anthrax vaccine from other companies who responded to
the NIAID request for proposals issued in June 2006. If we
continue to pursue the development of a next generation anthrax
vaccine, we also expect that we will face significant
competition for the supply of our product candidate to the
U.S. government. HHS has awarded strategic national
stockpile supply contracts to Cangene for an anthrax immune
globulin and Human Genome Sciences for a monoclonal antibody to
Bacillus anthracis
as a post-exposure therapeutic for
anthrax infection. Several companies have botulinum vaccines in
early clinical or preclinical development. HHS has awarded
Cangene a contract to develop a heptavalent botulinum immune
25
globulin derived from equine plasma and supply a botulinum
immune globulin for the strategic national stockpile.
One oral typhoid vaccine and one injectable typhoid vaccine are
currently approved and administered in the United States and
Europe. Numerous companies have vaccine candidates in
development that would compete with any of our commercial
immunobiotic product candidates for which we obtain marketing
approval.
Many of our competitors have significantly greater financial
resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products
than we do. Smaller or early stage companies may also prove to
be significant competitors, particularly through collaborative
arrangements with large and established companies. These
competitors also compete with us in recruiting and retaining
qualified scientific and management personnel, as well as in
acquiring products, product candidates and technologies
complementary to, or necessary for, our programs or advantageous
to our business.
Legislation
and contractual provisions limiting or restricting liability of
manufacturers, such as us, may not be adequate to protect us
from all liabilities associated with the manufacture, sale and
use of our products.
Provisions of our BioThrax contracts with the DoD and HHS and
federal legislation enacted to protect manufacturers of
biodefense and anti-terrorism countermeasures may limit our
potential liability related to the manufacture, sale and use of
BioThrax and our biodefense product candidates. However, these
contractual provisions and legislation may not fully protect us
from all related liabilities.
The Public Readiness and Emergency Preparedness Act, which was
signed into law in December 2005, creates general immunity for
manufacturers of biodefense countermeasures, including security
countermeasures, when the Secretary of HHS issues a declaration
for their manufacture, administration or use. The declaration is
meant to provide general immunity from all claims under state or
federal law for loss arising out of the administration or use of
a covered countermeasure. Manufacturers are not entitled to this
protection in cases of willful misconduct.
Upon a declaration by the Secretary, a compensation fund is
created to provide timely, uniform, and adequate
compensation to eligible individuals for covered injuries
directly caused by the administration or use of a covered
countermeasure. The covered injuries to which
the program applies are defined as serious physical injuries or
death. Individuals are permitted to bring a willful misconduct
action against a manufacturer only after they have exhausted
their remedies under the compensation program. However, a
willful misconduct action could be brought against us if any
individuals exhausted their remedies under the compensation
program and thereby expose us to liability. Although we may
petition the Secretary to make such a declaration with respect
to anthrax generally and BioThrax specifically, we do not know
if any such petition would be successful or that, if successful,
the Act will provide adequate coverage or survive anticipated
legal challenges to its validity.
In August 2006, the Department of Homeland Security approved our
application under the Safety Act enacted by the
U.S. Congress in 2002 for liability protection for sales of
BioThrax. The Safety Act creates product liability limitations
for qualifying anti-terrorism technologies for claims arising
from or related to an act of terrorism. In addition, the Safety
Act provides a process by which an anti-terrorism technology may
be certified as an approved product by the
Department of Homeland Security and therefore entitled to a
rebuttable presumption that the government contractor defense
applies to sales of the product. The government contractor
defense, under specified circumstances, extends the sovereign
immunity of the United States to government contractors who
manufacture a product for the
26
government. Specifically, for the government contractor defense
to apply, the government must approve reasonably precise
specifications, the product must conform to those specifications
and the supplier must warn the government about known dangers
arising from the use of the product. Although we are entitled to
the benefits of the Safety Act, it may not provide adequate
protection from any claims made against us.
In addition, although our existing contracts with the DoD and
HHS provide that the government will indemnify us for any
damages resulting from product liability claims, we cannot be
certain that we will be able to continue to negotiate similar
rights in future contracts or that the U.S. government will
honor this obligation. For example, although we have notified
the DoD of the lawsuits filed against us by current and former
members of the U.S. military claiming damages as the result
of personal injuries allegedly suffered from vaccination with
BioThrax, the DoD has not yet acted on our claim for
indemnification pending resolution of our claims under our
product liability insurance.
In addition, members of Congress have proposed and may in the
future propose legislation that reduces or eliminates these and
other liability protections for manufacturers of biodefense
countermeasures.
Product
liability lawsuits could cause us to incur substantial
liabilities and require us to limit commercialization of any
products that we may develop.
We face an inherent risk of product liability exposure related
to the sale of BioThrax and any other products that we
successfully develop and the testing of our product candidates
in clinical trials. We currently are a defendant in three
federal lawsuits filed on behalf of three individuals vaccinated
with BioThrax by the U.S. Army that claim damages resulting
from personal injuries allegedly suffered because of the
vaccination. The plaintiff in each of these three lawsuits
claims different injuries and seeks varying amounts of damages.
The first plaintiff alleges that the vaccine caused erosive
rheumatoid arthritis and requests damages in excess of
$1 million. The second plaintiff alleges that the vaccine
caused Bells palsy and other related conditions and
requests damages in excess of $75,000. The third plaintiff
alleges that the vaccine caused a condition that originally was
diagnosed as encephalitis related to a gastrointestinal
infection and caused him to fall into a coma for many weeks and
requests damages in excess of $10 million.
If we cannot successfully defend ourselves against claims that
our product or product candidates caused injuries and we are not
entitled to indemnity by the U.S. government, we will incur
substantial liabilities. Regardless of merit or eventual
outcome, liability claims may result in:
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decreased demand for any product candidates or products that we
may develop;
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injury to our reputation;
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withdrawal of clinical trial participants;
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withdrawal of a product from the market;
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costs to defend the related litigation;
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substantial monetary awards to trial participants or patients;
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loss of revenue; and
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the inability to commercialize any products that we may develop.
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We have product liability insurance for coverage up to a
$10 million annual aggregate limit with a deductible of
$75,000 per claim. The amount of insurance that we
currently hold may not be adequate
27
to cover all liabilities that may occur. Insurance coverage is
increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost and we may not be able to obtain
insurance coverage that will be adequate to satisfy any
liability that may arise. For example, from 2002 through
February 2006, we were unable to obtain product liability
insurance for sales of BioThrax on commercially reasonable
terms. We do not believe that the amount of insurance we have
been able to obtain for BioThrax is sufficient to manage the
risk associated with the potential deployment of BioThrax as a
countermeasure to bioterrorism threats. We rely on contractual
indemnification provisions and statutory protections to limit
our liability for BioThrax.
If we are
unable to obtain adequate reimbursement from governments or
third party payors for any products that we may develop or to
obtain acceptable prices for those products, our revenues will
suffer.
Our revenues and profits from any products that we successfully
develop, other than with respect to sales of our biodefense
products under government contracts, will depend heavily upon
the availability of adequate reimbursement for the use of such
products from governmental and other third party payors, both in
the United States and in other markets. Reimbursement by a third
party payor may depend upon a number of factors, including the
third party payors determination that use of a product is:
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a covered benefit under its health plan;
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safe, effective and medically necessary;
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appropriate for the specific patient;
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cost-effective; and
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neither experimental nor investigational.
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Obtaining a determination that a product is covered is a
time-consuming and costly process that could require us to
provide supporting scientific, clinical and cost-effectiveness
data for the use of our products to each payor. We may not be
able to provide data sufficient to gain coverage. Even when a
payor determines that a product is covered, the payor may impose
limitations that preclude payment for some uses that are
approved by the FDA or comparable authorities but are determined
by the payor to not be medically reasonable and necessary.
Moreover, eligibility for coverage does not imply that any
product will be covered in all cases or that reimbursement will
be available at a rate that permits the health care provider to
cover its costs of using the product. We expect that the success
of some of our commercial vaccine candidates for which we obtain
marketing approval will depend on inclusion of those product
candidates in government immunization programs.
Most non-pediatric commercial vaccines are purchased and paid
for, or reimbursed by, managed care organizations, other private
health plans or public insurers or paid for directly by
patients. In the United States, pediatric vaccines are funded by
a variety of federal entitlements and grants, as well as state
appropriations. Foreign governments also commonly fund pediatric
vaccination programs through national health programs. In
addition, with respect to some diseases affecting the public
health generally, particularly in developing countries, public
health authorities or nongovernmental, charitable or
philanthropic organizations fund the cost of vaccines.
Federal legislation, enacted in December 2003, has altered the
way in which physician-administered drugs and biologics covered
by Medicare are reimbursed. Under the new reimbursement
methodology, physicians are reimbursed based on a products
average sales price. This new reimbursement
methodology has generally led to lower reimbursement levels. The
new federal legislation also has added
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an outpatient prescription drug benefit to Medicare, which went
into effect January 2006. These benefits will be provided
primarily through private entities, which we expect will attempt
to negotiate price concessions from pharmaceutical manufacturers.
Any products we may develop may also be eligible for
reimbursement under Medicaid. If the state-specific Medicaid
programs do not provide adequate coverage and reimbursement for
any products we may develop, it may have a negative impact on
our operations.
The scope of coverage and payment policies varies among third
party private payors, including indemnity insurers, employer
group health insurance programs and managed care plans. These
third party carriers may base their coverage and reimbursement
on the coverage and reimbursement rate paid by carriers for
Medicare beneficiaries. Furthermore, many such payors are
investigating or implementing methods for reducing health care
costs, such as the establishment of capitated or prospective
payment systems. Cost containment pressures have led to an
increased emphasis on the use of cost-effective products by
health care providers. If third party payors do not provide
adequate coverage or reimbursement for any products we may
develop, it could have a negative effect on revenues and results
of operations.
Foreign
governments tend to impose strict price controls, which may
adversely affect our revenues.
In some foreign countries, particularly the countries of the
European Union, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take considerable
time after the receipt of marketing approval for a product. To
obtain reimbursement or pricing approval in some countries, we
may be required to conduct a clinical trial that compares the
cost-effectiveness of our product candidate to other available
therapies. If reimbursement of our products is unavailable or
limited in scope or amount, or if pricing is set at
unsatisfactory levels, our business could be adversely affected.
Legislation has been introduced into Congress that, if enacted,
would permit more widespread
re-importation
of drugs from foreign countries into the United States, which
may include
re-importation
from foreign countries where the drugs are sold at lower prices
than in the United States. Such legislation, or similar
regulatory changes, could decrease the price we receive for any
approved products which, in turn, could adversely affect our
operating results and our overall financial condition.
If we fail to
attract and keep senior management and key scientific personnel,
we may be unable to successfully sustain or expand our BioThrax
operations or develop or commercialize our product
candidates.
Our success depends on our continued ability to attract, retain
and motivate highly qualified managerial and key scientific
personnel. We consider Fuad El-Hibri, our president, chief
executive officer and chairman of our board of directors, Steven
N. Chatfield, our chief scientific officer and president of
Emergent Product Development UK Limited, Edward J. Arcuri, our
executive vice president and chief operating officer, and Robert
G. Kramer, president and chief executive officer of Emergent
BioDefense Operations, to be key to our BioThrax operations and
our efforts to develop and commercialize our product candidates.
All of these key employees, other than Dr. Chatfield, are
at will employees and can terminate their employment at any
time. Our employment agreement with Dr. Chatfield is
terminable by him on short notice. We do not maintain key
person insurance on any of our employees.
In addition, our growth will require us to hire a significant
number of qualified scientific and commercial personnel,
including clinical development, regulatory, marketing and sales
executives and field sales personnel, as well as additional
administrative personnel. There is intense competition from
other
29
companies and research and academic institutions for qualified
personnel in the areas of our activities. If we cannot continue
to attract and retain, on acceptable terms, the qualified
personnel necessary for the continued development of our
business, we may not be able to sustain our operations or grow.
Additional risks
related to sales of biodefense products to the
U.S. government
Our business
could be adversely affected by a negative audit by the
U.S. government.
U.S. government agencies such as the Defense Contract Audit
Agency, or the DCAA, routinely audit and investigate government
contractors. These agencies review a contractors
performance under its contracts, cost structure and compliance
with applicable laws, regulations and standards. The DCAA also
reviews the adequacy of, and a contractors compliance
with, its internal control systems and policies, including the
contractors purchasing, property, estimating, compensation
and management information systems. Any costs found to be
improperly allocated to a specific contract will not be
reimbursed, while such costs already reimbursed must be
refunded. If an audit uncovers improper or illegal activities,
we may be subject to civil and criminal penalties and
administrative sanctions, including:
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termination of contracts;
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forfeiture of profits;
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suspension of payments;
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fines; and
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suspension or prohibition from doing business with the
U.S. government.
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In addition, we could suffer serious reputational harm if
allegations of impropriety were made against us.
Laws and
regulations affecting government contracts make it more costly
and difficult for us to successfully conduct our
business.
We must comply with numerous laws and regulations relating to
the formation, administration and performance of government
contracts, which can make it more difficult for us to retain our
rights under these contracts. These laws and regulations affect
how we do business with federal, state and local government
agencies. Among the most significant government contracting
regulations that affect our business are:
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the Federal Acquisition Regulations, and agency-specific
regulations supplemental to the Federal Acquisition Regulations,
which comprehensively regulate the procurement, formation,
administration and performance of government contracts;
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the business ethics and public integrity obligations, which
govern conflicts of interest and the hiring of former government
employees, restrict the granting of gratuities and funding of
lobbying activities and incorporate other requirements such as
the Anti-Kickback Act and Foreign Corrupt Practices Act;
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export and import control laws and regulations; and
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laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the exportation of certain products and technical
data.
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In addition,
qui tam
lawsuits have been brought against
us in which the plaintiffs argued that we defrauded the
U.S. government by distributing non-compliant doses of
BioThrax. This litigation was brought against us under a
provision of the False Claims Act that allows a private citizen
to file a suit in
30
the name of the U.S. government charging fraud by
government contractors and other entities who receive or use
government funds and share in any money recovered. Although a
federal district court dismissed the litigation, and a federal
appeals court subsequently upheld that decision, we spent
significant time and money defending the litigation.
The states, many municipalities and foreign governments
typically also have laws and regulations governing contracts
with their respective agencies. These domestic and foreign laws
and regulations affect how we and our customers can do business
and, in some instances, impose added costs on our business. Any
changes in applicable laws and regulations could restrict our
ability to maintain our existing contracts and obtain new
contracts, which could limit our ability to conduct our business
and materially adversely affect our revenues and results of
operations.
We rely on
property and equipment owned by the DoD in the manufacturing
process for BioThrax.
Our BioThrax supply contract with the DoD grants us the right to
use property and equipment owned by the DoD in the manufacture
of BioThrax. This property and equipment, referred to as
government furnished equipment, is in service at our Lansing
site. Some of this government furnished equipment is important
to our business. We pay the DoD a small usage fee for the
government furnished equipment based on the number of doses of
BioThrax that we produce for sale to customers other than the
U.S. government. We have the option to purchase all or part
of the government furnished equipment at any time during the
contract period for approximately $21 million. If the DoD
modifies the terms under which we use the government furnished
equipment in a manner unfavorable to us, including raising the
usage fee, our business could be harmed. If DoD terminated our
contract, we could be required to rent or purchase all or a part
of the government furnished equipment to continue production of
BioThrax in our current facility.
Risks related to
regulatory approvals
If we are not
able to obtain required regulatory approvals, we will not be
able to commercialize our product candidates, and our ability to
generate revenue will be materially impaired.
Our product candidates and the activities associated with their
development and commercialization, including their testing,
manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertising, promotion, sale and distribution, are
subject to comprehensive regulation by the FDA and other
regulatory agencies in the United States and by comparable
authorities in other countries. Failure to obtain regulatory
approval for a product candidate will prevent us from
commercializing the product candidate. We have only limited
experience in preparing, filing and prosecuting the applications
necessary to gain regulatory approvals and expect to rely on
third party contract research organizations and consultants to
assist us in this process. Securing FDA approval requires the
submission of extensive preclinical and clinical data,
information about product manufacturing processes and inspection
of facilities and supporting information to the FDA to establish
the product candidates safety and efficacy. Our future
products may not be effective, may be only moderately effective
or may prove to have significant side effects, toxicities or
other characteristics that may preclude our obtaining regulatory
approval or prevent or limit commercial use.
In the United States, BioThrax, our biodefense product
candidates and our commercial product candidates are regulated
by the FDA as biologics. To obtain approval from the FDA to
market these product candidates, other than biodefense products
purchased by HHS for the strategic national stockpile, we will
be required to submit to the FDA a biologics license
application, or BLA. Ordinarily, the FDA requires a sponsor to
support a BLA application with substantial evidence of the
products safety and effectiveness in treating the targeted
indication based on data derived from adequate and well
controlled
31
clinical trials, including Phase III safety and efficacy
trials conducted in patients with the disease or condition being
targeted.
Because humans are rarely exposed to anthrax or botulinum toxins
under natural conditions, and cannot be intentionally exposed,
statistically significant effectiveness of our biodefense
product candidates cannot be demonstrated in humans, but instead
must be demonstrated, in part, by utilizing animal models before
they can be approved for marketing. We believe that, according
to the FDAs current BLA requirements for biologics that
cannot be ethically or feasibly tested in humans in
Phase III efficacy trials, we may instead be able to obtain
BLA approval based on clinical data from Phase II and
Phase III trials in healthy subjects that demonstrate
adequate safety and immune response and effectiveness data from
studies in animals. Specifically, we intend to pursue FDA
approval of BioThrax as a post-exposure prophylaxis, our immune
globulin candidates, our recombinant bivalent botulinum vaccine
candidate and a next generation anthrax vaccine under the FDA
animal rule. Under the animal rule, if human efficacy trials are
not ethical or feasible, the FDA can approve drugs or biologics
used to treat or prevent serious or life threatening conditions
caused by exposure to lethal or permanently disabling toxic
chemical, biological, radiological or nuclear substances based
on human clinical data demonstrating safety and immunogenicity
and evidence of efficacy from appropriate non-clinical animal
studies and any additional supporting data. Products approved
under the animal rule are subject to additional regulation not
normally required of other products. Additional regulation may
include post-marketing study requirements, restrictions imposed
on marketing or distribution or requirements to provide
information to patients.
We have applied to the FDA to reduce the number of required
doses of BioThrax for pre-exposure prophylaxis from six to five,
with an annual booster dose thereafter. Our application is based
on an interim analysis of data from an ongoing clinical trial
being conducted by the CDC to evaluate whether as few as three
doses of BioThrax, administered over six months, will confer
adequate immune response over as long as 42 months. In
April 2006, the FDA issued a complete response letter to our
application, requesting clarification and requiring additional
analysis of the data that we submitted. We are in the process of
responding to this letter and amending our application. If the
FDA does not find our response to be adequate, we might be
required to conduct additional independent testing to continue
to pursue the development of this dosing regimen. Responding to
the FDAs complete response letter will delay potential
approval of our application. If we are unable ultimately to
respond satisfactorily to the FDA, our application will not be
approved. We currently are awaiting the final data from the CDC
trial, which we expect at the end of 2007.
The process of obtaining regulatory approvals is expensive,
often takes many years, if approval is obtained at all, and can
vary substantially based upon the type, complexity and novelty
of the product candidates involved. Changes in the regulatory
approval policy during the development period, changes in or the
enactment of additional statutes or regulations, or changes in
regulatory review for each submitted product application, may
cause delays in the approval or rejection of an application. The
FDA has substantial discretion in the approval process and may
refuse to accept any application or may decide that our data are
insufficient for approval and require additional preclinical,
clinical or other studies. In addition, varying interpretations
of the data obtained from preclinical and clinical testing could
delay, limit or prevent regulatory approval of a product
candidate.
Our products
could be subject to restrictions or withdrawal from the market
and we may be subject to penalties if we fail to comply with
regulatory requirements or experience unanticipated problems
with our products.
Any immunobiotic product for which we obtain marketing approval,
along with the manufacturing processes, post-approval clinical
data, labeling, advertising and promotional activities for such
product, will be subject to
32
continual requirements of and review by the FDA and other
regulatory bodies, including through inspections of our
facilities. As an approved product, BioThrax is subject to these
requirements and ongoing review. These requirements include
submissions of safety and other post-marketing information and
reports, registration requirements, cGMP requirements relating
to quality control, quality assurance and corresponding
maintenance of records and documents, and recordkeeping. The FDA
enforces its cGMP and other requirements through periodic
unannounced inspections of manufacturing facilities. The FDA is
authorized to inspect manufacturing facilities without a warrant
at reasonable times and in a reasonable manner.
After we acquired BioThrax and related vaccine manufacturing
facilities in Lansing, Michigan in 1998 from the Michigan
Biologic Products Institute, we spent significant amounts of
time and money renovating those facilities before the FDA
approved a supplement to our manufacturing facility license in
December 2001. The State of Michigan had initiated renovations
after the FDA issued a notice of intent to revoke the FDA
license to manufacture BioThrax in 1997. The notice of intent to
revoke cited significant deviations by the Michigan Biologic
Products Institute from cGMP requirements, including quality
control failures. After approving the renovated Lansing
facilities in December 2001, the FDA conducted routine, biannual
inspections of the Lansing facilities in September 2002, May
2004 and May 2006. Following each of these inspections, the FDA
issued inspectional observations on Form FDA 483. We
responded to the FDA regarding the inspectional observations
relating to each inspection and, where necessary, implemented
corrective action. In December 2005, the FDA stated in its final
order on BioThrax that at that time we were in compliance with
all regulatory requirements related to the manufacture of
BioThrax and that the FDA would continue to evaluate the
production of BioThrax to assure compliance with federal
standards and regulations. Although we have filed a letter with
the FDA confirming that we have closed out all inspectional
observations relating to the May 2006 inspection, the FDA may
not find our corrective actions to be adequate. If the FDA finds
that we are not in substantial compliance with cGMP
requirements, the FDA may undertake enforcement action against
us.
Even if regulatory approval of a product is granted, the
approval may be subject to limitations on the indicated uses for
which the product may be marketed or to the conditions of
approval, or contain requirements for costly post-marketing
testing and surveillance to monitor the safety or efficacy of
the product. Later discovery of previously unknown problems with
our products or manufacturing processes, or failure to comply
with regulatory requirements, may result in:
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restrictions on the marketing or manufacturing of a product;
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warning letters;
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withdrawal of the product from the market;
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refusal to approve pending applications or supplements to
approved applications;
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voluntary or mandatory product recall;
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fines or disgorgement of profits or revenue;
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suspension or withdrawal of regulatory approvals, including
license revocation;
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refusal to permit the import or export of products;
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product seizure; and
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injunctions or the imposition of civil or criminal penalties.
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We may not be
able to obtain orphan drug exclusivity for our products. If our
competitors are able to obtain orphan drug exclusivity for their
products that are the same as our products, we may not be able
to have competing products approved by the applicable regulatory
authority for a significant period of time.
Regulatory authorities in some jurisdictions, including the
United States and Europe, may designate drugs and biologics for
relatively small patient populations as orphan drugs. Generally,
if a product with an orphan drug designation subsequently
receives the first marketing approval for the indication for
which it has such designation, the product is entitled to a
seven-year period of marketing exclusivity, which precludes the
FDA from approving another marketing application for the same
drug or biologic for that time period for the same indication.
Orphan drug exclusivity in Europe lasts for ten years, but can
be reduced to six years if a drug or biologic no longer meets
the criteria for orphan drug designation or if the drug or
biologic is sufficiently profitable so that market exclusivity
is no longer justified. If a competitor obtains orphan drug
exclusivity for an indication for a product that competes with
one of the indications for one of our product candidates before
we obtain orphan drug designation, and if the competitors
product is the same drug as ours, the FDA would be prohibited
from approving our product candidate for the same orphan
indication unless we demonstrate that our product is clinically
superior. None of our products or product candidates have been
designated as orphan drugs. Even if we obtain orphan drug
exclusivity for one or more indications for one of our product
candidates, we may not be able to maintain it. For example, if a
competitive product that is the same drug or biologic as our
product is shown to be clinically superior to our product, any
orphan drug exclusivity we have obtained will not block the
approval of that competitive product.
Failure to
obtain regulatory approval in international jurisdictions would
prevent us from marketing our products abroad.
We intend to have our products marketed outside the United
States. To market our products in the European Union and many
other foreign jurisdictions, we may need to obtain separate
regulatory approvals and comply with numerous and varying
regulatory requirements. With respect to some of our product
candidates, we expect that a future collaborator will have
responsibility to obtain regulatory approvals outside the United
States, and we will depend on our collaborators to obtain these
approvals. The approval procedure varies among countries and can
involve additional testing. The time required to obtain approval
may differ from that required to obtain FDA approval. The
foreign regulatory approval process may include all of the risks
associated with obtaining FDA approval. We may not obtain
foreign regulatory approvals on a timely basis, if at all.
Approval by the FDA does not ensure approval by regulatory
authorities in other countries or jurisdictions, and approval by
one foreign regulatory authority does not ensure approval by
regulatory authorities in other foreign countries or
jurisdictions or by the FDA. We and our collaborators may not be
able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.
Risks related to
our dependence on third parties
We may not be
successful in maintaining and establishing collaborations, which
could adversely affect our ability to develop and, particularly
in international markets, commercialize our product
candidates.
For each of our product candidates, we plan to evaluate the
merits of retaining commercialization rights for ourselves or
entering into collaboration arrangements with leading
pharmaceutical or biotechnology companies or non-governmental
organizations, such as our collaboration agreement with Sanofi
Pasteur for our meningitis B vaccine candidate. We expect that
we will selectively pursue collaboration
34
arrangements in situations in which the collaborator has
particular expertise or resources for the development or
commercialization of our products and product candidates or to
access particular markets. If we are unable to reach agreements
with suitable collaborators, we may fail to meet our business
objectives for the affected product or program. We face, and
will continue to face, significant competition in seeking
appropriate collaborators. Moreover, collaboration arrangements
are complex and time consuming to negotiate, document and
implement. We may not be successful in our efforts to establish
and implement collaborations or other alternative arrangements.
The terms of any collaborations or other arrangements that we
establish may not be favorable to us.
Any collaboration that we enter into may not be successful. The
success of our collaboration arrangements will depend heavily on
the efforts and activities of our collaborators. It is likely
that our collaborators will have significant discretion in
determining the efforts and resources that they will apply to
these collaborations. In particular, the successful development
of our meningitis B vaccine candidate will initially depend on
the success of our research collaboration with Sanofi Pasteur
and whether Sanofi Pasteur selects one or more viable candidates
pursuant to the collaboration for development of a product.
Thereafter, Sanofi Pasteur will have significant discretion in
the development and commercialization of any such candidate.
Sanofi Pasteur may choose not to pursue further development and
commercialization of any candidate that it selects based on many
factors outside our control. Sanofi Pasteur has the ability to
suspend development of a candidate under the collaboration in
various circumstances. The risks that we are subject to in our
current collaborations, and anticipate being subject to in
future collaborations, include the following:
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our collaboration agreements are likely to be for fixed terms
and subject to termination by our collaborators in the event of
a material breach by us;
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our collaborators may have the first right to maintain or defend
our intellectual property rights and, although we may have the
right to assume the maintenance and defense of our intellectual
property rights if our collaborators do not do so, our ability
to maintain and defend our intellectual property rights may be
compromised by our collaborators acts or
omissions; and
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our collaborators may utilize our intellectual property rights
in such a way as to invite litigation that could jeopardize or
invalidate our intellectual property rights or expose us to
potential liability.
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Collaborations with pharmaceutical companies and other third
parties often are terminated or allowed to expire by the other
party. For example, Sanofi Pasteur has the right to terminate
our meningitis B vaccine collaboration at any time after
April 1, 2007 upon six months prior written notice.
Sanofi Pasteur can also terminate the collaboration upon a
change of control or insolvency event involving us or upon our
uncured material breach. Those terminations or expirations would
adversely affect us financially and could harm our business
reputation.
If third
parties on whom we rely for clinical trials do not perform as
contractually required or as we expect, we may not be able to
obtain regulatory approval for or commercialize our product
candidates, and our business may suffer.
We do not have the ability to independently conduct the clinical
trials required to obtain regulatory approval for our products.
We depend on independent clinical investigators, contract
research organizations and other third party service providers
to conduct the clinical trials of our product candidates and
expect to continue to do so.
We rely heavily on these third parties for successful execution
of our clinical trials, but do not exercise
day-to-day
control over their activities. We are responsible for ensuring
that each of our clinical trials is
35
conducted in accordance with the general investigational plan
and protocols for the trial. Moreover, the FDA requires us to
comply with standards, commonly referred to as Good Clinical
Practices, for conducting and recording and reporting the
results of clinical trials to assure that data and reported
results are credible and accurate and that the rights, integrity
and confidentiality of trial participants are protected. Our
reliance on third parties that we do not control does not
relieve us of these responsibilities and requirements. Third
parties may not complete activities on schedule, or may not
conduct our clinical trials in accordance with regulatory
requirements or our stated protocols. The failure of these third
parties to carry out their obligations could delay or prevent
the development, approval and commercialization of our product
candidates.
In addition, we encourage government entities and non-government
organizations to conduct studies of, and pursue other
development efforts for, our product candidates. For example,
the CDC is currently conducting an independent clinical trial to
evaluate the administration of BioThrax in a regimen of fewer
doses. We participate in monthly meetings with the trial
investigators and in the annual review meeting for this trial
and provide input to the CDC for responses to FDA questions and
requests for additional information. We expect to rely on data
from these development efforts in seeking marketing approval for
our product candidates. For example, our BLA supplement for a
label expansion of BioThrax for a regimen of fewer doses is
based on the interim trial report provided to us by the CDC from
its ongoing clinical trial. We currently are awaiting the final
data from the CDC trial, which we expect at the end of 2007.
These government entities and non-government organizations have
no obligation or commitment to us to conduct or complete any of
these studies or clinical trials and may choose to discontinue
these development efforts at any time. In addition, government
entities depend on annual Congressional appropriations to fund
these development efforts. In prior years, there has been some
uncertainty whether Congress would choose to fund the CDC trial.
Although the trial has been funded to date, Congress may not
continue to fund the trial.
If we are unable to in license the necessary components of
a next generation anthrax vaccine, we will not be successful in
developing or commercializing such a product candidate.
If we continue to pursue the development of a next generation
anthrax vaccine, including a product candidate relating to any
of the proposals we submitted in September 2006 in response to a
NIAID request for proposals, we expect that we will need to in
license various components of the product candidate, including
adjuvants and novel delivery technologies. There are a limited
number of companies from whom we can license these components.
We may be unable to obtain licenses to the necessary components
of a next generation anthrax vaccine on acceptable terms, or at
all. If we are unable to obtain these licenses, we could be
prevented from continuing further development of a product
candidate that we select for development. Ultimately, even if
our development efforts are successful, we could be prevented
from commercializing a next generation anthrax vaccine if we are
unable to enter into licenses on acceptable terms.
Risks related to
our intellectual property
We may fail to
protect our intellectual property rights, which would harm our
business.
Our success, particularly with respect to our commercial
business, will depend in large part on our ability to obtain and
maintain protection in the United States and other countries for
the intellectual property covering or incorporated into our
technology and products. The patent situation in the field of
immunobiotics and other pharmaceuticals generally is highly
uncertain and involves complex legal and scientific questions.
We may not be able to obtain additional issued patents relating
to our technology or products. Even if issued, patents may be
challenged, narrowed, invalidated or circumvented, which could
limit our ability to stop competitors from marketing similar
products or limit the length of term of patent
36
protection we may have for our products. Changes in patent laws
or administrative patent office rules or changes in
interpretations of patent laws in the United States and other
countries may diminish the value of our intellectual property or
narrow the scope of our patent protection.
Our patents also may not afford us protection against
competitors with similar technology. Because patent applications
in the United States and many foreign jurisdictions are
typically not published until 18 months after filing, or in
some cases not at all, and because publications of discoveries
in the scientific literature often lag behind actual
discoveries, neither we nor our licensors can be certain that we
or they were the first to make the inventions claimed in issued
patents or pending patent applications, or that we or they were
the first to file for protection of the inventions set forth in
these patent applications. In addition, patents generally
expire, regardless of their date of issue, 20 years from
the earliest claimed non-provisional filing date. As a result,
the time required to obtain regulatory approval for a product
candidate may consume part or all of the patent term. We are not
able to accurately predict the remaining length of the
applicable patent term following regulatory approval of any of
our product candidates.
Our collaborators and licensors may not adequately protect our
intellectual property rights. These third parties may have the
first right to maintain or defend our intellectual property
rights and, although we may have the right to assume the
maintenance and defense of our intellectual property rights if
these third parties do not do so, our ability to maintain and
defend our intellectual property rights may be compromised by
the acts or omissions of these third parties. Under our
collaboration agreement with Sanofi Pasteur for our meningitis B
vaccine candidate, we have the right to prosecute and maintain
our patent rights under the collaboration agreement. Sanofi
Pasteur is responsible for prosecuting and maintaining joint
patent rights under the collaboration agreement, although we
have the right to support the continued prosecution or
maintenance of the joint patent rights if Sanofi Pasteur fails
to do so. In addition, Sanofi Pasteur has the first right to
pursue claims against third parties for infringement of the
patent rights under the collaboration agreement and assume the
defense of any infringement claims that may arise, although we
have the right to pursue infringement claims against third
parties and assume the defense of infringement claims if Sanofi
Pasteur fails to do so. Under our licenses with HPA relating to
our recombinant bivalent botulinum vaccine candidate and the
botulinum toxoid vaccine that we plan to use as the basis for
our botulinum immune globulin candidate, HPA is responsible for
prosecuting and maintaining patent rights, although we have the
right to support the continued prosecution or maintenance of the
patent rights if HPA fails to do so. In addition, we have the
first right to pursue claims against third parties for
infringement of the patent rights and assume the defense of any
infringement claims that may arise.
If we fail to
comply with our obligations in our intellectual property
licenses with third parties, we could lose license rights that
are important to our business.
We are a party to a number of license agreements. We consider
our licenses with HPA relating to our recombinant bivalent
botulinum vaccine candidate and the botulinum toxoid vaccine
that we plan to use as the basis for our botulinum immune
globulin candidate to be material to our business. Under these
license agreements, we obtained the exclusive, worldwide right
to develop, manufacture and commercialize pharmaceutical
products that consist of botulinum toxoid components or
recombinant botulinum toxin components for the prevention or
treatment of illness in humans caused by exposure to the
botulinum toxin, subject to HPAs non-exclusive right to
make, use or sell recombinant botulinum products to meet public
health requirements in the United Kingdom. We expect to enter
into additional licenses in the future. Our existing licenses
impose, and we expect future licenses will impose, various
diligence, milestone payment, royalty, insurance and other
obligations on us. If we fail to comply with these obligations,
the licensor may have the right to terminate the license, in
which event we might not be able to market any product that is
covered by the licensed patents.
37
If we are
unable to protect the confidentiality of our proprietary
information and know-how, the value of our technology and
products could be adversely affected.
In addition to patented technology, we rely upon unpatented
proprietary technology, processes and know-how, particularly as
to our proprietary manufacturing processes. Because we do not
have patent protection for BioThrax, the label expansions and
improvements that we are pursuing for BioThrax or our anthrax
immune globulin candidate, our only intellectual property
protection for BioThrax and our anthrax immune globulin
candidate is confidentiality regarding our manufacturing
capability and specialty know-how, such as techniques, processes
and biological starting materials. However, these types of trade
secrets can be difficult to protect. We seek to protect this
confidential information, in part, with agreements with our
employees, consultants and third parties. These agreements may
be breached, and we may not have adequate remedies for any such
breach. In addition, our trade secrets may otherwise become
known or be independently developed by competitors. If we are
unable to protect the confidentiality of our proprietary
information and know-how, competitors may be able to use this
information to develop products that compete with our products,
which could adversely impact our business.
If we infringe
or are alleged to infringe intellectual property rights of third
parties, it will adversely affect our business.
Our development and commercialization activities, as well as any
product candidates or products resulting from these activities,
may infringe or be claimed to infringe patents and other
intellectual property rights of third parties under which we do
not hold licenses or other rights. Third parties may own or
control these patents and intellectual property rights in the
United States and abroad. These third parties could bring claims
against us or our collaborators that would cause us to incur
substantial expenses and, if successful against us, could cause
us to pay substantial damages. Further, if a patent infringement
or other similar suit were brought against us or our
collaborators, we or they could be forced to stop or delay
development, manufacturing or sales of the product or product
candidate that is the subject of the suit.
As a result of patent infringement or other similar claims, or
to avoid potential claims, we or our collaborators may choose or
be required to seek a license from the third party and be
required to pay license fees or royalties or both. These
licenses may not be available on acceptable terms, or at all.
Even if we or our collaborators were able to obtain a license,
the rights may be non-exclusive, which could result in our
competitors gaining access to the same intellectual property.
Ultimately, we could be prevented from commercializing a
product, or be forced to cease some aspect of our business
operations, if, as a result of actual or threatened patent
infringement claims, we or our collaborators are unable to enter
into licenses on acceptable terms. This could harm our business
significantly.
There has been substantial litigation and other proceedings
regarding patent and other intellectual property rights in the
biotechnology and pharmaceutical industries. For example, we are
aware of and are monitoring ongoing litigation between Bavarian
Nordic and Acambis relating to the manufacture of the modified
vaccinia Ankara virus, or MVA, as a smallpox vaccine for
biodefense use by the U.S. government. We have licensed
from the Bavarian State Ministry of the Environment, Public
Health and Consumer Protection rights to materials and
technology related to MVA. Our
MVAtor
tm
platform technology, which is based on these licensed rights,
could potentially be used as a viral vector for delivery of
multiple vaccine antigens for different disease-causing
organisms, including influenza, using recombinant technology. As
a result, our licensed rights and our ability to use our MVAtor
platform technology could be negatively affected by the outcome
of this ongoing litigation. It also is possible that we could be
named as a defendant in future similar litigation relating to
MVA. In addition to infringement claims against us, we may
become a party to other patent litigation and other proceedings,
including interference and reexamination proceedings declared by
the United States Patent and Trademark Office
38
and opposition proceedings in the European Patent Office,
regarding intellectual property rights with respect to our
products and technology. For example, we have filed an
opposition in the European Patent Office against Bavarian
Nordics patent covering certain aspects of the MVA
technology. We may also become a party to trademark invalidation
and interference proceedings in foreign trademark offices. The
cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our
competitors may be able to sustain the costs of such litigation
or proceedings more effectively than we can because of their
substantially greater financial resources. Uncertainties
resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse
effect on our ability to compete in the marketplace. Patent
litigation and other proceedings may also absorb significant
management time.
Risks related to
our acquisition strategy
Our strategy
of generating growth through acquisitions may not be
successful.
We have pursued an acquisition strategy since our inception to
build our business of developing, manufacturing and
commercializing immunobiotics. We commenced operations in
September 1998 through an acquisition of rights to BioThrax,
vaccine manufacturing facilities at a multi-building campus on
approximately 12.5 acres in Lansing, Michigan and vaccine
development and production know-how from the Michigan Biologic
Products Institute. We acquired our pipeline of commercial
vaccine candidates through our acquisition of Microscience in
2005 and our acquisition of substantially all of the assets of
Antex in 2003.
In the future, we may be unable to license or acquire suitable
products or product candidates from third parties for a number
of reasons. In particular, the licensing and acquisition of
pharmaceutical and biological products is a competitive area. A
number of more established companies are also pursuing
strategies to license or acquire products in the immunobiotics
field. These established companies may have a competitive
advantage over us due to their size, cash resources and greater
clinical development and commercialization capabilities. Other
factors that may prevent us from licensing or otherwise
acquiring suitable products and product candidates include the
following:
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we may be unable to license or acquire the relevant technology
on terms that would allow us to make an appropriate return on
the product;
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companies that perceive us to be their competitor may be
unwilling to assign or license their product rights to
us; or
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we may be unable to identify suitable products or product
candidates within our areas of expertise.
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In addition, we expect competition for acquisition candidates in
the immunobiotic field to increase, which may mean fewer
suitable acquisition opportunities for us as well as higher
acquisition prices. If we are unable to successfully obtain
rights to suitable products and product candidates, our
business, financial condition and prospects for growth could
suffer.
If we fail to
successfully manage any acquisitions, our ability to develop our
product candidates and expand our product candidate pipeline may
be harmed.
As part of our business strategy, we intend to continue to seek
to obtain marketed products and development stage product
candidates through acquisitions and licensing arrangements with
third parties. The failure to adequately address the financial,
operational or legal risks of these transactions
39
could harm our business. Financial aspects of these transactions
that could alter our financial position, reported operating
results or stock price include:
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use of cash resources;
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higher than anticipated acquisition costs and expenses;
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potentially dilutive issuances of equity securities;
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the incurrence of debt and contingent liabilities, impairment
losses or restructuring charges;
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large write-offs and difficulties in assessing the relative
percentages of in-process research and development expense that
can be immediately written off as compared to the amount that
must be amortized over the appropriate life of the
asset; and
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amortization expenses related to other intangible assets.
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Operational risks that could harm our existing operations or
prevent realization of anticipated benefits from these
transactions include:
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challenges associated with managing an increasingly diversified
business;
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disruption of our ongoing business;
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difficulty and expense in assimilating the operations, products,
technology, information systems or personnel of the acquired
company;
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diversion of managements time and attention from other
business concerns;
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inability to maintain uniform standards, controls, procedures
and policies;
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the assumption of known and unknown liabilities of the acquired
company, including intellectual property claims; and
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subsequent loss of key personnel.
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If we are unable to successfully manage our acquisitions, our
ability to develop new products and continue to expand our
product pipeline may be limited.
Risks related to
the offering
Fuad El-Hibri,
our president, chief executive officer and chairman of our board
of directors, will continue to have substantial control over us
after this offering, including through his ability to control
the election of the members of our board of directors, and could
delay or prevent a change of control.
Even after this offering, Mr. El-Hibri will be able to
control the election of the members of our board of directors
through his ownership interests and voting arrangements among
our significant stockholders. Immediately prior to this
offering, Mr. El-Hibri was the beneficial owner of 99.5% of
our outstanding common stock. Immediately following this
offering, Mr. El-Hibri will be the beneficial owner of
81.4% of our outstanding common stock, or 78.9% of our
outstanding common stock if the underwriters exercise their
over-allotment option in full.
Because Mr. El-Hibri will be able to control the election
of the members of our board, and because of his substantial
control of our capital stock, Mr. El-Hibri will likely have
the ability to delay or prevent a change
40
of control of our company that may be favored by other directors
or stockholders and otherwise exercise substantial control over
all corporate actions requiring board or stockholder approval,
including any amendment of our certificate of incorporation or
by-laws. The control by Mr. El-Hibri may prevent other
stockholders from influencing significant corporate decisions
and may result in conflicts of interest that could cause our
stock price to decline.
Provisions in
our corporate charter documents and under Delaware law may
prevent or frustrate attempts by our stockholders to change our
management and hinder efforts to acquire a controlling interest
in us.
Provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares. These provisions may also prevent or
frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
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the classification of our directors;
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limitations on changing the number of directors then in office;
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limitations on the removal of directors;
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limitations on filling vacancies on the board;
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limitations on the removal and appointment of the chairman of
our board of directors;
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following the second anniversary of the completion of this
offering, advance notice requirements for stockholder
nominations for election of directors and other proposals;
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the inability of stockholders to act by written consent;
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the inability of stockholders to call special meetings; and
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the ability of our board of directors to designate the terms of
and issue new series of preferred stock without stockholder
approval.
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Until the second anniversary of the completion of this offering,
the affirmative vote of holders of our capital stock
representing a majority of the voting power of all outstanding
stock entitled to vote is required to amend or repeal the above
provisions of our certificate of incorporation. Following the
second anniversary of the completion of this offering, the
affirmative vote of holders of our capital stock representing at
least 75% of the voting power of all outstanding stock entitled
to vote is required to amend or repeal the above provisions of
our certificate of incorporation. Until the second anniversary
of the completion of this offering, the affirmative vote of
either at least 75% of the directors then in office or holders
of our capital stock representing a majority of the voting power
of all outstanding stock entitled to vote is required to amend
or repeal our by-laws. Following the second anniversary of the
completion of this offering, the affirmative vote of either a
majority of the directors present at a meeting of our board of
directors or holders of our capital stock representing at least
75% of the voting power of all outstanding stock entitled to
vote is required to amend or repeal our by-laws.
In addition, Section 203 of the General Corporation Law of
Delaware prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns or within the last three years has owned 15% of
our voting stock, for a period of three years after the date of
the transaction in which the person became an interested
41
stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section 203 may discourage,
delay or prevent a change in control of our company.
Our
stockholder rights plan could prevent a change in control of our
company in instances in which some stockholders may believe a
change in control is in their best interests.
In connection with this offering, we will enter into a rights
agreement that establishes our stockholder rights plan. Under
the rights agreement, we will issue to our stockholders one
preferred stock purchase right for each outstanding share of our
common stock. Each right, when exercisable, will entitle its
holder to purchase from us a unit consisting of one
one-thousandth of a share of series A junior participating
preferred stock at a purchase price to be determined by our
board of directors at the same time the initial public offering
price of our common stock is determined. Our stockholder rights
plan is intended to protect stockholders in the event of an
unfair or coercive offer to acquire our company and to provide
our board of directors with adequate time to evaluate
unsolicited offers. The rights plan may have anti-takeover
effects. The rights plan will cause substantial dilution to a
person or group that attempts to acquire us on terms that our
board of directors does not believe are in our best interests
and those of our stockholders and may discourage, delay or
prevent a merger or acquisition that stockholders may consider
favorable, including transactions in which stockholders might
otherwise receive a premium for their shares.
If you
purchase shares of our common stock in this offering, you will
suffer immediate and substantial dilution of your
investment.
The initial public offering price of our common stock is
substantially higher than the net tangible book value per share
of our common stock. Therefore, if you purchase shares of our
common stock in this offering, your interest will be diluted
immediately to the extent of the difference between the initial
public offering price per share of our common stock and the net
tangible book value per share of our common stock after this
offering. Based on an assumed initial public offering price of
$15.00 per share, which is the midpoint of the price range
set forth on the cover page of this prospectus, investors in
this offering will incur immediate dilution of $10.51 per
share. To the extent outstanding options are exercised, you will
incur further dilution. In addition, based on an assumed initial
public offering price of $15.00 per share, which is the
midpoint of the price range set forth on the cover page of this
prospectus, investors in this offering will have contributed
approximately 68% of the total consideration paid by all
purchasers of our common stock but will own only approximately
18% of our common stock outstanding after this offering. See
Dilution.
An active
trading market for our common stock may not
develop.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price for our common
stock was determined through negotiations with the underwriters.
Although our common stock has been authorized for listing on the
New York Stock Exchange, an active trading market for our shares
may never develop or be sustained following this offering. If an
active market for our common stock does not develop, it may be
difficult to sell shares you purchase in this offering without
depressing the market price for the shares or at all.
If our stock
price is volatile, purchasers of our common stock could incur
substantial losses.
Our stock price is likely to be volatile. The stock market in
general and the market for biotechnology companies in particular
have experienced extreme volatility that has often been
unrelated to the
42
operating performance of particular companies. As a result of
this volatility, investors may not be able to sell their common
stock at or above the initial public offering price. The market
price for our common stock may be influenced by many factors,
including:
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the success of competitive products or technologies;
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results of clinical trials of our product candidates or those of
our competitors;
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decisions and procurement policies by the U.S. government
affecting BioThrax and our biodefense product candidates;
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regulatory developments in the United States and foreign
countries;
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developments or disputes concerning patents or other proprietary
rights;
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the recruitment or departure of key personnel;
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variations in our financial results or those of companies that
are perceived to be similar to us;
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market conditions in the pharmaceutical and biotechnology
sectors and issuance of new or changed securities analysts
reports or recommendations;
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general economic, industry and market conditions; and
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the other factors described in this Risk factors
section.
|
We have broad
discretion in the use of the net proceeds from this offering and
may not use them effectively.
Our management will have broad discretion in the application of
the net proceeds from this offering and could spend the proceeds
in ways that do not improve our results of operations or enhance
the value of our common stock. The failure by our management to
apply these funds effectively could result in financial losses
that could have a material adverse effect on our business, cause
the price of our common stock to decline and delay the
development of our product candidates. Pending their use, we may
invest our net proceeds from this offering in a manner that does
not produce income or that loses value.
We do not
anticipate paying any cash dividends in the foreseeable
future.
We currently intend to retain our future earnings, if any, to
fund the development and growth of our business. Any future debt
agreements that we enter into may limit our ability to pay
dividends. As a result, capital appreciation, if any, of our
common stock will be your sole source of gain for the
foreseeable future.
A significant
portion of our total outstanding shares are restricted from
immediate resale but may be sold into the market in the near
future. This could cause the market price of our common stock to
drop significantly, even if our business is doing
well.
Sales of a substantial number of shares of our common stock in
the public market, or the perception in the market that the
holders of a large number of shares intend to sell shares, could
reduce the market price of our common stock. Upon the completion
of this offering, we will have outstanding
27,420,404 shares of common stock, after giving effect to
the issuance of 5,000,000 shares of common stock in this
offering. Of the shares to be outstanding after the completion
of this offering, the 5,000,000 shares of common stock sold
in this offering will be freely tradable without restriction
under
43
the Securities Act unless purchased by our
affiliates, as that term is defined in Rule 144
under the Securities Act. The remaining shares of our common
stock are restricted securities under Rule 144.
Substantially all of these restricted securities will be subject
to the
180-day
lock-up
period described below. After the
180-day
lock-up
period, these restricted securities may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rule 144 or 701 under the
Securities Act.
The holders of substantially all of our currently outstanding
capital stock have agreed that, without the prior written
consent of J.P. Morgan Securities Inc., they will not,
during the period ending 180 days after the date of this
prospectus, subject to exceptions specified in the
lock-up
agreements, offer, pledge, announce the intention to sell, sell,
contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for
our common stock or enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences
of ownership of our common stock. Further, these holders have
agreed that, during this period, they will not make any demand
for, or exercise any right with respect to, the registration of
our common stock or any security convertible into or exercisable
or exchangeable for our common stock. The
180-day
lock-up
period may be extended under specified circumstances. The
lock-up
restrictions, specified exceptions and the circumstances under
which the
180-day
lock-up
period may be extended are described in more detail under
Underwriting.
Upon expiration of the
180-day
lock-up
period, 22,356,535 shares of our common stock outstanding
as of October 20, 2006, representing approximately 81.5% of
our common stock outstanding after this offering, will be
eligible for sale under Rule 144. In general, shares
eligible for sale under Rule 144 are subject to volume
limitations. However, upon expiration of the
180-day
lock-up
period, 10,932 shares of our common stock outstanding as of
October 20, 2006 will be eligible for sale under
Rule 144(k) without regard to volume limitations. In
addition, beginning 90 days after the date of this
prospectus, 117,124 shares of our common stock outstanding
as of October 20, 2006 will be eligible for sale in
accordance with Rule 701 under the Securities Act without
regard to volume limitations. Mr. El-Hibri has the power to
dispose of or direct the disposition of 14,698,292 shares
of our common stock outstanding as of October 20, 2006,
representing approximately 53.6% of our common stock outstanding
after this offering. These shares will be eligible for sale
under Rule 144, subject to volume limitations, upon
expiration of the
180-day
lock-up
period.
Moreover, after this offering, holders of an aggregate of
22,303,280 shares of our common stock outstanding as of
October 20, 2006 will have the right to require us to
register these shares of common stock under specified
circumstances.
In addition, of the 3,109,932 shares of our common stock
that may be issued upon the exercise of options outstanding as
of October 20, 2006, approximately 2,607,793 shares
will be vested and eligible for sale within 180 days after
the date of this prospectus, subject to any lock-up agreements
applicable to these shares. Promptly following this offering, we
intend to file a registration statement on
Form S-8
registering the sale of up to 7,676,851 shares of common
stock subject to outstanding options and options and other
awards issuable pursuant to our equity incentive plans. Shares
registered under this registration statement on
Form S-8
will be available for sale in the open market, subject to
Rule 144 volume limitations applicable to affiliates, and
subject to any vesting restrictions and
lock-up
agreements applicable to these shares.
For a further description of the eligibility of shares for sale
into the public market following this offering, see Shares
eligible for future sale.
44
Special
note regarding forward-looking statements
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenues, projected costs, prospects, plans and
objectives of management are forward-looking statements. The
words anticipate, believe,
estimate, expect, intend,
may, plan, predict,
project, will, would and
similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements
include, among other things, statements about:
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our performance under existing BioThrax sales contracts with HHS
and DoD, including the timing of deliveries under these
contracts;
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our plans for future sales of BioThrax;
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our plans to pursue label expansions and improvements for
BioThrax;
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our plans to expand our manufacturing facilities and
capabilities;
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|
the rate and degree of market acceptance and clinical utility of
our products;
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our ongoing and planned development programs, preclinical
studies and clinical trials;
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|
our ability to identify and acquire or in license products and
product candidates that satisfy our selection criteria;
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|
the potential benefits of our existing collaboration agreements
and our ability to enter into selective additional collaboration
arrangements;
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|
the timing of and our ability to obtain and maintain regulatory
approvals for our product candidates;
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our commercialization, marketing and manufacturing capabilities
and strategy;
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our intellectual property portfolio; and
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|
our estimates regarding expenses, future revenues, capital
requirements and needs for additional financing.
|
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements, and
you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important
factors in the cautionary statements included in this
prospectus, particularly in the Risk factors
section, that we believe could cause actual results or events to
differ materially from the forward-looking statements that we
make. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments we may make.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect. We do
not assume any obligation to update any forward-looking
statements.
45
Use of
proceeds
We estimate that the net proceeds to us from this offering will
be approximately $66.3 million, assuming an initial public
offering price of $15.00 per share, which is the midpoint
of the price range set forth on the cover page of this
prospectus, after deducting estimated underwriting discounts and
commissions and offering expenses payable by us. A $1.00
increase (decrease) in the assumed initial public offering price
of $15.00 per share would increase (decrease) our net
proceeds from this offering by approximately $4.7 million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same and after
deducting estimated underwriting discounts and commissions. If
the underwriters exercise their over-allotment option in full,
we estimate that our net proceeds from this offering will be
approximately $70.1 million. We will not receive any
proceeds from the sale of shares of common stock by the selling
stockholders as a result of the exercise by the underwriters of
their over-allotment option.
If we fund the following solely with the net proceeds from this
offering without allocating funds from other sources, we
currently estimate that we will use:
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approximately $10 million of these net proceeds to fund
development of our biodefense product candidates, comprised of
approximately $3 million for label expansions and
improvements for BioThrax, approximately $2 million for a
next generation anthrax vaccine candidate and approximately
$5 million for our anthrax immune globulin candidate;
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approximately $19 million of these net proceeds to fund
clinical development of our commercial product candidates,
comprised of approximately $6 million for our typhoid
vaccine candidate and approximately $13 million for our
hepatitis B therapeutic vaccine candidate;
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approximately $25 million of these net proceeds to fund a
portion of the construction, validation and qualification costs
for our new manufacturing facility in Lansing, Michigan and the
initial engineering design and preliminary utility build out of
our manufacturing facilities in Frederick, Maryland; and
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the balance of these net proceeds for general corporate
purposes, which may include the expansion of our sales and
marketing organization, the acquisition or in license of
technologies, products or businesses, working capital and
capital expenditures.
|
This expected use of proceeds from this offering represents our
intentions based upon our current plans and business conditions.
The amounts and timing of our actual expenditures may vary
significantly depending upon numerous factors, including the
progress of our development and commercialization efforts, the
progress of our clinical trials and our operating costs and
capital expenditures, including the timing of, and the costs
involved in, constructing our new manufacturing facility in
Lansing, Michigan and the build out of our manufacturing
facilities in Frederick, Maryland. As a result, we will retain
broad discretion in the allocation of the net proceeds from this
offering. We have no current understandings, commitments or
agreements to acquire or in license any technologies, products
or businesses using the net proceeds from this offering.
Based on our planned use of proceeds described above, we expect
that the net proceeds from this offering will be sufficient to
enable us to complete:
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for our biodefense product candidates, the work necessary to
support our applications to the FDA to further extend the shelf
life and reduce the number of required doses for BioThrax,
stability testing, animal efficacy studies and exploration of an
alternative delivery system for a next generation anthrax
vaccine candidate and animal efficacy studies and a Phase I
safety and pharmacokinetic trial of our anthrax immune globulin
candidate; and
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46
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for our commercial product candidates, a Phase II clinical trial
and a disease surveillance study and the manufacture of initial
clinical material for a Phase III clinical trial of our typhoid
vaccine candidate and a Phase II clinical trial of our hepatitis
B therapeutic vaccine candidate.
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It is possible that we will not achieve the progress that we
expect because the actual costs and timing of development,
particularly clinical trials, are difficult to predict, subject
to substantial risks and often vary depending on the particular
indication and development strategy.
We do not expect that our existing cash and cash equivalents,
committed sources of funds and net proceeds from this offering
alone will be sufficient to enable us to fund the completion of
the development of any of our product candidates or all of the
construction costs of our new manufacturing facility in Lansing.
We expect to continue to fund a significant portion of our
development and commercialization costs with internally
generated funds from sales of BioThrax. In particular, our
planned use of proceeds described above assumes that we will
fund continued development of our recombinant bivalent botulinum
vaccine candidate, our botulinum immune globulin candidate, our
group B streptococcus vaccine candidate and our commercial
preclinical product candidates with funds from sales of BioThrax
and grant funding without allocating any of the net proceeds
from this offering. Accordingly, our need for additional
external sources of funds for these purposes will depend
significantly on the level and timing of our sales of this
product. Our business plan also contemplates that we will raise
$10 million to $20 million of additional external debt
financing to fund the Lansing facility construction and to
provide additional financial flexibility. If we do not obtain
this additional debt financing, we may need to reduce spending
for other purposes in order to complete this construction
project.
Pending use of the proceeds from this offering, we intend to
invest the proceeds in a variety of capital preservation
investments, including short-term, investment-grade,
interest-bearing instruments.
47
Dividend
policy
We currently intend to retain all of our future earnings to
finance the growth and development of our business. We do not
intend to pay cash dividends to our stockholders in the
foreseeable future.
On June 15, 2005, our board of directors declared a special
cash dividend to the holders of our outstanding shares of common
stock in an aggregate amount of approximately $5.4 million.
Our board of directors declared this special dividend in order
to distribute the net proceeds of a payment that we received as
a result of the settlement of litigation that we initiated
against Elan Pharmaceuticals, Inc., Athena Neurosciences, Inc.
and Solstice Neurosciences, Inc. We paid the special cash
dividend on July 13, 2005 to stockholders of record as of
June 15, 2005. Prior to this special cash dividend, we had
never declared or paid any cash dividends on our common stock.
48
Capitalization
The following table sets forth our capitalization as of
September 30, 2006:
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on an actual basis; and
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on an as adjusted basis to give effect to:
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the reclassification of our previously existing class A
common stock as common stock and the conversion of each
outstanding share of our class B common stock into one
share of common stock prior to the completion of this
offering; and
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the sale of 5,000,000 shares of common stock that we are
offering at an assumed initial public offering price of
$15.00 per share, which is the midpoint of the price range
set forth on the cover page of this prospectus, after deducting
estimated underwriting discounts and commissions and offering
expenses payable by us.
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Our capitalization following this offering will be adjusted
based on the actual initial public offering price and other
terms of this offering determined at pricing. You should read
this table together with our financial statements and the
related notes appearing at the end of this prospectus and the
Managements discussion and analysis of financial
condition and results of operations section of this
prospectus.
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As of
September 30, 2006
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(in thousands,
except share and per share data)
|
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Actual
|
|
|
As
adjusted
|
|
|
|
|
|
(unaudited)
|
|
|
Long-term indebtedness, including
current portion
|
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$
|
36,410
|
|
|
$
|
36,410
|
|
Notes payable to employees
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|
|
63
|
|
|
|
63
|
|
Stockholders equity:
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|
|
|
|
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|
Common stock, class A,
$0.001 par value per share; 100,000,000 shares
authorized and 22,303,280 shares issued and outstanding,
actual; no shares authorized, issued or outstanding, as adjusted
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22
|
|
|
|
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|
Common stock, class B,
$0.01 par value per share; 2,000,000 shares authorized
and 86,340 shares issued and outstanding, actual; no shares
authorized, issued or outstanding, as adjusted
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|
1
|
|
|
|
|
|
Common stock, $0.001 par
value per share; no shares authorized, issued or outstanding,
actual; 100,000,000 shares authorized and
27,389,620 shares issued and outstanding, as adjusted
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|
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27
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|
Preferred stock, $0.001 par value
per share; 3,000,000 shares authorized, actual;
15,000,000 shares authorized, as adjusted; no shares issued
or outstanding, actual and as adjusted
|
|
|
|
|
|
|
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|
Additional paid-in capital
|
|
|
35,079
|
|
|
|
101,375
|
|
Accumulated other comprehensive
loss
|
|
|
(182
|
)
|
|
|
(182
|
)
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Retained earnings
|
|
|
21,839
|
|
|
|
21,839
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
56,759
|
|
|
|
123,059
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
93,232
|
|
|
$
|
159,532
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $15.00 per share would increase
(decrease) the as adjusted amount of each of additional paid-in
capital, total stockholders equity and total
capitalization by approximately $4.7 million, assuming that
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions.
49
The table above gives effect to an adjustment to par value and
an increase in the number of authorized shares of the
class A common stock upon the reclassification of the
class A common stock as common stock and an adjustment to
par value of the preferred stock on an actual basis as if the
adjustments to par value and the increase in the number of
authorized shares was effective as of September 30, 2006.
The table above does not include:
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3,141,003 shares of common stock issuable upon the exercise
of stock options outstanding as of September 30, 2006 at a
weighted average exercise price of $2.54 per share;
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369,032 additional shares of common stock reserved for
issuance under our employee stock option plan as of
September 30, 2006; and
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503,500 additional shares of common stock that will be reserved
for issuance under our 2006 stock incentive plan immediately
prior to completion of this offering.
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50
Dilution
If you invest in our common stock, your interest will be diluted
immediately to the extent of the difference between the public
offering price per share of our common stock and the net
tangible book value per share of our common stock after this
offering.
Our actual net tangible book value as of September 30, 2006
was $56.8 million or $2.54 per share of our common stock.
Net tangible book value per share represents the amount of our
total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding.
After giving effect to the issuance and sale by us of
5,000,000 shares of common stock in this offering, at an
assumed initial public offering price of $15.00 per share, which
is the midpoint of the price range set forth on the cover page
of this prospectus, less estimated underwriting discounts and
commissions and offering expenses payable by us, our net
tangible book value as of September 30, 2006 would have
been approximately $123 million, or $4.49 per share of
common stock. This represents an immediate increase in net
tangible book value per share of $1.95 to existing stockholders
and immediate dilution of $10.51 per share to new
investors. Dilution per share to new investors is determined by
subtracting the net tangible book value per share after this
offering from the initial public offering price per share paid
by a new investor. The following table illustrates this dilution
on a per share basis:
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|
|
|
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|
Assumed initial public offering
price per share of common stock
|
|
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|
$
|
15.00
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Actual net tangible book value per
share as of September 30, 2006
|
|
$
|
2.54
|
|
|
|
Increase in net tangible book
value per share attributable to new investors
|
|
|
1.95
|
|
|
|
|
|
|
|
|
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Adjusted net tangible book value
per share after this offering
|
|
|
|
|
|
4.49
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
$
|
10.51
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A $1.00 increase (decrease) in the assumed initial public
offering price of $15.00 per share would increase
(decrease) our adjusted net tangible book value per share after
this offering by approximately $0.17 and dilution per share to
new investors by approximately $0.83, assuming that the number
of shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting estimated
underwriting discounts and commissions.
If any shares are issued in connection with outstanding options,
you will experience further dilution.
The following table summarizes as of September 30, 2006 the
number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by
existing stockholders and by new investors in this offering at
an assumed initial public offering price of $15.00 per
share, which is the midpoint of the price range set forth on the
cover page of this prospectus, before deducting estimated
underwriting discounts and commissions and offering expenses
payable by us.
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|
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|
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|
|
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|
|
|
|
|
|
|
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|
Shares
purchased
|
|
|
Total
consideration
|
|
|
Average price
|
|
|
Number
|
|
Percentage
|
|
|
Amount
|
|
Percentage
|
|
|
per
share
|
|
|
Existing stockholders
|
|
|
22,389,620
|
|
|
82
|
%
|
|
$
|
35,102,225
|
|
|
32
|
%
|
|
$
|
1.57
|
New investors
|
|
|
5,000,000
|
|
|
18
|
|
|
|
75,000,000
|
|
|
68
|
|
|
|
15.00
|
|
|
|
|
|
|
Total
|
|
|
27,389,620
|
|
|
100
|
%
|
|
$
|
110,102,225
|
|
|
100
|
%
|
|
|
|
|
|
51
A $1.00 increase (decrease) in the assumed initial public
offering price of $15.00 per share would increase
(decrease) the total consideration paid by new investors by
$5 million and increase (decrease) the percentage of total
consideration paid by new investors by approximately 2%,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same.
The table above is based on shares outstanding as of
September 30, 2006 and excludes:
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|
|
3,141,003 shares of common stock issuable upon the exercise
of stock options outstanding as of September 30, 2006 at a
weighted average exercise price of $2.54 per share;
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|
|
369,032 additional shares of common stock reserved for issuance
under our employee stock option plan as of September 30,
2006; and
|
|
|
503,500 additional shares of common stock that will be reserved
for issuance under our 2006 stock incentive plan immediately
prior to completion of this offering.
|
If the underwriters exercise their over-allotment option in
full, the following will occur:
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|
the number of shares of common stock held by existing
stockholders will decrease to 21,909,620, or approximately 79.2%
of the total number of shares of our common stock outstanding
after this offering; and
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|
|
the number of shares of common stock held by new investors will
increase to 5,750,000, or approximately 20.8% of the total
number of shares of our common stock outstanding after this
offering.
|
52
Selected
consolidated financial data
You should read the following selected consolidated financial
data together with our consolidated financial statements and the
related notes appearing at the end of this prospectus and the
Managements discussion and analysis of financial
condition and results of operations section of this
prospectus.
We have derived the consolidated statement of operations data
for the years ended December 31, 2003, 2004 and 2005 and
the consolidated balance sheet data as of December 31, 2004
and 2005 from our audited consolidated financial statements,
which are included in this prospectus. We have derived the
consolidated statements of operations data for the years ended
December 31, 2001 and 2002 and the consolidated balance
sheets data as of December 31, 2001, 2002 and 2003 from our
audited consolidated financial statements, which are not
included in this prospectus. We have derived the consolidated
statement of operations data for the nine-month periods ended
September 30, 2005 and 2006 and the consolidated balance
sheet data as of September 30, 2006 from our unaudited
consolidated financial statements, which are included in this
prospectus. The unaudited consolidated financial data include,
in the opinion of our management, all adjustments, consisting
only of normal recurring adjustments, that are necessary for a
fair presentation of our financial position and results of
operations for these periods. Our historical results for any
prior period are not necessarily indicative of results to be
expected in any future period, and our results for any interim
period are not necessarily indicative of results for a full
fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
Nine months ended
September 30,
|
|
(in thousands,
except share and per share data)
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Statements of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
486
|
|
|
$
|
61,253
|
|
|
$
|
55,536
|
|
|
$
|
81,014
|
|
|
$
|
127,271
|
|
|
$
|
85,807
|
|
|
$
|
61,263
|
|
Contracts and grants
|
|
|
44,823
|
|
|
|
17,288
|
|
|
|
233
|
|
|
|
2,480
|
|
|
|
3,417
|
|
|
|
1,093
|
|
|
|
4,580
|
|
|
|
|
|
|
|
Total revenues
|
|
|
45,309
|
|
|
|
78,541
|
|
|
|
55,769
|
|
|
|
83,494
|
|
|
|
130,688
|
|
|
|
86,900
|
|
|
|
65,843
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
34,367
|
|
|
|
24,569
|
|
|
|
22,342
|
|
|
|
30,102
|
|
|
|
31,603
|
|
|
|
23,147
|
|
|
|
11,645
|
|
Research and development
|
|
|
382
|
|
|
|
2,808
|
|
|
|
6,327
|
|
|
|
10,117
|
|
|
|
18,381
|
|
|
|
9,632
|
|
|
|
26,640
|
|
Selling, general &
administrative
|
|
|
10,924
|
|
|
|
13,397
|
|
|
|
19,547
|
|
|
|
30,323
|
|
|
|
42,793
|
|
|
|
28,924
|
|
|
|
32,952
|
|
Purchased in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
1,824
|
|
|
|
|
|
|
|
26,575
|
|
|
|
26,575
|
|
|
|
477
|
|
Settlement of State of Michigan
Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
45,673
|
|
|
|
40,774
|
|
|
|
50,040
|
|
|
|
66,723
|
|
|
|
109,352
|
|
|
|
78,278
|
|
|
|
71,714
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(364
|
)
|
|
|
37,767
|
|
|
|
5,729
|
|
|
|
16,771
|
|
|
|
21,336
|
|
|
|
8,622
|
|
|
|
(5,871
|
)
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
122
|
|
|
|
80
|
|
|
|
100
|
|
|
|
65
|
|
|
|
485
|
|
|
|
338
|
|
|
|
405
|
|
Interest expense
|
|
|
(193
|
)
|
|
|
(451
|
)
|
|
|
(293
|
)
|
|
|
(241
|
)
|
|
|
(767
|
)
|
|
|
(575
|
)
|
|
|
(778
|
)
|
Other income (expense), net
|
|
|
(119
|
)
|
|
|
(271
|
)
|
|
|
168
|
|
|
|
6
|
|
|
|
55
|
|
|
|
(24
|
)
|
|
|
291
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(190
|
)
|
|
|
(642
|
)
|
|
|
(25
|
)
|
|
|
(170
|
)
|
|
|
(227
|
)
|
|
|
(261
|
)
|
|
|
(82
|
)
|
Income (loss) before provision for
(benefit from) income taxes
|
|
|
(554
|
)
|
|
|
37,125
|
|
|
|
5,704
|
|
|
|
16,601
|
|
|
|
21,109
|
|
|
|
8,361
|
|
|
|
(5,953
|
)
|
Provision for (benefit from) income
taxes
|
|
|
|
|
|
|
733
|
|
|
|
1,250
|
|
|
|
5,129
|
|
|
|
5,325
|
|
|
|
2,109
|
|
|
|
(2,617
|
)
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(554
|
)
|
|
$
|
36,392
|
|
|
$
|
4,454
|
|
|
$
|
11,472
|
|
|
$
|
15,784
|
|
|
$
|
6,252
|
|
|
$
|
(3,336
|
)
|
|
|
|
Earnings (loss) per
share basic
|
|
$
|
(0.03
|
)
|
|
$
|
1.97
|
|
|
$
|
0.24
|
|
|
$
|
0.61
|
|
|
$
|
0.77
|
|
|
$
|
0.31
|
|
|
$
|
(0.15
|
)
|
Earnings (loss) per
share diluted
|
|
$
|
(0.03
|
)
|
|
$
|
1.75
|
|
|
$
|
0.22
|
|
|
$
|
0.56
|
|
|
$
|
0.69
|
|
|
$
|
0.28
|
|
|
$
|
(0.15
|
)
|
Weighted average number of
shares basic
|
|
|
16,259,044
|
|
|
|
18,441,235
|
|
|
|
18,904,992
|
|
|
|
18,919,850
|
|
|
|
20,533,471
|
|
|
|
19,930,498
|
|
|
|
22,370,191
|
|
Weighted average number of
shares diluted
|
|
|
16,259,044
|
|
|
|
20,752,243
|
|
|
|
20,316,752
|
|
|
|
20,439,252
|
|
|
|
22,751,733
|
|
|
|
20,048,412
|
|
|
|
22,370,191
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
December 31,
|
|
September 30,
|
(in
thousands)
|
|
2001
|
|
|
2002
|
|
2003
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,854
|
|
|
$
|
4,891
|
|
$
|
7,119
|
|
|
$
|
6,821
|
|
$
|
36,294
|
|
$
|
19,906
|
Working capital
|
|
|
(35,299
|
)
|
|
|
1,130
|
|
|
(3,147
|
)
|
|
|
7,509
|
|
|
29,023
|
|
|
18,726
|
Total assets
|
|
|
25,423
|
|
|
|
22,790
|
|
|
37,127
|
|
|
|
69,056
|
|
|
100,332
|
|
|
130,831
|
Total long-term liabilities
|
|
|
4,857
|
|
|
|
4,592
|
|
|
1,228
|
|
|
|
11,921
|
|
|
10,502
|
|
|
35,606
|
Total stockholders equity
(deficit)
|
|
|
(32,295
|
)
|
|
|
4,155
|
|
|
8,448
|
|
|
|
22,949
|
|
|
59,737
|
|
|
56,759
|
|
|
54
Managements
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 prospectus. Some of the
information contained in this discussion and analysis or set
forth elsewhere in this prospectus, including information with
respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve
risks and uncertainties. You should review the Risk
factors section of this prospectus 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
We are a biopharmaceutical company focused on the development,
manufacture and commercialization of immunobiotics. We operate
in two business segments: biodefense and commercial. We
commenced operations as BioPort Corporation in September 1998
through an acquisition from the Michigan Biologic Products
Institute of rights to our marketed product, BioThrax, vaccine
manufacturing facilities at a multi-building campus on
approximately 12.5 acres in Lansing, Michigan and vaccine
development and production know-how. Following this acquisition,
we completed renovations at the Lansing facilities that had been
initiated by the State of Michigan. In December 2001, the FDA
approved a supplement to our manufacturing facility license for
the manufacture of BioThrax at the renovated facilities.
In June 2004, we completed a corporate reorganization in which
we:
|
|
|
issued 18,666,479 shares of class A common stock in
exchange for 18,017,994 shares of BioPort class A
common stock and 648,485 shares of BioPort class B
common stock;
|
|
|
repurchased and retired all other issued and outstanding shares
of BioPort class B common stock; and
|
|
|
assumed all outstanding stock options to purchase BioPort
class B common stock and granted option holders replacement
stock options to purchase an equal number of shares of our
class B common stock.
|
As a result of the reorganization, BioPort became a wholly owned
subsidiary of Emergent. We subsequently renamed BioPort as
Emergent BioDefense Operations Lansing Inc. We acquired our
portfolio of commercial vaccine candidates through our
acquisition of Microscience in a share exchange in June 2005 and
our acquisition of substantially all of the assets of Antex for
cash in May 2003. We subsequently renamed Microscience as
Emergent Product Development UK Limited. We expect to continue
to seek to obtain marketed products and development stage
product candidates through acquisitions and licensing
arrangements with third parties.
Our biodefense business has generated net income for each of the
last three fiscal years. However, in our commercial business, we
have not received approval to market any of our product
candidates and, to date, have received no product sales
revenues. Our only sources of revenue in our commercial business
are development grant funding and an upfront license fee and
additional payments for development work under a collaboration
agreement with Sanofi Pasteur. As a result, our commercial
business has incurred a net loss for each of the last three
fiscal years.
55
Biodefense
In our biodefense business, we develop and commercialize
immunobiotics for use against biological agents that are
potential weapons of bioterrorism. Our marketed product,
BioThrax, is the only vaccine approved by the FDA for the
prevention of anthrax infection. In addition to BioThrax, our
biodefense product portfolio includes three biodefense product
candidates in preclinical development and a next generation
anthrax vaccine program with product candidates in preclinical
and Phase I clinical development. The DoD and HHS have been
the principal customers for BioThrax. In addition, we have
supplied small amounts of BioThrax directly to several foreign
governments. Since 1998, we have been a party to two supply
agreements for BioThrax with the DoD. Pursuant to these
contracts, we have supplied over nine million doses of
BioThrax through September 2006 for immunization of military
personnel. Our current contract with the DoD provides for the
supply of a minimum of approximately 1.5 million additional
doses of BioThrax to the DoD through September 2007. Under a
contract that we entered into with HHS in May 2005, we supplied
five million doses of BioThrax to HHS for placement into the
strategic national stockpile for a fixed price of
$123 million. In May 2006, we entered into a contract
modification with HHS for the delivery of an additional five
million doses of BioThrax to HHS by May 2007 for a fixed price
of $120 million. We have delivered approximately
one million doses of BioThrax under this contract
modification through September 2006.
We have derived and expect for the foreseeable future to
continue to derive substantially all of our revenue from sales
of BioThrax. Our total revenues from BioThrax sales were
$55.5 million in 2003, $81.0 million in 2004,
$127.3 million in 2005 and $61.3 million in the nine
months ended September 30, 2006. We are focused on
increasing sales of BioThrax to U.S. government customers,
expanding the market for BioThrax to other customers and
pursuing label expansions and improvements for BioThrax.
We are collaborating with HPA in the development of a
recombinant bivalent botulinum vaccine candidate and a new
botulinum toxoid vaccine that we plan to use as the basis for a
botulinum immune globulin candidate. We are independently
developing an anthrax immune globulin candidate, in part with
funding from NIAID. We have submitted three separate proposals
for testing and development of three distinct next generation
anthrax vaccine product candidates, featuring attributes such as
self-administration and a longer shelf life, in response to a
request for proposals issued by NIAID. We are actively pursuing
additional government sponsored development grants and working
with various government agencies to encourage them to conduct
studies relating to BioThrax and our other biodefense product
candidates.
Commercial
In our commercial business, we develop immunobiotics for use
against infectious diseases with significant unmet or
underserved medical needs. Our commercial product portfolio
includes a typhoid vaccine candidate and a hepatitis B
therapeutic vaccine candidate, both of which are in
Phase II clinical development, a group B streptococcus
vaccine candidate in Phase I clinical development and a
chlamydia vaccine candidate and a meningitis B vaccine
candidate, both of which are in preclinical development. In May
2006, we entered into a license and co-development agreement
with Sanofi Pasteur under which we granted Sanofi Pasteur an
exclusive, worldwide license under our proprietary technology to
develop and commercialize a meningitis B vaccine candidate.
We plan to encourage government entities and non-government and
philanthropic organizations to provide development funding for,
or to conduct clinical studies of, one or more of our commercial
product candidates. For example, the Wellcome Trust provided
funding for our Phase I clinical trial of our typhoid
vaccine candidate in Vietnam and has agreed to provide funding
for our Phase II clinical trial of this vaccine candidate
in Vietnam.
56
Manufacturing
infrastructure
To augment our existing manufacturing capabilities, we are
constructing a new 50,000 square foot manufacturing
facility on our Lansing, Michigan campus. We expect the
construction of the facility to cost approximately
$75 million, including approximately $55 million for
the building and associated capital equipment, with the balance
related to validation and qualification activities required for
regulatory approval and initiation of manufacturing. We
anticipate that we will incur up to approximately
$35 million for these purposes during 2006, of which we had
incurred approximately $21 million through September 2006.
We expect to complete construction of this facility in mid 2007,
with validation and qualification activities required for
regulatory approval continuing thereafter. We are constructing
this new facility as a large scale manufacturing plant that we
can use to produce multiple vaccine products, subject to
complying with appropriate change-over procedures. We anticipate
that we will initiate large scale manufacturing of BioThrax for
commercial sale at the new facility in 2008. Our plans assume
that the FDA will not require us to complete a human bridging
trial demonstrating that BioThrax manufactured at our new
facility is bioequivalent to BioThrax manufactured at our
existing facility. We currently expect to rely on nonclinical
studies for these purposes. However, the FDA has not approved
our plan to rely on nonclinical studies without conducting a
human bridging trial and may not do so. If the FDA requires us
to conduct a human bridging trial, the initiation of large scale
manufacturing of BioThrax for commercial sale at our new
facility will be delayed and we will incur additional
unanticipated costs.
We also own two buildings in Frederick, Maryland that we plan to
build out as new manufacturing facilities. We anticipate that we
will incur up to $1 million related to initial engineering
design and preliminary utility build out for these facilities
during 2006, of which we had incurred approximately
$234,000 through September 30, 2006. Because we are in
the preliminary planning stages of our Frederick build out, we
cannot reasonably estimate the timing and costs that will be
necessary to complete this project. If we proceed with this
project, we expect the costs to be substantial and to likely
require external sources of funds to finance the project.
Critical
accounting policies and estimates
Our discussion and analysis of our financial condition and
results of operations are based on our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities and expenses. On an ongoing basis, we
evaluate our estimates and judgments, including those related to
accrued expenses, fair valuation of stock related to stock-based
compensation and income taxes. We based our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities and the reported amounts of
revenues and expenses that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our financial statements.
Revenue
recognition
We recognize revenues from product sales in accordance with
Staff Accounting Bulletin No. 104,
Revenue
Recognition
, or SAB 104. SAB 104 requires
recognition of revenues from product sales that require no
continuing performance on our part if four basic criteria have
been met:
|
|
|
there is persuasive evidence of an arrangement;
|
57
|
|
|
delivery has occurred or title has passed to our customer based
on contract terms;
|
|
|
the fee is fixed and determinable and no further obligation
exists; and
|
|
|
collectibility is reasonably assured.
|
We cannot sell BioThrax to our customers without written FDA
approval for each lot that we manufacture. As part of the FDA
review process, we submit a detailed lot protocol for each
BioThrax lot that we produce for sale. We also are required to
submit product samples to the FDA for testing. Although we
generally submit lot protocols and product samples promptly
following the satisfactory completion of internal testing, we
are permitted to submit product samples in advance of the lot
protocols. The length of the FDA review process is approximately
four to six weeks. However, individual lots may be released
sooner or later depending on factors such as reviewer questions,
license supplement approval, reviewer availability and whether
our internal testing of product samples is completed before or
concurrently with FDA testing. During the period covered by our
financial statements included in this prospectus, the FDA has
not denied the sale of any BioThrax lots that we have submitted
for approval.
We have generated BioThrax sales revenues under
U.S. government contracts with the DoD and HHS. Under our
DoD contract, we invoice the DoD for progress payments upon
reaching contractually specified stages in the manufacture of
BioThrax. We record as deferred revenue the full amount of each
progress payment invoice that we submit to the DoD. Title to the
product passes to the DoD upon submission of the first invoice.
The earnings process is complete upon FDA release of the product
for sale and distribution. Following FDA release of the product,
we segregate the product for later shipment and recognize as
period revenue all deferred revenue related to the released
product in accordance with the bill and hold sale
requirements under SAB 104. At that time, we also invoice
the DoD for the final progress payment and recognize the amount
of that invoice as period revenue. Our contract with HHS does
not provide for progress payments. We invoice HHS and recognize
the related revenue upon delivery of the product to the
government carrier, at which time title to the product passes to
HHS. We do not record allowances for sales returns, rebates or
special promotional programs for sales of BioThrax or provisions
for sales made in prior periods.
Under the collaboration agreement that we entered into with
Sanofi Pasteur in May 2006 for our meningitis B vaccine
candidate, we received an upfront license fee and are entitled
to additional payments for development work under the
collaboration and upon achieving contractually defined
development and commercialization milestones. We evaluate the
various components of a collaboration in accordance with
Emerging Issues Task Force, or EITF, Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
, or EITF
No. 00-21,
which addresses whether, for revenue recognition purposes, there
is one or several elements in an arrangement. We concluded that
under EITF No. 00-21, the upfront license fee, the
development work and the milestone payments under our agreement
with Sanofi Pasteur should be accounted for as a single unit of
accounting. We recognize amounts received under this agreement
over the estimated development period as we perform services. We
recorded the amount of the upfront license fee as deferred
revenue. We are recognizing this revenue over the estimated
development period under the contract, currently estimated at
seven years, as adjusted from time to time for any delays or
acceleration in the development of the product candidate. Under
the collaboration agreement, we are entitled to payments up to
specified levels for development work we perform for Sanofi
Pasteur. We invoice Sanofi Pasteur in the beginning of each
quarter for the estimated work to occur in that quarter. We
record the invoice amount as deferred revenue. As services are
completed, we recognize the amount of the related deferred
revenue as period revenue. Under the collaboration agreement, we
also will be entitled to royalty payments on any future net
sales of this product candidate.
58
From time to time, we are awarded reimbursement contracts for
services and development grant contracts with government
entities and non-government and philanthropic organizations.
Under these contracts, we typically are reimbursed for our costs
in connection with specific development activities and may also
be entitled to additional fees. We record the reimbursement of
our costs and any associated fees as contract and grant revenue
and the associated costs as research and development expense. We
issue invoices under these contracts after we incur the
reimbursable costs. We recognize revenue upon invoicing the
sponsoring organization.
Accounts
receivable
Accounts receivable are stated at invoice amounts and consist
primarily of amounts due from the DoD and HHS as well as amounts
due under reimbursement contracts with other government entities
and non-government and philanthropic organizations. Because the
prior collection history for receivables from these entities
indicate that collection is likely, we do not currently record
an allowance for doubtful accounts.
Inventories
Inventories are stated at the lower of cost or market, with cost
being determined using a standard cost method, which
approximates average cost. Average cost consists primarily of
material, labor and manufacturing overhead expenses and includes
the services and products of third party suppliers. We analyze
our inventory levels quarterly and write down in the applicable
period inventory that has become obsolete, inventory that has a
cost basis in excess of its expected net realizable value and
inventory in excess of expected customer demand. We also write
off in the applicable period the costs related to expired
inventory. We capitalize the costs associated with the
manufacture of BioThrax as inventory from the initiation of the
manufacturing process through the completion of manufacturing,
labeling and packaging.
Accrued
expenses
As part of the process of preparing financial statements, we are
required to estimate accrued expenses. This process involves
identifying services that have been performed on our behalf and
estimating the level of service performed and the associated
cost incurred for such service where we have not yet been
invoiced or otherwise notified of actual cost. We make these
estimates as of each balance sheet date in our financial
statements. Examples of estimated accrued expenses include:
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fees payable to contract research organizations in conjunction
with clinical trials;
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fees payable to third party manufacturers in conjunction with
the production of clinical trial materials; and
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professional service fees.
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In accruing service fees, we estimate the time period over which
services were provided and the level of effort in each period.
If the actual timing of the provision of services or the level
of effort varies from the estimate, we will adjust the accrual
accordingly. The majority of our service providers invoice us
monthly in arrears for services performed. In the event that we
do not identify costs that have begun to be incurred or we
underestimate or overestimate the level of services performed or
the costs of such services, our actual expenses could differ
from such estimates. The date on which some services commence,
the level of services performed on or before a given date and
the cost of such services are often subjective determinations.
We make judgments based upon the facts and circumstances known
to us.
59
Purchased
in-process research and development
We account for purchased in-process research and development in
accordance with Statement of Financial Accounting Standards, or
SFAS, No. 2,
Accounting for Research and Development
Costs
along with Financial Accounting Standards Board, or
FASB, Interpretation No. 4,
Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by
the Purchase Method.
Under these standards, we are required to determine whether the
technology relating to a particular research and development
project we acquire has an alternative future use. If we
determine that the technology has no alternative future use, we
expense the value of the research and development project not
directly attributed to fixed assets. Otherwise, we capitalize
the value of the research and development project not
attributable to fixed assets as an intangible asset and conduct
an impairment analysis at least annually. In connection with our
acquisition of Microscience and our acquisition of substantially
all of the assets of Antex and ViVacs GmbH, a German limited
liability company, or ViVacs, we allocated the value of the
purchase consideration to current assets, current liabilities,
fixed assets and development programs. Because we determined
that the development programs at Microscience, Antex and ViVacs
had no future alternative use, we charged the value attributable
to the development programs as in-process research and
development. For the Microscience acquisition, which was a share
exchange, our board of directors determined the fair value of
our shares issued in the exchange for financial statement
purposes. For the Antex and ViVacs acquisitions, which were cash
transactions, no fair value determination was necessary.
Stock-based
compensation
Through December 31, 2005, in accordance with
SFAS No. 123,
Accounting for Stock-Based
Compensation
, or SFAS No. 123, we elected to
account for our employee stock-based compensation using the
intrinsic value method in accordance with Accounting Principles
Board, or APB, Opinion No. 25,
Accounting for Stock
Issued to Employees
, and related interpretations, or APB
No. 25, rather than the alternative fair value accounting
method provided for under SFAS No. 123. Accordingly,
we did not record compensation expense on employee stock options
granted in fixed amounts and with fixed exercise prices when the
exercise prices of the options were equal to the fair value of
the underlying common stock on the date of grant. Pro forma
information regarding net loss and loss per share is required by
SFAS No. 123 and has been determined as if we had
accounted for employee stock option grants under the fair value
method prescribed by that statement. We provide this pro forma
disclosure in our financial statements. We account for
transactions in which services are received in exchange for
equity instruments based on the fair value of the services
received from non-employees or of the equity instruments issued,
whichever is more reliably measured, in accordance with
SFAS No. 123 and EITF Issue
No. 96-18,
Accounting for Equity Instruments that Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
, or EITF
No. 96-18.
In accordance with EITF
No. 96-18,
we periodically remeasure stock-based compensation for options
granted to non-employees as the underlying options vest. As of
October 20, 2006, we had no outstanding options that had
been granted to non-employees other than our directors.
In December 2004, the FASB issued SFAS No. 123
(revised 2004),
Share-Based Payment
, or
SFAS No. 123(R), which is a revision of
SFAS No. 123. SFAS No. 123(R) supersedes APB
No. 25 and amends SFAS No. 95,
Statement of
Cash Flows.
Generally, the approach in
SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their estimated fair values. Pro forma
disclosure is no longer an alternative. We adopted
SFAS No. 123(R) on January 1, 2006 using the
modified prospective method. We will continue to value our
share-based payment transactions using a Black-Scholes valuation
model. Under the modified
60
prospective method, we recognize compensation cost in our
financial statements for all awards granted after
January 1, 2006 and for all awards outstanding as of
January 1, 2006 for which the requisite service had not
been rendered as of the date of adoption. Prior period operating
results have not been restated. We measure the amount of
compensation cost based on the fair value of the underlying
common stock on the date of grant. We recognize compensation
cost over the period that an employee provides service in
exchange for the award.
As a result of our adoption of SFAS No. 123(R)
effective January 1, 2006, we recorded stock-based
compensation expense of $385,000 for the nine months ended
September 30, 2006 related to stock options that were
outstanding and had not completely vested as of January 1,
2006. During the nine months ended September 30, 2006, we
granted 258,933 stock options. We recorded additional
stock-based compensation expense of $57,000 related to these
options during the nine months ended September 30, 2006.
Both basic and diluted loss per share for the nine months ended
September 30, 2006 are $0.01 less than if we had continued
to account for stock-based compensation under APB No. 25.
The effect of adopting SFAS No. 123(R) on net loss and
net loss per share is not necessarily representative of the
effects in future years due to, among other things, the vesting
period of the stock options and the fair value of additional
stock option grants in future years. Based on options granted to
employees as of September 30, 2006, total compensation
expense not yet recognized related to unvested options is
approximately $970,000, after tax. We expect to recognize that
expense over a weighted average period of 2.8 years. Based
on options granted to employees as of September 30, 2006,
we expect to recognize amortization of stock-based compensation,
after tax, of approximately $143,000 during the remainder of
2006, $464,000 in 2007, $250,000 in 2008 and $113,000 in 2009.
The factors that most affect charges or credits to operations
related to stock-based compensation are the fair value of the
common stock underlying stock options for which stock-based
compensation is recorded, the volatility of fair value of the
common stock, the expected life of the instrument and the
assumed risk free rate of return. Because shares of our common
stock have not been publicly traded, our board of directors has
determined the fair value of our common stock for accounting
purposes. There is no certainty that the results of our
boards determination would be the value at which the
shares would be traded for cash. In determining the fair value
of our common stock, our board of directors considered:
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the history and nature of our business and results of operations;
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our prospects for growth, including potential contracts for
BioThrax product sales;
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our available cash, assets and financial condition;
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prior determinations of the fair value of the common stock
underlying stock options granted and the effect of corporate
developments, including the progress of our product candidates,
that have occurred between the time of the grants;
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rights and preferences of the security being granted compared to
the rights and preferences of our other outstanding equity;
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values of public companies that we believe are comparable to us,
adjusted for the risks related to and the lack of a liquid
market for the shares;
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the time frame in which a liquid market would likely be
available for the shares;
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business developments involving our direct competitors; and
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general economic trends and the economic outlook and market
conditions for our industry.
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If our estimates of the fair value of these equity instruments
are too high or too low, it would have the effect of overstating
or understating expenses.
In 2004, in connection with our reorganization, we recorded
stock-based compensation expense as a result of the issuance of
stock options to purchase our class B common stock to
replace the outstanding stock options to purchase BioPort
class B common stock. The exercise period of these
replacement options was extended to June 2007. Based upon the
guidance in APB No. 25, because the stock options granted
for our class B common stock provided for an extended term
over that of the cancelled BioPort options, a new measurement
date was created and we recorded as stock-based compensation
expense the excess of the intrinsic value of the modified
options over the intrinsic value of the BioPort options when
originally issued. This resulted in stock-based compensation
expense of $4.3 million for 2004. We did not record any
stock-based compensation expense for options granted during 2003
or 2005.
Income
taxes
Our deferred tax assets include the unamortized portion of
in-process research and development expenses, the anticipated
future benefit of the net operating losses that we have incurred
and other timing differences between financial reporting basis
of assets and liabilities. We have historically incurred net
operating losses for income tax purposes in some states and in
some foreign jurisdictions, primarily the United Kingdom. The
amount of the deferred tax assets on our balance sheet reflects
our expectations regarding our ability to use our net operating
losses to offset future taxable income. The applicable tax rules
in particular jurisdictions limit our ability to use net
operating losses as a result of ownership changes. In
particular, we believe that these rules will significantly limit
our ability to use net operating losses generated by
Microscience and Antex prior to our acquisition of Microscience
in June 2005 and our acquisition of substantially all of the
assets of Antex in May 2003.
We review our deferred tax assets on a quarterly basis to assess
our ability to realize the benefit from these deferred tax
assets. If we determine that it is more likely than not that the
amount of our expected future taxable income will not be
sufficient to allow us to fully utilize our deferred tax assets,
we increase our valuation allowance against deferred tax assets
by recording a provision for income taxes on our income
statement, which reduces net income, or increases net loss, for
that period and reduces our deferred tax assets on our balance
sheet. If we determine that the amount of our expected future
taxable income will allow us to utilize net operating losses in
excess of our net deferred tax assets, we reduce our valuation
allowance by recording a benefit from income taxes on our income
statement, which increases net income, or reduces net loss, for
that period and increases our deferred tax assets on our balance
sheet.
Financial
operations overview
Revenues
We have generated substantially all of our revenues from sales
of BioThrax. We delivered approximately 5.2 million total
doses of BioThrax, representing 97% of our total revenues, in
2005. We delivered approximately 2.5 million total doses of
BioThrax, representing 93% of our total revenues, in the nine
months ended September 30, 2006. The DoD and HHS have been
the principal customers for BioThrax. We also have had limited
sales of BioThrax to foreign governments and private industry.
In addition, we periodically realize revenues from grants from
government entities and non-government and philanthropic
organizations and from licensing fees, milestone payments and
development reimbursement. These items accounted for 3% of our
total revenues in 2005 and 7% of our total revenues in the nine
months ended September 30, 2006. If our ongoing development
efforts are
62
successful, we would expect to generate revenues from sales of
additional products and milestone payments, development payments
and royalties on sales of products that we license to third
parties.
In May 2005, we entered into an agreement to supply five million
doses of BioThrax to HHS for placement into the strategic
national stockpile for a fixed price of $123 million. We
completed delivery of all five million doses by February 2006,
seven months earlier than required. In May 2006, we entered into
a contract modification with HHS for the delivery of an
additional five million doses of BioThrax to HHS by May 2007 for
a fixed price of $120 million. We have delivered
approximately one million doses of BioThrax under this contract
modification through September 2006. We expect to deliver to HHS
between 1.25 million and 1.75 million doses of
BioThrax in each of November 2006 and December 2006,
with the balance to be delivered in the first half of 2007 prior
to expiration of the contract.
In January 2004, we entered into our current contract with the
DoD for the delivery of a minimum number of doses of BioThrax
over one base contract year plus two option periods for a
minimum fixed price of approximately $91 million. Under the
original terms of this contract, we were required to deliver a
minimum of approximately 3.8 million total doses through
September 2006. We delivered approximately 4.9 million total
doses under this contract from 2004 through September 30,
2006 pursuant to DoD purchase orders. We have amended our
current contract with the DoD to provide for the supply of a
minimum of approximately 1.5 million additional doses of
BioThrax to the DoD through September 2007. We expect to deliver
to the DoD approximately 480,000 of these doses by December
2006, with the balance to be delivered by September 2007. We
have invoiced the DoD, as contemplated under this contract, for
progress payments as doses of BioThrax are manufactured for sale
to the DoD. In accordance with our revenue recognition policy,
we record deferred revenue for invoiced amounts until the FDA
releases the product for sale and delivery. As of
September 30, 2006, the amount of our deferred revenue for
DoD sales was $8.4 million. In April 2006, the DoD issued a
notice that it intends to negotiate a sole source fixed price
contract for the purchase of up to an additional 11 million
doses of BioThrax over one base year plus four option years.
Although we are in discussions with the DoD, the DoD has not
issued a formal request for proposals for such a contract and we
have not yet entered into an agreement with the DoD for this
procurement.
In May 2006, we entered into a collaboration agreement with
Sanofi Pasteur relating to the development and commercialization
of our meningitis B vaccine candidate and received a
$3.8 million upfront license fee. This agreement also
provides for a series of milestone payments upon the achievement
of specified development and commercialization objectives,
payments for development work under the collaboration and
royalties on net sales of this product. We recognize the upfront
license fee, milestone payments and development payments under
this agreement as revenue in accordance with our revenue
recognition policies.
Our revenue, operating results and profitability have varied,
and we expect that they will continue to vary, on a quarterly
basis primarily because of the timing of our fulfilling orders
for BioThrax. We expect contracts and grant revenues to increase
in 2006 compared to 2005 as we receive reimbursement for
development expenses under our meningitis B collaboration with
Sanofi Pasteur, funding from the Wellcome Trust for costs
associated with our completed Phase I clinical trial and
planned Phase II clinical trial of our typhoid vaccine
candidate in Vietnam and funding from NIAID for costs associated
with our animal efficacy studies in rabbits of our anthrax
immune globulin candidate.
Cost of product
sales
The primary expense that we incur to deliver BioThrax to our
customers is manufacturing costs, which are primarily fixed
costs. These fixed manufacturing costs consist of attributable
facilities, utilities and salaries
63
and personnel related expenses for indirect manufacturing
support staff. Variable manufacturing costs for BioThrax consist
primarily of costs for materials, direct labor and contract
filling operations. In 2005, we improved manufacturing
efficiencies for BioThrax by extending the hours of operation
for our manufacturing facility. As a result, the cost of product
sales per dose of BioThrax decreased in 2005 compared to 2004.
We do not expect further significant improvements in
manufacturing efficiencies for BioThrax until we complete our
new manufacturing facility in Lansing, Michigan. We currently
are producing BioThrax at close to the maximum capacity of our
existing manufacturing facility. We expect our manufacturing
costs to remain relatively stable for the remainder of 2006 and
during 2007.
We determine the cost of product sales for doses sold for a
period based on the average manufacturing cost per dose for that
period. We calculate the average manufacturing cost per dose by
dividing the actual costs of manufacturing in the applicable
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
any period.
Research and
development expenses
We expense research and development costs as incurred. Our
research and development expenses consist primarily of:
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salaries and related expenses for personnel;
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fees to professional service providers for, among other things,
independently monitoring our clinical trials and acquiring and
evaluating data from our clinical trials;
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costs of contract manufacturing services;
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costs of materials used in clinical trials and research and
development;
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depreciation of capital assets used to develop our
products; and
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operating costs, such as the cost of facilities and the legal
costs of pursuing patent protection of our intellectual property.
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The successful development of our product candidates is highly
uncertain. We believe that significant investment in product
development is a competitive necessity and plan to continue
these investments in order to be in a position to realize the
potential of our product candidates. We cannot reasonably
estimate or know the nature, timing and projected costs of the
efforts that will be necessary to complete the remainder of the
development of, or the period, if any, in which material net
cash inflows may commence from any of our product candidates.
This is due to the numerous risks and uncertainties associated
with developing drugs, including the uncertainty of:
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the scope, rate of progress and expense of our clinical trials
and other research and development activities;
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our ability to obtain adequate supplies of our product
candidates required for later stage clinical trials, including
from third party manufacturers;
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the potential benefits of our product candidates over other
products;
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our ability to market, commercialize and achieve market
acceptance for any of our product candidates that we are
developing or may develop in the future;
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64
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future clinical trial results;
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the terms and timing of regulatory approvals; and
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the expense of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights.
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A change in the outcome of any of these variables with respect
to the development of a product candidate could mean a
significant change in the costs and timing associated with the
development of that product candidate.
We expect that development spending will increase for all of our
biodefense product candidates as our product development
activities continue and we prepare for regulatory submissions
and other regulatory activities. We expect our development
expenses in our commercial business to increase in connection
with our ongoing activities, particularly as we conduct
additional and later stage clinical trials for our product
candidates.
We expect that the magnitude of any increase in our research and
development spending will be dependent upon such factors as the
results from our ongoing preclinical studies and clinical
trials, the size, structure and duration of any follow on
clinical program that we may initiate, cost associated with
manufacturing our product candidates on a large scale basis for
later stage clinical trials, our ability to use data generated
by government agencies, such as the ongoing CDC studies with
BioThrax, and our ability to rely upon and utilize clinical and
nonclinical data, such as the data generated by CDC from use of
the pentavalent botulinum toxoid vaccine previously manufactured
by the State of Michigan. Furthermore, if the FDA or other
regulatory authority were to require us to conduct clinical
trials beyond those which we currently anticipate will be
required for the completion of clinical development of a product
candidate or if we experience significant delays in enrollment
in any of our clinical trials, we could be required to expend
significant additional financial resources and time on the
completion of clinical development.
Selling, general
and administrative expenses
General and administrative expenses consist primarily of
salaries and other related costs for personnel serving the
executive, 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 and accounting services. We expect
that our general and administrative expenses will increase as we
add personnel to support the increased scale of our operations
and become subject to the reporting obligations applicable to
public companies. Our general and administrative expenses have
increased as a result of preparing for this offering and
supporting the overall growth of the company. We currently
market and sell BioThrax directly to the DoD and HHS with a
small, targeted marketing and sales group. Accordingly, our
marketing and sales expense for these efforts has been limited.
As we seek to broaden the market for BioThrax and if we receive
marketing approval for additional products, we expect that we
will increase our spending for marketing and sales activities.
Total other
income (expense)
Total other income (expense) consists principally of interest
income and interest expense. We earn interest on our cash, cash
equivalents and short-term investments, and we incur interest
expense on our indebtedness. Our net interest expense will
increase in future periods as compared to prior periods as a
result of the mortgage loan that we entered into in April 2006
and the term loan that we entered into in August 2006, as well
as any borrowings under our revolving lines of credit. In
addition, some of our existing debt arrangements provide for
increasing amortization of principal payments in future periods.
See Liquidity and capital resources Debt
financing for additional information.
65
Results of
operations
Nine months ended
September 30, 2006 compared to nine months ended
September 30, 2005
Revenues
Product sales revenues, which relate only to the biodefense
segment, decreased by $24.5 million, or 29%, to
$61.3 million for the nine months ended September 30,
2006 from $85.8 million for the nine months ended
September 30, 2005. This decrease in product sales revenues
was primarily due to a 29% decrease in the number of doses
we delivered as a result of the timing of our fulfilling orders
from the DoD and HHS. Product sales revenues in the nine months
ended September 30, 2006 consisted of BioThrax sales to HHS
of $35.4 million, sales to the DoD of $25.3 million
and sales to the Canadian government of $630,000. Product sales
revenues in the nine months ended September 30, 2005
consisted of BioThrax sales to HHS of $69.9 million, sales
to the DoD of $14.5 million, sales to the Canadian
government of $1.1 million and other sales of $291,000.
Contracts and grant revenues increased by $3.5 million to
$4.6 million for the nine months ended September 30,
2006 from $1.1 million for the nine months ended
September 30, 2005. Contracts and grant revenues for the
nine months ended September 30, 2006 consisted of
$3.2 million in upfront and development program revenue
from the Sanofi Pasteur collaboration and $1.5 million in
grant revenue from the Wellcome Trust. Contracts and grant
revenues for the nine months ended September 30, 2005
resulted from reimbursement from the DoD for expenses related to
production development and supply chain management improvements
for BioThrax incurred in prior periods, and for additional work
that we performed on a project basis for the DoDs Defense
Advanced Research Projects Agency, or DARPA, to evaluate a new
vaccine adjuvant for BioThrax.
Cost of
product sales
Cost of product sales, which relate only to the biodefense
segment, consists of expenses incurred in the manufacture of
BioThrax. Cost of product sales decreased by $11.5 million,
or 50%, to $11.6 million for the nine months ended
September 30, 2006 from $23.1 million for the nine
months ended September 30, 2005. This decrease was
attributable to the delivery of 1.0 million fewer doses of
BioThrax in the nine months ended September 30, 2006 and
improved utilization of our manufacturing capacity for BioThrax
as a result of extending the hours of operation for our
manufacturing facility. The reduction in the number of doses
delivered resulted in a reduction in costs of approximately
$6.8 million. Manufacturing efficiencies resulted in a cost
savings of approximately $4.7 million.
Research and
development expenses
Research and development expenses increased by
$17.0 million to $26.6 million for the nine months
ended September 30, 2006 from $9.6 million for the
nine months ended September 30, 2005. This increase
reflects increased expenses of $9.1 million in the
biodefense segment and $8.8 million in the commercial
segment, offset by a reduction of $892,000 in other research and
development expenses.
The increase in biodefense spending was attributable to
increased efforts on all our biodefense programs as we completed
various studies and began subsequent studies and trials. This
increase primarily reflects additional personnel and contract
service costs. The increase in spending for BioThrax
enhancements is related to preparing for animal efficacy studies
to support applications for marketing approval of these
enhancements, which we expect to submit to the FDA in 2008. The
increase in spending for immune globulin development related
primarily to costs associated with our plasma donor stimulation
program for our anthrax immune globulin candidate. The increase
in spending for the recombinant botulinum vaccine
66
program, which is in preclinical development, resulted from
advancing this program to the process development stage and the
manufacture of clinical trial material. The increase in spending
for the next generation anthrax vaccine program, which has
product candidates in preclinical and Phase I clinical
development, resulted from formulation development and the
manufacture of clinical trial material.
The increase in commercial spending was mainly attributable to
spending on the commercial products listed in the table below
following our acquisition of Microscience in June 2005. This
increase primarily reflects additional personnel and contract
service costs. Research and development spending by Microscience
prior to our acquisition of Microscience in June 2005 is not
included in our results for the nine months ended
September 30, 2005. The spending in the nine months ended
September 30, 2006 for our typhoid vaccine candidate
resulted from ongoing work for the Phase I clinical trial
in Vietnam that we recently completed and preparing for our
Phase II clinical trial in Vietnam that we plan to initiate
in the fourth quarter of 2006. The spending in the nine months
ended September 30, 2006 for our hepatitis B therapeutic
vaccine candidate resulted from preparing for our Phase II
clinical trial that we plan to initiate in the fourth quarter of
2006. The spending in the nine months ended September 30,
2006 for our group B streptococcus vaccine candidate resulted
from costs associated with our analysis of results from the
Phase I clinical trial that we recently completed for one
of the protein components of the vaccine candidate and
preparation for Phase I clinical trials for the two other
protein components of the vaccine candidate. Both our chlamydia
vaccine and meningitis B vaccine candidates are in preclinical
development.
The decrease in spending on other research and development
expenses was attributable to our discontinuation of preclinical
programs that we acquired from Antex and determined not to
pursue.
Our principal research and development expenses for the nine
months ended September 30, 2005 and 2006 are shown in the
following table:
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
September 30,
|
(in thousands)
|
|
2005
|
|
2006
|
|
|
Biodefense:
|
|
|
|
|
|
|
BioThrax enhancements
|
|
$
|
1,815
|
|
$
|
2,678
|
Immune globulin development
|
|
|
2,154
|
|
|
6,947
|
Recombinant bivalent botulinum
vaccine
|
|
|
718
|
|
|
1,323
|
Next generation anthrax vaccine
|
|
|
180
|
|
|
3,032
|
|
|
|
|
|
|
Total biodefense
|
|
|
4,867
|
|
|
13,980
|
Commercial:
|
|
|
|
|
|
|
Typhoid vaccine
|
|
|
897
|
|
|
4,483
|
Hepatitis B therapeutic vaccine
|
|
|
727
|
|
|
2,508
|
Group B streptococcus vaccine
|
|
|
411
|
|
|
1,764
|
Chlamydia vaccine
|
|
|
431
|
|
|
1,225
|
Meningitis B vaccine
|
|
|
670
|
|
|
1,943
|
|
|
|
|
|
|
Total commercial
|
|
|
3,136
|
|
|
11,923
|
Other
|
|
|
1,629
|
|
|
737
|
|
|
|
|
|
|
Total
|
|
$
|
9,632
|
|
$
|
26,640
|
|
|
67
Selling,
general and administrative expenses
Selling, general and administrative expenses increased by
$4.0 million, or 14%, to $33.0 million for the nine
months ended September 30, 2006 from $28.9 million for
the nine months ended September 30, 2005. Selling, general
and administrative expenses related to the biodefense segment
decreased by $194,000, or 1%, to $24.4 million for the nine
months ended September 30, 2006 from $24.6 million for
the nine months ended September 30, 2005. Selling, general
and administrative expenses related to the commercial segment
increased by $4.2 million, or 98%, to $8.5 million for
the nine months ended September 30, 2006 from
$4.3 million for the nine months ended September 30,
2005. The increase in the commercial segment was primarily
attributable to an increase in general and administrative
expenses of $3.6 million resulting from the addition of
personnel and facilities for Emergent Product Development UK
following our acquisition of Microscience in June 2005.
Purchased
in-process research and development
In June 2005, we recorded a non-cash charge for purchased
in-process research and development of $26.6 million
associated with our acquisition of Microscience. We valued the
3,636,801 shares of class A common stock that we issued in
the acquisition at $28.2 million after the inclusion of
acquisition costs. Of this amount, we identified
$1.4 million as current assets, $0.9 million as fixed
assets, $0.7 million as current liabilities and
$26.6 million as the value attributable to development
programs. Because we determined that the development programs
had no future alternative use, we charged the value attributable
to the development programs as purchased in-process research and
development. We are amortizing this charge for tax purposes over
15 years.
In July 2006, we recorded a non-cash charge for purchased
in-process research and development of $477,000 associated with
our acquisition of ViVacs. We paid total purchase consideration
of $250,000 and assumed a net deficit of liabilities in excess
of assets of $47,000. We valued the acquisition at $430,000
after the inclusion of acquisition costs. Of this amount, we
identified $153,000 as current assets, $97,000 as fixed assets,
$297,000 as current liabilities and $477,000 as the value
attributable to development programs and technology. Because we
determined that the development programs and technology had no
future alternative use, we charged the value attributable to the
development programs and technology as purchased in-process
research and development. We are amortizing this charge for tax
purposes over 15 years.
Litigation
settlement
In June 2005, we recorded a gain of $10.0 million relating
to a settlement of a litigation matter that we initiated to
resolve a contract and intellectual property dispute. There were
no settlements for the nine months ended September 30,
2006.
Total other
income (expense)
Total other expense decreased by $179,000 to $82,000 for the
nine months ended September 30, 2006 from $261,000 for the
nine months ended September 30, 2005. The decrease resulted
principally from an increase in interest income of $67,000 as a
result of higher investment return on increased average cash
balances, an increase in interest expense of $203,000 related
primarily to the mortgage loan we entered into in April 2006 and
the term loan we entered into in August 2006, and an
increase in other income (expense) of $315,000.
68
Income
taxes
We recorded a benefit from income taxes of $2.6 million for
the nine months ended September 30, 2006 compared to a
provision for income taxes of $2.1 million for the nine
months ended September 30, 2005. The benefit from income
taxes for the nine months ended September 30, 2006 resulted
primarily from our loss before benefit from income taxes of
$6.0 million and an estimated effective annual tax rate of
44%. The provision for income taxes for the nine months ended
September 30, 2005 resulted primarily from our income
before provision for income taxes of $8.4 million and an
estimated effective annual tax rate of 25%. The increase in the
estimated effective annual tax rate by 19% is due primarily
to an increase in the valuation allowance related to estimated
foreign and state net operating losses. While the net operating
losses for foreign and state jurisdictions have been recorded as
deferred tax assets, a full valuation allowance also has been
recorded for such tax assets due to current uncertainty as to
whether we will generate sufficient future taxable income in the
applicable jurisdictions to fully utilize these net operating
losses.
Year ended
December 31, 2005 compared to year ended December 31,
2004
Revenues
Product sales revenues increased by $46.3 million, or 57%,
to $127.3 million for 2005 from $81.0 million for
2004. This increase in product sales revenues was primarily due
to a 52% increase in the number of doses delivered. Product
sales revenues in 2005 consisted of BioThrax sales to HHS of
$111.2 million, sales to the DoD of $14.5 million and
aggregate sales to the governments of Canada and Taiwan of $1.6
million. Product sales revenues in 2004 consisted of BioThrax
sales to the DoD of $80.6 million and sales to the Canadian
government of $360,000.
Contracts and grant revenues increased by $937,000, or 38%, to
$3.4 million in 2005 from $2.5 million in 2004
primarily as a result of additional work that we performed on a
project basis for DARPA to evaluate a new vaccine adjuvant for
BioThrax.
Cost of
product sales
Cost of product sales increased by $1.5 million, or 5%, to
$31.6 million for 2005 from $30.1 million for 2004.
This increase was attributable to the delivery of
1.8 million additional doses of BioThrax in 2005 and a
decrease in production yield, resulting in a higher average
manufacturing cost per dose in 2005, offset by improved
utilization of our manufacturing capacity for BioThrax as a
result of extending the hours of operation for our manufacturing
facility. The increase in the number of doses delivered combined
with the decrease in production yield resulted in additional
costs of $6.6 million. Manufacturing efficiencies resulted
in a cost savings of $5.1 million.
Research and
development expenses
Research and development expenses increased by
$8.3 million, or 82%, to $18.4 million for 2005 from
$10.1 million for 2004. This increase reflects increased
expenses of $4.0 million in the biodefense segment and
$5.8 million in the commercial segment, offset by a
reduction of $1.6 million in other research and development
expenses.
The increase in biodefense spending resulted from costs
associated with our plasma donor stimulation program for our
anthrax immune globulin candidate, process development related
to our recombinant botulinum vaccine candidate and evaluation of
third party technology related to our next generation anthrax
vaccine program for potential acquisition or in license, offset
by decreased spending on BioThrax
69
enhancements. In 2004, the immune globulin program was in
initial development and we had not yet begun work on the
recombinant botulinum vaccine and next generation anthrax
vaccine candidates. The decrease in spending on BioThrax
enhancements resulted from substantial completion during 2004 of
research regarding manufacturing process development for
BioThrax to improve the stability and consistency of production
lots.
The increase in spending in the commercial segment was
attributable to spending on the commercial programs listed in
the table below following our acquisition of Microscience in
June 2005. Research and development spending by Microscience is
not included in our results prior to the acquisition date. The
commercial spending in 2005 resulted from the Phase I
clinical trial in Vietnam for our typhoid vaccine candidate,
preparation for a planned Phase II clinical trial for our
hepatitis B therapeutic vaccine candidate, including the
manufacture of clinical trial material, preparation for one of
three planned Phase I clinical trials related to one of the
protein components of our group B streptococcus vaccine
candidate and preclinical work for our chlamydia vaccine and
meningitis B vaccine candidates.
The decrease in spending on other research and development
expenses was attributable to our discontinuation of preclinical
programs that we acquired from Antex and determined not to
pursue.
Our principal research and development expenses for 2004 and
2005 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
December 31,
|
(in
thousands)
|
|
2004
|
|
2005
|
|
|
Biodefense:
|
|
|
|
|
|
|
BioThrax enhancements
|
|
$
|
5,929
|
|
$
|
2,883
|
Immune globulin development
|
|
|
350
|
|
|
5,309
|
Recombinant bivalent botulinum
vaccine
|
|
|
|
|
|
1,708
|
Next generation anthrax vaccine
|
|
|
|
|
|
427
|
|
|
|
|
|
|
Total biodefense
|
|
|
6,279
|
|
|
10,327
|
Commercial:
|
|
|
|
|
|
|
Typhoid vaccine
|
|
|
|
|
|
1,477
|
Hepatitis B therapeutic vaccine
|
|
|
|
|
|
1,884
|
Group B streptococcus vaccine
|
|
|
|
|
|
1,032
|
Chlamydia vaccine
|
|
|
1,136
|
|
|
837
|
Meningitis B vaccine
|
|
|
|
|
|
1,334
|
|
|
|
|
|
|
Total commercial
|
|
|
1,136
|
|
|
6,564
|
Other
|
|
|
2,702
|
|
|
1,490
|
|
|
|
|
|
|
Total
|
|
$
|
10,117
|
|
$
|
18,381
|
|
|
Selling,
general and administrative expenses
Selling, general and administrative expenses increased by
$12.5 million, or 41%, to $42.8 million for 2005 from
$30.3 million for 2004. Selling, general and administrative
expenses related to our biodefense segment increased by
$6.4 million to $35.4 million for 2005 from
$29.0 million for 2004. Selling, general and administrative
expenses related to our commercial segment increased by
$6.0 million to $7.3 million
70
for 2005 from $1.3 million for 2004. The increase in the
biodefense segment was attributable to an increase in general
and administrative expenses of $5.5 million resulting from
additional personnel and professional service providers for our
headquarters organization who devoted time to the biodefense
segment and an increase in sales and marketing expenses of
$1.0 million resulting from the addition of sales personnel
to investigate potential other markets for BioThrax. The
increase in the commercial segment was attributable to an
increase in general and administrative expenses of
$5.3 million resulting from the addition of personnel for
Emergent Product Development UK and legal expenses associated
with reorganizing our corporate structure following our
acquisition of Microscience in June 2005.
Purchased
in-process research and development
In 2005, as described above, we recorded a non-cash charge of
$26.6 million for purchased in-process research and
development associated with our acquisition of Microscience.
Litigation
settlement
In 2005, we recorded a gain of $10.0 million relating to a
settlement of a litigation matter that we initiated to resolve a
contract and intellectual property dispute. There were no
settlements in 2004.
Total other
income (expense)
Total other expense increased by $57,000 to $227,000 for 2005
from $170,000 for 2004. This increase resulted primarily from an
increase in interest expense associated with our financing of
the acquisition costs for one building at our Frederick facility.
Income
taxes
Provision for income taxes increased by $196,000, or 4%, to
$5.3 million for 2005 from $5.1 million for 2004. The
provision for income taxes for 2005 resulted primarily from our
income before provision for income taxes of $21.1 million
and an effective annual tax rate of 25%. The provision for
income taxes for 2004 resulted primarily from our income before
provision for income taxes of $16.6 million and an
effective annual tax rate of 31%. The provision for income taxes
also reflects research and development tax credits of $474,000
for 2005 and $492,000 for 2004 and small amounts of permanent
tax differences in each year.
Year ended
December 31, 2004 compared to year ended December 31,
2003
Revenues
Product sales revenues increased by $25.5 million, or 46%,
to $81.0 million for 2004 from $55.5 million for 2003.
This increase in product sales revenues was primarily due to a
45% increase in the number of doses delivered. Product sales
revenues in 2004 consisted of BioThrax sales to the DoD of
$80.6 million and sales to the Canadian government of
$360,000. Product sales revenues in 2003 consisted of BioThrax
sales to the DoD of $55.2 million and sales to the Canadian
government of $270,000.
Contracts and grant revenues increased to $2.5 million in
2004 from $233,000 in 2003 primarily as a result of additional
work that we performed on a project basis for DARPA to evaluate
a new vaccine adjuvant for BioThrax.
71
Cost of
product sales
Cost of product sales increased by $7.8 million, or 35%, to
$30.1 million for 2004 from $22.3 million for 2003.
This increase was attributable to the delivery of approximately
1.0 million additional doses of BioThrax in 2004. We were
able to deliver these additional doses as a result of increasing
our manufacturing capacity at our Lansing facility in 2004 by
extending the hours of operation of the facility. The increase
in the number of doses delivered resulted in additional costs of
$3.5 million. Increasing manufacturing capacity resulted in
additional costs of $4.3 million, primarily for the
training of new personnel. Our increase in manufacturing
capacity allowed us to spread our fixed manufacturing costs over
a greater number of doses, which resulted in a decrease in the
cost of product sales per dose of BioThrax in 2004 compared to
2003.
Research and
development expenses
Research and development expenses increased by
$3.8 million, or 60%, to $10.1 million for 2004 from
$6.3 million for 2003. This increase reflects increased
expenses of $1.9 million in the biodefense segment and
$1.8 million in the commercial segment. The increase in the
biodefense segment was attributable to work on the initiation of
programs for BioThrax enhancements and consisted primarily of
personnel and contract service costs. The increase in the
commercial segment was attributable to spending on commercial
product candidates acquired from Antex in May 2003. Research and
development spending by Antex is not included in our results
prior to the acquisition date.
Selling,
general and administrative expenses
Selling, general and administrative expenses increased by
$10.8 million, or 55%, to $30.3 million for 2004 from
$19.5 million for 2003. Selling, general and administrative
expenses related to the biodefense segment increased by
$9.5 million to $29.0 million for 2004 from
$19.5 million for 2003. This increase was attributable to
growth in corporate staff to support expanding business activity
and increased costs for professional service providers. Selling,
general and administrative expenses related to the commercial
segment increased by $1.3 million for 2004 from an
immaterial amount for 2003 as we hired additional employees to
support the newly acquired Antex operations. The overall
increase in selling, general and administrative expenses was
primarily attributable to an increase of $7.0 million in
general and administrative expenditures as a result of our
corporate reorganization in June 2004 and the formation of our
headquarters organization, including a non-cash stock-based
compensation charge of $4.3 million. In addition, general
and administrative expenses increased $1.1 million as a
result of our acquisition of assets from Antex. Selling and
marketing expense increased to $843,000 for 2004 from an
immaterial amount for 2003. This increase in spending resulted
from the addition of personnel and outside consulting fees.
Purchased
in-process research and development
In 2003, we recorded a non-cash charge of $1.8 million
associated with our acquisition of assets from Antex. We paid
total purchase consideration of $3.4 million in cash. We
valued the transaction at $3.8 million after the inclusion
of acquisition costs. Of this amount, we identified $300,000 as
current assets, $1.7 million as fixed assets and
$1.8 million as the value attributable to development
programs. Because we determined that the development programs
had no future alternative use, we charged the value attributable
to the development programs as purchased in-process research and
development. We are amortizing this charge for tax purposes over
15 years.
72
Settlement of
State of Michigan obligation
In 2004, we recorded a gain of $3.8 million from the
satisfaction for less than originally estimated of an obligation
to the State of Michigan related to our acquisition of assets
from the Michigan Biologic Products Institute in 1998. We have
no ongoing obligations to the State of Michigan related to our
acquisition of assets from the Michigan Biologic Products
Institute. There was no settlement of obligations in 2003.
Total other
income (expense)
Total other expense, net, increased to $170,000 for 2004 from
$25,000 for 2003. The increase resulted principally from a
decrease in other income of $162,000.
Income
taxes
Provision for income taxes increased by $3.9 million to
$5.1 million for 2004 from $1.3 million for 2003. The
provision for income taxes for 2004 resulted primarily from our
income before provision for income taxes of $16.6 million
and an effective annual tax rate of 31%. The provision for
income taxes for 2003 resulted primarily from our income before
provision for income taxes of $5.7 million and an effective
annual tax rate of 22%. The provision for income taxes also
reflects research and development tax credits of $492,000 for
2004 and $441,000 for 2003 and small amounts of permanent tax
differences in each year.
Liquidity and
capital resources
Sources of
liquidity
We require cash to meet our operating expenses and for capital
expenditures, acquisitions and principal and interest payments
on our debt. We have funded our cash requirements from inception
through September 30, 2006 principally with a combination
of revenues from BioThrax product sales, debt financings and
facilities and equipment leases, revenues under our
collaboration agreement with Sanofi Pasteur, development funding
from government entities and non-government and philanthropic
organizations and, to a lesser extent, from the sale of our
class B common stock upon exercise of stock options. We
have operated profitably for each of the years in the three year
period ended December 31, 2005, but incurred a loss in the
nine months ended September 30, 2006. As of
September 30, 2006, we had cash and cash equivalents of
$19.9 million.
Cash
flows
The following table provides information regarding our cash
flows for the years ended December 31, 2003, 2004 and 2005
and the nine months ended September 30, 2005 and
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
Nine months ended
September 30,
|
|
(in
thousands)
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities(1)
|
|
$
|
11,072
|
|
|
$
|
9,196
|
|
|
$
|
41,974
|
|
|
$
|
21,581
|
|
|
$
|
(8,032
|
)
|
Investing activities
|
|
|
(7,917
|
)
|
|
|
(18,175
|
)
|
|
|
(5,841
|
)
|
|
|
(2,317
|
)
|
|
|
(32,741
|
)
|
Financing activities
|
|
|
(927
|
)
|
|
|
8,681
|
|
|
|
(6,660
|
)
|
|
|
(6,574
|
)
|
|
|
24,385
|
|
|
|
|
|
|
|
Total net cash provided
(used)
|
|
$
|
2,228
|
|
|
$
|
(298
|
)
|
|
$
|
29,473
|
|
|
$
|
12,690
|
|
|
$
|
(16,388
|
)
|
|
|
|
|
(1)
|
|
Includes the effect of exchange rate changes on cash and cash
equivalents.
|
73
Net cash used in operating activities of $8.0 million in
the nine months ended September 30, 2006 resulted
principally from our net loss of $3.3 million, an increase
in inventories of $11.6 million, reflecting the value of
work in process for BioThrax lots being manufactured or awaiting
delivery, and a non-cash benefit from income taxes of
$4.9 million, reflecting our net loss before provision for
income taxes for the period, offset by an increase in accounts
payable of $6.1 million related to expenses incurred but
unpaid at September 30, 2006 and an increase in deferred
revenue of $4.6 million related to amounts billed under our
contract with the DoD and deferral of a portion of the upfront
license fee from Sanofi Pasteur. The net loss for the period and
the increase in inventory are primarily related to the timing of
our fulfilling orders from the DoD and HHS. The increase in
deferred revenue primarily reflects progress billings to the
DoD, pursuant to our contract, for product not yet released or
shipped and, therefore, not recorded as revenue during the
period.
Net cash provided by operating activities of $21.6 million
in the nine months ended September 30, 2005 resulted
principally from our net income of $6.3 million, a non-cash
charge for purchased in-process research and development
relating to the Microscience acquisition, which reduced net
income by $26.6 million, and a reduction in accounts
receivable of $16.3 million as a result of the collection
of amounts due from the DoD during 2005 for invoices outstanding
at the end of 2004 for progress in the manufacture of BioThrax
lots, offset by a reduction in deferred revenue of
$10.9 million, reflecting the recognition of revenue
related to the delivery to the DoD of BioThrax lots for which we
had previously invoiced the DoD for progress payments and been
paid, and an increase in deferred tax assets of
$10.3 million, reflecting a deferred tax asset recorded to
reflect the timing differences between the book charge and the
tax deferral of expense related to the purchased in-process
research and development expense related to the Microscience
acquisition.
Net cash provided by operating activities of $42.3 million
in 2005 resulted principally from our net income of
$15.8 million, a non-cash charge for purchased in-process
research and development related to the Microscience
acquisition, which reduced net income by $26.6 million, and
a reduction of accounts receivable of $16.1 million as a
result of the collection of amounts due from the DoD during 2005
for invoices outstanding at the end of 2004 for progress in the
manufacture of BioThrax lots, offset by a reduction of deferred
revenue of $10.9 million, reflecting the delivery to the
DoD in the first quarter of 2005 of BioThrax lots for which we
had previously invoiced the DoD for progress payments and been
paid and an increase in deferred tax assets of
$11.0 million, reflecting a deferred tax asset recorded to
reflect the timing differences between the book charge and the
tax deferral of expense related to the purchased in-process
research and development expense related to the Microscience
acquisition.
Net cash provided by operating activities of $9.2 million
in 2004 resulted principally from our net income of
$11.5 million, a non-cash stock based compensation charge
that we incurred as a result of our issuance of new stock
options in our corporate reorganization in June 2004, which
reduced net income by $4.3 million, an increase in income
taxes payable of $5.8 million related to the timing of
payment of taxes and related deferred tax assets, and an
increase in deferred revenue of $3.9 million, reflecting
invoices to and payments from the DoD for progress in the
manufacture of BioThrax lots, offset by an increase in accounts
receivable of $15.7 million, reflecting invoices for
amounts due from the DoD for progress in the manufacture of
BioThrax lots, and a one-time non-cash gain of $3.8 million
resulting from the satisfaction of an obligation to the State of
Michigan for less than originally estimated.
Net cash provided by operating activities of $11.1 million
in 2003 resulted principally from our net income of
$4.5 million and an increase of $11.9 million in
deferred revenue reflecting invoices to and payments from the
DoD for progress in the manufacture of BioThrax lots, offset by
an increase in inventories of $4.7 million reflecting the
timing of deliveries to the DoD.
74
Net cash used in investing activities in the nine months ended
September 30, 2006 and 2005 and in 2005, 2004 and 2003
resulted principally from the purchase of property, plant and
equipment. Capital expenditures in the nine months ended
September 30, 2006 relate primarily to costs for
construction of our new building in Lansing, Michigan and the
acquisition of our second facility in Frederick, Maryland.
Capital expenditures in 2005 were primarily attributable to
investments in information technology upgrades and miscellaneous
facility enhancements. Capital expenditures in 2004 include
infrastructure investments of $4.7 million,
$3.8 million for an enterprise resource planning system and
$8.5 million for the purchase of one of our facilities in
Frederick, Maryland. Capital expenditures in 2003 include
infrastructure investments in our Lansing facilities. Net cash
used in investing activities in 2003 also includes cash of
$3.8 million used for the acquisition of assets from Antex.
Net cash provided by financing activities of $24.4 million
in the nine months ended September 30, 2006 resulted
primarily from proceeds from notes payable related to the
financing of the purchase of our Frederick facility in May 2006
and the financing of a portion of the costs related to the
construction of our new building in Lansing. Net cash used in
financing activities of $6.6 million in the nine months
ended September 30, 2005 resulted principally from the
payment of a special dividend from a portion of the proceeds of
a litigation settlement and the repayment of notes payable to
employees and the repurchase of class B common stock.
Net cash used in financing activities of $6.7 million in
2005 resulted principally from the payment of a special dividend
of $5.4 million from a portion of the proceeds of a
litigation settlement and the repayment of notes payable to
employees.
Net cash provided by financing activities of $8.7 million
in 2004 resulted principally from an increase in notes payable
as a result of $11.0 million of total debt incurred to
finance the purchase of one of our facilities in Frederick,
Maryland and to finance the purchase of an enterprise resource
planning system, offset by the repayment of non-recurring
royalty and product supply obligations to the State of Michigan
of $2.4 million.
Net cash used in financing activities of $927,000 in 2003
resulted primarily from the repayment of royalty and product
supply obligations to the State of Michigan.
Contractual
obligations
The following table summarizes our contractual obligations at
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by
period
|
(in
thousands)
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
After 2010
|
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short and long-term debt(1)
|
|
$
|
49,707
|
|
$
|
3,504
|
|
$
|
5,627
|
|
$
|
5,297
|
|
$
|
5,287
|
|
$
|
5,286
|
|
$
|
24,707
|
Operating lease obligations
|
|
|
15,919
|
|
|
422
|
|
|
1,699
|
|
|
1,801
|
|
|
686
|
|
|
647
|
|
|
10,664
|
Contractual settlement liabilities
|
|
|
200
|
|
|
100
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations
|
|
$
|
65,826
|
|
$
|
4,026
|
|
$
|
7,426
|
|
$
|
7,098
|
|
$
|
5,973
|
|
$
|
5,933
|
|
$
|
35,371
|
|
|
|
|
(1)
|
|
Includes scheduled interest payments.
|
The preceding table excludes contingent contractual payments
that we may become obligated to make upon achievement of
specified research, development and commercialization milestones
and contingent contractual royalty payments. The amount of
contingent contractual milestone payments that we may become
obligated to make is variable based on the actual achievement
and timing of the applicable milestones and the characteristics
of any products or product candidates that are developed,
including
75
factors such as number of products or product candidates
developed, type and number of components of each product or
product candidate, ownership of the various components and the
specific markets affected. Based on our current development
plans, we estimate that the maximum amount of these contingent
contractual milestone payments under our existing contracts
would be approximately $11 million. We are not obligated to
pay any minimum royalties under our existing contracts.
Debt
financing
As of September 30, 2006, we had $36.5 million
principal amount of debt outstanding, comprised primarily of the
following:
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|
|
$2.5 million outstanding under a forgivable loan from the
Department of Business and Economic Development of the State of
Maryland used to finance eligible costs incurred to purchase one
of our facilities in Frederick, Maryland;
|
|
|
$7.0 million outstanding under a mortgage loan from
Mercantile Potomac Bank used to finance the remaining portion of
the purchase price for the Frederick facility;
|
|
|
$8.4 million outstanding under a mortgage loan from HSBC
Realty Credit Corporation used to finance the purchase price for
a second facility on the Frederick site;
|
|
|
$1.3 million outstanding under a term loan from Fifth Third
Bank used to finance the purchase of an enterprise resource
planning system;
|
|
|
$2.2 million outstanding under a $10.0 million
revolving line of credit with Fifth Third Bank;
|
|
|
$10.0 million outstanding under a term loan from HSBC
Realty Credit Corporation used to finance a portion of the costs
of our facility expansion in Lansing, Michigan; and
|
|
|
$5.0 million outstanding under a $5.0 million
revolving line of credit with HSBC Realty Credit Corporation.
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We can borrow under the line of credit with Fifth Third Bank
through November 2006 and under the line of credit with HSBC
Realty Credit Corporation through October 2007.
Some of these debt instruments contain financial and operating
covenants. In particular:
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|
|
Under our mortgage loan from Mercantile Potomac Bank for our
Frederick facility, we are required to maintain at all times a
minimum tangible net worth of not less than $5.0 million.
In addition, we are required to maintain at all times a ratio of
earnings before interest, taxes, depreciation and amortization
to the sum of current obligations under capital leases and
principal obligations and interest expenses for borrowed money,
in each case due and payable within the following
12 months, of not less than 1.1 to 1.0.
|
|
|
Under our forgivable loan from the State of Maryland, we are not
required to repay the principal amount of the loan if beginning
December 31, 2009 and through 2012 we maintain a specified
number of employees at the Frederick site, by December 31,
2009 we have invested at least $42.9 million in total funds
toward financing the purchase of the buildings on the site and
for related improvements and operation of the facility and we
occupy the facility through 2012.
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|
|
Under our term loan and revolving line of credit with HSBC
Realty Credit Corporation, we are required to maintain on an
annual basis a minimum tangible net worth of not less than the
sum of 85% of our tangible net worth for the most recently
completed fiscal year plus 25% of current net operating profit
after taxes. In addition, we are required to maintain on a
quarterly basis a ratio of earnings before
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76
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|
interest, taxes, depreciation and amortization for the most
recent four quarters to the sum of current obligations under
capital leases and principal obligations and interest expenses
for borrowed money, in each case due and payable for the
following four quarters, of not less than 1.25 to 1.00.
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|
Under our line of credit with Fifth Third Bank, our wholly owned
subsidiary, Emergent BioDefense Operations, is required to
maintain at all times a ratio of total liabilities to tangible
net worth of not more than 2.5 to 1.0.
|
Our debt instruments also contain negative covenants restricting
our activities. Our term loan and revolving line of credit with
HSBC Realty Credit Corporation limit the ability of Emergent
BioDefense Operations to incur indebtedness and liens, sell
assets, make loans, advances or guarantees, enter into mergers
or similar transactions and enter into transactions with
affiliates. Our term loan and revolving line of credit with HSBC
Realty Credit Corporation also limit our ability to incur
indebtedness and liens, enter into mergers or similar
transactions and enter into transactions with affiliates. Our
line of credit with Fifth Third Bank limits the ability of
Emergent BioDefense Operations to incur indebtedness and liens,
sell assets, make loans, advances or guarantees, enter into
mergers or similar transactions, enter into transactions with
affiliates and amend the terms of any government contract.
The facilities and software and other equipment that we
purchased with the proceeds of our loans from Mercantile Potomac
Bank, the State of Maryland, HSBC Realty Credit Corporation and
Fifth Third Bank serve as collateral for these loans. Our line
of credit with Fifth Third Bank is secured by accounts
receivable under our DoD and HHS contracts. Our term loan and
revolving line of credit with HSBC Realty Credit Corporation are
secured by substantially all of Emergent BioDefense
Operations assets, other than accounts receivable under
our DoD and HHS contracts. The covenants under our existing debt
instruments and the pledge of our existing assets as collateral
limit our ability to obtain additional debt financing.
Under our mortgage loan from Mercantile Potomac Bank, we are
required to make monthly principal payments beginning in
November 2006. A residual principal repayment of approximately
$5.0 million is due upon maturity in October 2011. Interest
is payable monthly and accrues at an annual rate of 6.625%
through October 2009. In October 2009, the interest rate is
scheduled to be adjusted to a fixed annual rate equal to 3.20%
over the yield on U.S. government securities adjusted to a
constant maturity of two years.
Under our mortgage loan from HSBC Realty Credit Corporation, we
are required to make monthly principal payments. A residual
principal repayment of approximately $7.5 million is due
upon maturity in April 2011. Interest is payable monthly and
accrues at an annual rate equal to LIBOR plus 3.00%.
Under our term loan from Fifth Third Bank, we make monthly
principal payments through maturity in September 2007. Interest
is payable monthly and accrues at an annual rate equal to 0.375%
less than the prime rate of interest established from time to
time by Fifth Third Bank.
Under our revolving line of credit with Fifth Third Bank, any
outstanding principal is due upon maturity in November 2006.
Interest is payable monthly and accrues at an annual rate equal
to 0.375% less than the prime rate of interest established from
time to time by Fifth Third Bank.
Under our term loan with HSBC Realty Credit Corporation, we are
required to make monthly principal payments beginning in April
2007. A residual principal payment of approximately
$4.0 million is due upon maturity in August 2011. Upon our
request, the term loan is subject to an extension term in the
sole discretion of HSBC Realty Credit Corporation for five
additional years until August 2016 for an extension fee of 1.00%
of the principal balance of the loan. If the term of the loan
were extended, we would be required to continue to make monthly
principal payments through maturity in August 2016 in
77
lieu of the residual principal payment otherwise due in August
2011. Interest is payable monthly and accrues at an annual rate
equal to LIBOR plus 3.75%.
Under our revolving line of credit with HSBC Realty Credit
Corporation, we are not required to repay outstanding principal
until October 2007. In October 2007, the outstanding principal
under the revolving line of credit will convert to a term loan
with required monthly principal payments through maturity in
August 2011. Interest is payable monthly and accrues at an
annual rate equal to LIBOR plus 3.75%. We also are required to
pay a fee on a quarterly basis equal to 0.50% of the average
daily difference between $5.0 million and the amount
outstanding under the revolving line of credit. As of
September 30, 2006, $5.0 million was outstanding under
the revolving line of credit.
Tax
benefits
In connection with our facility expansion in Lansing, the State
of Michigan and the City of Lansing have provided us a variety
of tax credits and abatements. We estimate that the total value
of these tax benefits may be up to $18.5 million over a
period of up to 15 years. These tax benefits are based on
our $75 million planned additional investment in our
Lansing facilities. In addition, we must maintain a specified
number of employees in Lansing to continue to qualify for these
tax benefits.
Funding
requirements
We believe that the net proceeds from this offering, together
with our existing cash and cash equivalents, revenues from
BioThrax product sales and other committed sources of funds,
will be sufficient to enable us to fund our anticipated
operating expenses and capital expenditure and debt service
requirements for at least the next 24 months. We have based
this estimate on assumptions that may prove to be wrong. We
expect to continue to fund a significant portion of our
development and commercialization costs for our product
candidates with internally generated funds from sales of
BioThrax. There are numerous risks and uncertainties associated
with BioThrax product sales and with the development and
commercialization of our product candidates. Our business plan
also contemplates that we will raise $10 million to
$20 million of additional external debt financing to fund
our facility expansion in Lansing and to provide additional
financial flexibility. In addition to purchase obligations and
orders under our contracts with the DoD and HHS for BioThrax
sales, our only committed external sources of funds are
remaining borrowing availability under our revolving lines of
credit with HSBC Realty Credit Corporation and Fifth Third
Bank, development funding under our collaboration agreement with
Sanofi Pasteur, funding from NIAID for animal efficacy studies
of our anthrax immune globulin candidate and funding from the
Wellcome Trust for our Phase II clinical trial of our
typhoid vaccine candidate in Vietnam. Our ability to borrow
additional amounts under our loan agreements is subject to our
satisfaction of specified conditions. Our future capital
requirements will depend on many factors, including:
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the level and timing of BioThrax product sales and cost of
product sales;
|
|
|
the timing of, and the costs involved in, constructing our new
manufacturing facility in Lansing, Michigan and the build out of
our manufacturing facilities in Frederick, Maryland;
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|
the scope, progress, results and costs of our preclinical and
clinical development activities;
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|
the costs, timing and outcome of regulatory review of our
product candidates;
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|
|
the number of, and development requirements for, other product
candidates that we may pursue;
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|
|
the costs of commercialization activities, including product
marketing, sales and distribution;
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78
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|
|
the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other patent-related
costs, including litigation costs and the results of such
litigation;
|
|
|
the extent to which we acquire or invest in businesses, products
and technologies;
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|
|
our ability to obtain development funding from government
entities and non-government and philanthropic organizations; and
|
|
|
our ability to establish and maintain collaborations, such as
our collaboration with Sanofi Pasteur.
|
We may require additional sources of funds for future
acquisitions that we may make or, depending on the size of the
obligation, to meet balloon payments upon maturity of our
current borrowings. To the extent our capital resources are
insufficient to meet our future capital requirements, we will
need to finance our cash needs through public or private equity
offerings, debt financings or corporate collaboration and
licensing arrangements.
Additional equity or debt financing, grants, or corporate
collaboration and licensing arrangements, may not be available
on acceptable terms, if at all. If adequate funds are not
available, we may be required to delay, reduce the scope of or
eliminate our research and development programs or reduce our
planned commercialization efforts. If we raise additional funds
by issuing equity securities, our stockholders may experience
dilution. Debt financing, if available, may involve agreements
that include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt, making
capital expenditures or declaring dividends. Any debt financing
or additional equity that we raise may contain terms, such as
liquidation and other preferences, that are not favorable to us
or our stockholders. If we raise additional funds through
collaboration and licensing arrangements with third parties, it
may be necessary to relinquish valuable rights to our
technologies or product candidates or grant licenses on terms
that may not be favorable to us.
Quantitative and
qualitative disclosures about market risk
Our exposure to market risk is currently confined to our cash
and cash equivalents and restricted cash that have maturities of
less than three months. We currently do not hedge interest rate
exposure. We have not used derivative financial instruments for
speculation or trading purposes. Because of the short-term
maturities of our cash and cash equivalents, we do not believe
that an increase in market rates would have any significant
impact on the realized value of our investments, but may
increase the interest expense associated with our debt.
Effects of
inflation
Our most liquid assets are cash, cash equivalents and short-term
investments. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have
intangible assets in the value of our intellectual property. In
accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our balance sheet. Due to the nature of this intellectual
property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue
to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related
to replacement costs of such items will not materially affect
our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract
services, which could increase our level of expenses and the
rate at which we use our resources.
79
Recent accounting
pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements
, or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 emphasizes that fair value
is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants
would use in pricing the asset or liability. The provisions of
SFAS No. 157 are effective for fiscal years beginning
after November 15, 2007 and interim periods within those
fiscal years. Prior to adoption, we will evaluate the impact of
adopting SFAS No. 157 on our financial statements.
In June 2006, the FASB issued FASB Interpretation 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109
,
Accounting for Income Taxes
, or
FIN 48. FIN 48 clarifies the accounting for
uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 requires that we recognize in the financial
statements, the impact of a tax position, if that position is
more likely than not of being sustained on audit, based on the
technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative
effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently
evaluating the impact of adopting FIN 48 on our financial
statements.
In March 2006, the FASB issued Statement No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140
, or
SFAS No. 156. SFAS No. 156 requires an
entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial
asset by entering into a servicing contract based on certain
conditions. The provisions of SFAS No. 156 are
effective for fiscal years beginning after September 15,
2006. The adoption of SFAS No. 156 will not have a
material impact on our consolidated financial statements.
In February 2006, the FASB issued Statement No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140
, or SFAS No. 155.
SFAS No. 155 permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject
to the requirements of Statement No. 133, establishes a
requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are
not embedded derivatives and amends Statement No. 140 to
eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to
a beneficial interest other than another derivative financial
instrument. The provisions of SFAS No. 155 are
effective for fiscal years beginning after September 15,
2006. The adoption of SFAS No. 155 will not have a
material impact on our consolidated financial statements.
80
Business
Overview
We are a biopharmaceutical company focused on the development,
manufacture and commercialization of immunobiotics.
Immunobiotics are pharmaceutical products, such as vaccines and
immune globulins that induce or assist the bodys immune
system to prevent or treat disease. We operate in two business
segments: biodefense and commercial. In our biodefense business,
we develop and commercialize immunobiotics for use against
biological agents that are potential weapons of bioterrorism. In
our commercial business, we develop immunobiotics for use
against infectious diseases with significant unmet or
underserved medical needs. Our marketed product, BioThrax, is
the only vaccine approved by the U.S. Food and Drug
Administration, or FDA, for the prevention of anthrax infection.
In addition to BioThrax, our biodefense product portfolio
includes three biodefense product candidates in preclinical
development and a next generation anthrax vaccine program with
product candidates in preclinical and Phase I clinical
development. Our commercial product portfolio includes a typhoid
vaccine candidate and a hepatitis B therapeutic vaccine
candidate, both of which are in Phase II clinical
development, one vaccine candidate in Phase I clinical
development and two vaccine candidates in preclinical
development.
We manufacture and market BioThrax, also referred to as anthrax
vaccine adsorbed, the only FDA approved anthrax vaccine.
BioThrax was originally approved in the United States in 1970.
There have been more than 20 published studies of the use of
BioThrax in humans. In December 2005, based on a review of the
human efficacy data used to support the approval of BioThrax and
other studies of BioThrax, the FDA reaffirmed that BioThrax is
safe and effective for the prevention of anthrax infection by
all routes of exposure, including inhalation. Our total revenues
from BioThrax sales were $55.5 million in 2003,
$81.0 million in 2004, $127.3 million in 2005 and
$61.3 million in the nine months ended September 30,
2006. The U.S. Department of Defense, or DoD, and the
U.S. Department of Health and Human Services, or HHS, have
been the principal customers for BioThrax. Under two contracts
with the DoD, we have supplied over nine million doses of
BioThrax through September 2006 for immunization of military
personnel. Since March 1998, the DoD has vaccinated more than
1.5 million military personnel with more than
5.5 million doses of BioThrax. Our current contract with
the DoD provides for the supply of a minimum of approximately
1.5 million additional doses of BioThrax to the DoD through
September 2007. In April 2006, the DoD issued a notice that it
intends to negotiate a sole source fixed price contract for the
purchase of up to an additional 11 million doses of
BioThrax over one base contract year plus four option years.
Under a contract that we entered into with HHS in May 2005, we
supplied five million doses of BioThrax to HHS for placement
into the strategic national stockpile for a fixed price of
$123 million. In May 2006, we entered into a contract
modification with HHS for the delivery of an additional five
million doses of BioThrax to HHS by May 2007 for a fixed price
of $120 million. We have delivered approximately one
million doses of BioThrax under this contract modification
through September 2006.
The September 11, 2001 terrorist attacks and the October
2001 anthrax letter attacks significantly affected political and
budgetary attitudes toward the threat of bioterrorism. Following
these attacks, the U.S. government enacted measures to
provide incentives for private industry to develop and
manufacture biodefense products. In particular, in 2004, the
Project BioShield Act became law, providing $5.6 billion in
appropriations over ten years and authorizing the procurement of
countermeasures for biological, chemical, radiological and
nuclear attacks. Project BioShield provides for the procurement
of countermeasures for anthrax and botulism, which are two of
the biological agents that the Centers for Disease Control and
Prevention, or CDC, has identified as the greatest possible
threat to public health. The U.S. government procures most
biodefense countermeasures through HHS, the CDC and the DoD and
provides biodefense research and development funding through the
National Institute of Allergy and Infectious Diseases, or NIAID,
of the National Institutes of Health, or NIH, and the DoD.
81
In addition to BioThrax, we have three biodefense immunobiotic
product candidates in preclinical development and a next
generation anthrax vaccine program with product candidates in
preclinical and Phase I clinical development. Our
biodefense product candidates in preclinical development are:
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Anthrax immune globulin
for post-exposure
treatment of anthrax infection, which we are developing in part
with funding from NIAID;
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|
|
Botulinum immune globulin
for post-exposure
treatment of illness caused by botulinum toxin, which we are
developing based on a new botulinum toxoid vaccine that we are
developing in collaboration with the U.K. Health Protection
Agency, or HPA; and
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|
|
Recombinant bivalent botulinum vaccine
a
prophylaxis for illness caused by botulinum toxin, which we also
are developing in collaboration with HPA.
|
We are evaluating several potential product candidates in
connection with development of a next generation anthrax
vaccine, featuring attributes such as self administration and a
longer shelf life. In September 2006, we submitted three
separate proposals in response to a request for proposals issued
by NIAID in June 2006 for the advanced development and testing
of next generation anthrax vaccine candidates. One of our
proposals relates to a vaccine candidate that has completed a
Phase I clinical trial.
In our commercial business, we are developing a range of
immunobiotic product candidates for use against infectious
diseases with significant unmet or underserved medical needs.
Our commercial product candidates in clinical development are:
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|
|
Typhoid vaccine
a single dose, drinkable
vaccine, for which we have completed a Phase I clinical
program, including trials in the United States, the United
Kingdom and Vietnam, and expect to initiate a Phase II
clinical trial in Vietnam in the fourth quarter of 2006;
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|
|
Hepatitis B therapeutic vaccine
a multiple
dose, drinkable vaccine for treatment of chronic carriers of
hepatitis B infection, for which we have completed a
Phase I clinical trial in the United Kingdom and expect to
initiate a Phase II clinical trial in the United Kingdom in
the fourth quarter of 2006; and
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|
|
Group B streptococcus vaccine
a multiple
dose, injectable vaccine for administration to women of
childbearing age for protection of the fetus and newborn babies,
for which we have completed a Phase I clinical trial in the
United Kingdom.
|
In addition, we are developing a chlamydia vaccine and a
meningitis B vaccine, each of which is currently in preclinical
development.
The Wellcome Trust provided funding for our Phase I
clinical trial of our typhoid vaccine candidate in Vietnam and
has agreed to provide funding for our Phase II clinical
trial of this vaccine candidate in Vietnam. In May 2006, we
entered into a license and co-development agreement with Sanofi
Pasteur, the vaccines business of Sanofi-Aventis, under which we
granted Sanofi Pasteur an exclusive, worldwide license under our
proprietary technology to develop and commercialize a meningitis
B vaccine candidate.
Our
strategy
Our goal is to become a worldwide leader in developing,
manufacturing and commercializing immunobiotics that target
diseases with significant unmet or underserved medical needs.
Key elements of our strategy to achieve this goal are:
Maximize the commercial potential of BioThrax.
We
are focused on increasing sales of BioThrax to
U.S. government customers, expanding the market for
BioThrax to other customers and pursuing label expansions and
improvements for BioThrax. The potential label expansions and
improvements for
82
BioThrax include an extension of shelf life, reductions in the
number of required doses, addition of another method of
administration and use as a post-exposure prophylaxis for
anthrax infection in combination with antibiotic therapy.
Continue to develop a balanced portfolio of immunobiotic
products.
We seek to maintain a balanced product
portfolio that includes both biodefense and commercial
immunobiotic product candidates and both vaccines and
therapeutics to diversify product development and
commercialization risk. We use multiple technologies in our
development programs, which we believe significantly reduces our
risk in these activities. We expect that biodefense product
candidates may generate revenues from product sales sooner than
commercial product candidates because of Project BioShield,
which allows the U.S. government to purchase biodefense
products for the strategic national stockpile before they are
approved by the FDA.
Focus on core capabilities in product development and
manufacturing.
We focus our efforts on immunobiotic
product development and manufacturing, which we believe are our
core capabilities. This approach enables us to avoid the expense
and time entailed in early stage research activities and, we
believe, reduces product development and commercialization risk.
We seek to obtain marketed products and development stage
product candidates through acquisitions and licensing
arrangements with third parties. We believe that we have
secured, and will be able to continue to secure, rights to a
diverse product pipeline that targets diseases with significant
unmet or underserved medical needs. We also believe that this
approach may enable us to accelerate product development
timelines through our preclinical and clinical development and
regulatory expertise and manufacturing capabilities.
Build a large scale manufacturing infrastructure.
To
augment our existing manufacturing capabilities, we are
constructing a new 50,000 square foot manufacturing
facility on our Lansing, Michigan campus. We also own two
buildings in Frederick, Maryland that we plan to build out as
future manufacturing facilities. We are constructing our new
facility in Lansing as a large scale commercial manufacturing
plant that we can use to produce multiple vaccine products,
subject to complying with appropriate change-over procedures. We
anticipate that we will initiate large scale manufacturing of
BioThrax for commercial sale at the new Lansing facility in
2008. We are constructing this facility to accommodate
production of up to 40 million doses of BioThrax per year
on a single production line, which we could expand for
production of up to 80 million doses per year through the
addition of a second production line. In comparison, our current
facility has a maximum production capacity of approximately nine
million doses of BioThrax per year.
Selectively establish collaborations.
For each of
our product candidates, we plan to evaluate the merits of
retaining commercialization rights for ourselves or entering
into collaboration arrangements with leading pharmaceutical or
biotechnology companies or non-governmental organizations. We
expect that we will selectively pursue collaboration
arrangements in situations in which the collaborator has
particular expertise or resources for the development or
commercialization of our products and product candidates or to
access particular markets. We recently entered into a
collaboration with Sanofi Pasteur for our meningitis B vaccine
candidate as we believe that the value of this vaccine candidate
may be maximized if it is sold in combination with other
vaccines offered by Sanofi Pasteur. We are currently
collaborating with HPA for the development of both a new
botulinum toxoid vaccine, which we plan to use to develop our
botulinum immune globulin candidate, and our recombinant
bivalent botulinum vaccine candidate, which has given us access
to HPAs technology and manufacturing capabilities.
Seek governmental and other third party grants and
support.
The biodefense immunobiotic product candidates
that we are developing are of significant interest to the U.S.
and potentially other governments. The CDC currently is
independently conducting a clinical trial to evaluate whether as
few as three doses of BioThrax, administered over six months,
will confer adequate immune response over as long as
42 months. In addition, NIAID has completed an independent
animal efficacy study of BioThrax in
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combination with antibiotics as a post-exposure prophylaxis for
anthrax infection. NIAID has awarded us grant funding for animal
efficacy studies of our anthrax immune globulin candidate. We
believe that some of our commercial immunobiotic product
candidates that may benefit people in the developing world are
of interest to charitable and philanthropic organizations. The
Wellcome Trust provided funding for our Phase I clinical
trial of our typhoid vaccine candidate in Vietnam and has agreed
to provide funding for our Phase II clinical trial of this
vaccine candidate in Vietnam. We plan to encourage government
entities and non-government and philanthropic organizations to
continue to conduct studies of, and pursue other development
efforts and provide development funding for, BioThrax and our
product candidates.
Market
opportunity
We focus on the biodefense and commercial markets for
immunobiotics.
The biodefense
market
The biodefense market for immunobiotics has grown dramatically
as a result of the increased awareness of the threat of global
terror activity in the wake of the September 11, 2001
terrorist attacks and the October 2001 anthrax letter attacks.
The letter attacks involved the delivery of mail contaminated
with anthrax spores to government officials and members of the
media in the United States. As a result of the letter attacks,
22 people became infected with anthrax, including 11 with
inhalational anthrax, and five people died.
The U.S. government is the principal source of worldwide
biodefense spending. Most U.S. government spending on
biodefense programs results from procurement of countermeasures
by HHS, the CDC and the DoD and development funding from NIAID
and the DoD. The U.S. government is now the largest source
of funding for academic institutions and biotechnology companies
conducting biodefense basic research or developing novel
vaccines and other immunobiotic therapeutics.
Department of Health and Human Services.
In 2004,
the Project BioShield Act became law. This statute provides
$5.6 billion in appropriations over ten years and
authorizes the procurement of countermeasures for biological,
chemical, radiological and nuclear attacks. Pursuant to Project
BioShield, HHS has begun to procure vaccines and other products
for a strategic national stockpile. The strategic national
stockpile is a national repository of medical assets and
countermeasures designed to provide state and local public
health agencies with medical supplies needed to treat those
affected by terrorist attacks, natural disasters, industrial
accidents and other public health emergencies, such as a flu
epidemic. Materials from the strategic national stockpile were
deployed following both the September 11, 2001 terrorist
attacks and the October 2001 anthrax letter attacks. We expect
that HHS will procure supplies of vaccines for the strategic
national stockpile on an ongoing basis and replenish the
stockpile as the existing inventories reach the end of their
shelf lives.
Pursuant to Project BioShield, the CDC has categorized
bioterrorism agents into three categories from A to C based on
the perceived risk of the agent to national security. The
highest risk category is category A. The six agents that the CDC
has classified as category A are anthrax, botulism, plague,
smallpox, tularemia and viral hemorrhagic fevers. The Secretary
of HHS has directed most of the BioShield procurement efforts
and funding to date to category A agents. Under Project
BioShield, the Secretary of HHS can contract to purchase
countermeasures for the strategic national stockpile prior to
FDA approval of the countermeasure in specified circumstances.
To be eligible for purchase under these provisions, the
Secretary of HHS must
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determine that there is sufficient and satisfactory clinical
results or research data, including data, if available, from
preclinical and clinical trials, to support a reasonable
conclusion that the countermeasure will qualify for approval or
licensing within eight years, even though the product has not
completed clinical trials and has not yet been approved by the
FDA. Project BioShield also allows the Secretary of HHS to
authorize the emergency use of medical products that have not
yet been approved by the FDA.
Members of Congress have proposed and may in the future propose
legislation that expands the funding and coverage of Project
BioShield. We believe that continued assessments of the threat
that bioterrorism poses to the public health are likely to
advance these legislative initiatives.
Centers for Disease Control.
The U.S. Congress
provides annual funding to the CDC for the procurement of
medical assets and countermeasures for the strategic national
stockpile. This appropriation funding supplements amounts
available under Project BioShield for procurement of
countermeasures. Congress provided funding to CDC of
$525 million in fiscal year 2006 and $467 million in
fiscal year 2005 for this purpose.
Department of Defense.
The DoD procures biodefense
immunobiotics that it administers primarily through the Military
Vaccine Agency, or MilVax. MilVax administers various
vaccination programs for military personnel, including vaccines
for common infectious diseases, such as influenza, and vaccines
to protect against specific bioterrorism threats, such as
anthrax and smallpox. The DoD has included anthrax at the top of
its biological threat list. The level of spending by the DoD for
MilVax is a function of the size of the U.S. military and
the approach of the DoD with respect to vaccine stockpile and
use, particularly whether, and to what extent, the DoD mandates
that members of the military participate in vaccination
programs. Absent a Presidential waiver or the informed consent
of the recipient, the DoD is required to use FDA approved
products, if available, and not investigational products under
development, in MilVax vaccination programs. The DoD provides
development funding for biodefense vaccines through its Joint
Vaccine Acquisition Program.
National Institute of Allergy and Infectious
Diseases.
Beginning with fiscal year 2003, the
U.S. Congress added approximately $1.5 billion per
year to the biodefense research funding budget for NIAID. In
fiscal year 2004, NIAID awarded more than 700 research project
grants for biodefense research. In fiscal year 2004, biodefense
funding by NIAID totaled $1.6 billion, which was more than
one-third of NIAIDs total third party research funding
budget.
There are also a number of potential additional customers for
biodefense immunobiotics. These include:
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the U.S. Postal Service;
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foreign governments;
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state and local governments, which we expect will be interested
in these products to protect first responders, such as police,
fire and emergency medical personnel;
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multinational companies and non-governmental
organizations; and
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hospitals.
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Although there have been minimal sales to these customers to
date, we believe that they may comprise an important component
of the overall biodefense market in the future.
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The commercial
market
Vaccines have long been recognized as a safe and cost-effective
method for preventing infection caused by various bacteria and
viruses. Because of an increased emphasis on preventative
medicine in industrialized countries, vaccines are now well
recognized as an important part of public health management
strategies. According to Frost & Sullivan, a market
research organization, from 2002 to 2005, annual worldwide
vaccine sales increased from $6.7 billion to
$9.9 billion, a compound annual growth rate of
approximately 14%. Frost & Sullivan estimates that the
worldwide sales of vaccines will grow at a compound annual rate
of approximately 10.5% from 2005 through 2012. As of 2005,
Frost & Sullivan estimates that approximately
two-thirds of global vaccine sales were attributable to
pediatric vaccines. In addition, vaccines sold in developed
markets represented approximately 80% of worldwide vaccine
revenues. New vaccine technologies and a greater understanding
of how disease-causing organisms, or pathogens, cause disease
are leading to the introduction of new vaccine products.
Moreover, while existing marketed vaccines generally are
designed to prevent infections, new vaccine technologies have
also led to a focus on the development of vaccines for
therapeutic purposes. Potential therapeutic vaccines extend
beyond infectious diseases to cancer, autoimmune diseases and
allergies.
Most non-pediatric commercial vaccines are purchased and paid
for, or reimbursed by, managed care organizations, other private
health plans or public insurers or paid for directly by
patients. With respect to some diseases affecting the public
health generally, particularly in developing countries, public
health authorities or nongovernmental, charitable or
philanthropic organizations fund the cost of vaccines. According
to Frost & Sullivan, public purchases of vaccines,
including for immunization programs and government stockpiles,
account for approximately 90% of the total volume of worldwide
vaccine sales. Although accounting for only 10% of the total
volume of worldwide vaccine sales, private market purchases of
vaccines accounted for approximately 60% of total worldwide
vaccine sales revenues in 2005.
Scientific
background
The immune
system
The immune system provides protection against pathogens, such as
bacteria and viruses, through immune responses that are
generated by a type of white blood cells known as lymphocytes.
Immune responses that depend on lymphocyte recognition of
components of pathogens, called antigens, have two important
characteristics. First, these immune responses are specific,
which means that lymphocytes recognize particular antigens on
pathogens. Second, these immune responses induce memory so that
when the antigen is encountered again, the immune response is
enhanced. Generally, there are two types of specific immunity:
humoral immunity and cell mediated immunity. Humoral immunity is
provided by proteins, known as antibodies or immune globulins,
that are produced by lymphocytes. Antibodies are effective in
dealing with pathogens before the pathogens enter cells. Cell
mediated immunity is provided by lymphocytes that generally deal
with threats from cells that are already infected with pathogens
by directly killing infected cells or interacting with other
immune cells to initiate the production of antibodies or
activate cells that kill and eliminate infected cells.
Vaccines
A vaccine is normally given to a healthy person as a prophylaxis
in order to generate immune responses that will protect against
future infection and disease caused by pathogens. Following
vaccination, the immune systems memory of antigens
presented by a vaccine allows for an immune response to be
generated to a pathogen to provide protection against disease.
Therapeutic vaccines also are being
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developed to strengthen or modify the immune response in
patients already infected with bacterial and viral pathogens to
clear the pathogens from their bodies. Without treatment, these
patients can be subject to recurring bouts of the disease.
There are three basic types of vaccines: live attenuated
vaccines, inactivated whole cell vaccines and subunit vaccines.
Live attenuated vaccines are made from weakened, or attenuated,
viruses or bacteria that are designed to mimic some of the early
stages of infection without causing disease. Inactivated whole
cell vaccines are made by growing the infectious organism in
culture media or mammalian cells and then inactivating the
organisms. Subunit vaccines are derived from individual antigens
that can be purified and used as vaccines. Culture filtrate
vaccines are a type of subunit vaccine. These vaccines are based
on components that are secreted by pathogens grown in a culture
media and then purified by filtration of the culture media.
Live attenuated vaccines can produce stronger, longer lasting
immunity than inactivated whole cell vaccines and often are
effective after only a single dose. However, live attenuated
vaccines are subject to safety concerns related to the risk that
they may revert to the virulent form or cause disease in
patients with weakened immune systems. Inactivated whole cell
vaccines have been successfully developed for some pathogens,
but large quantities of the infectious organism have to be grown
to make the vaccine. This poses a safety risk for people
involved in the manufacturing process and requires high levels
of containment. Subunit vaccines generally produce fewer side
effects than vaccines that use the whole organism, but often are
not as immunogenic as inactivated whole cell or live attenuated
vaccines. Adjuvants, which augment or enhance the immune
responses to vaccine antigens, are often used in combination
with weaker antigens, such as subunit vaccines.
Scientists have applied recombinant technology, which allows for
the manipulation of the genetic material of pathogens, in the
development of new live attenuated and subunit vaccines. For
live attenuated vaccines, genes involved in virulence can be
completely deleted from a pathogen so that the organism can no
longer cause disease or revert to the virulent form. For subunit
vaccines, the gene directing the production of the antigen can
be isolated and moved into a harmless organism where it can be
expressed at high levels and purified. In addition, scientists
have used recombinant technology to develop vector systems to
deliver multiple vaccine antigens from different disease-causing
organisms in a single live attenuated vaccine by inserting genes
coding for these antigens into the genetic material of the
vector. Currently, the only recombinant vaccines approved by the
FDA are those for the prevention of hepatitis B infection,
including both stand-alone vaccines and combination vaccines
that include the recombinant hepatitis B component. The only
recombinant vaccines currently licensed by the European
Medicines Agency for marketing in the European Union member
states are several vaccines that contain recombinant hepatitis B
and one vaccine that includes a recombinant cholera toxin B
subunit. We believe that the primary application for recombinant
technology in the vaccine field will be for the development of
vaccines in situations in which other vaccine technologies have
not been successful or in which recombinant technology permits
vaccine production with a lower level of safety containment.
Immune
globulins
Immune globulins are normally made by collecting plasma from
individuals who have contracted or been vaccinated for a
particular disease and whose plasma contains protective
antibodies, known as IgG, generated by a humoral immune response
to pathogen exposure or vaccination. These antibodies are
isolated by fractionation of the plasma, purified and then
administered intravenously to patients, providing an immediate
protective effect. Because it normally takes several weeks to
generate antibodies after vaccination, immune globulins are used
in situations in which it is not possible to wait for active
immunization to generate the protective immune response.
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Products
The following table summarizes key information about our
marketed product, BioThrax, and our biodefense and commercial
immunobiotic product candidates. We utilize a wide array of
technologies to develop and manufacture our marketed product and
product candidates, including conventional and recombinant
technologies. For each development program, we select and apply
the technology that we believe is best suited to address the
particular disease based on our evaluation of factors such as
safety, efficacy, manufacturing requirements, regulatory pathway
and cost. We currently hold all commercial rights to BioThrax
and all of our immunobiotic product candidates, other than our
recombinant bivalent botulinum vaccine, for which HPA has the
non-exclusive right to make, use and sell to meet public health
requirements in the United Kingdom, and our meningitis B vaccine
candidate that we are developing in collaboration with Sanofi
Pasteur. For more information about our agreements with HPA, see
Intellectual property and licenses License
agreements HPA agreements. For more information
about our collaboration with Sanofi Pasteur, see
Sanofi Pasteur collaboration.
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Therapeutic/
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Stage of
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Collaboration/
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Immunobiotic
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prophylactic
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development
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Status
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external
relationship
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Biodefense
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Anthrax
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BioThrax (anthrax vaccine adsorbed)
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Prophylactic
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FDA approved
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Commercially marketed six dose
regimen
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Prophylactic
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Post-approval label expansion
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BLA supplement submitted for five
dose regimen and intramuscular injection; CDC clinical trial
ongoing for three dose regimen with a booster dose once every
three years thereafter
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CDC independent
clinical trial
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Prophylactic
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Post-approval label expansion
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Single dose syringe development
program initiated
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BioThrax (anthrax vaccine adsorbed)*
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Post-exposure prophylactic
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Post-approval label expansion
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Phase I clinical trial
ongoing; two
proof-of-concept
animal studies completed for three dose regimen
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Next generation anthrax vaccine*
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Pre-exposure and post-exposure
prophylactic
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Phase I and preclinical
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Proposals submitted for three
distinct product candidates in response to NIAID request for
proposals
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Anthrax immune globulin*
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Therapeutic
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Preclinical
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Plasma donor stimulation program
ongoing; animal efficacy studies planned; plan to file IND in
late 2006 or early 2007
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NIAID funding for animal
efficacy studies in rabbits
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Botulinum
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Recombinant bivalent botulinum
vaccine*
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Prophylactic
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Preclinical
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Proof-of-concept
animal study completed
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HPA collaboration
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Botulinum immune globulin*
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Therapeutic
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Preclinical
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Proof-of-concept
animal studies planned
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HPA collaboration for
development of a new botulinum toxoid vaccine
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Commercial
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Typhoid vaccine
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Prophylactic
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Phase II
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Phase I clinical trial in
Vietnam completed for a drinkable single dose regimen; plan to
initiate Phase II clinical trial in Vietnam in the fourth
quarter of 2006
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Wellcome Trust funding
for Phase I and Phase II clinical trials in Vietnam
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Hepatitis B therapeutic vaccine
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Therapeutic
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Phase II
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Phase I clinical trial in the
United Kingdom completed for a drinkable multiple dose regimen;
clinical trial application approved in the United Kingdom for a
Phase II clinical trial
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Group B streptococcus vaccine
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Prophylactic
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Phase I
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One Phase I clinical trial in
the United Kingdom completed; two additional Phase I
clinical trials planned
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Chlamydia vaccine
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Prophylactic
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Preclinical
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Proof-of-concept
animal study completed
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Meningitis B vaccine
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Prophylactic
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Preclinical
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Antigen identification ongoing
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Sanofi Pasteur
collaboration
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We currently intend to rely on the
FDA animal rule in seeking marketing approval for these product
candidates. Under the animal rule, if human efficacy trials are
not ethical or feasible, the FDA can approve drugs or biologics
used to treat or prevent serious or life threatening conditions
caused by exposure to lethal or permanently disabling toxic
chemical, biological, radiological or nuclear substances based
on human clinical data demonstrating safety and immunogenicity
and evidence of efficacy from appropriate non-clinical animal
studies and any additional supporting data. For more information
about the FDA animal rule, see Government
regulation Clinical trials.
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No assessment of the safety or efficacy of our vaccine
candidates can be considered definitive until all clinical
trials needed to support a submission for marketing approval are
completed. The results of our completed preclinical tests and
Phase I clinical trials do not ensure that our planned later
stage clinical trials for our vaccine candidates will be
successful. A failure of one or more of our clinical trials can
occur at any stage of testing.
Biodefense
business
In our biodefense business, we are developing and
commercializing immunobiotics for use against biological agents
that are potential weapons of bioterrorism. Our marketed
product, BioThrax, is the only vaccine approved by the FDA for
the prevention of anthrax infection. In addition to BioThrax,
our biodefense product portfolio includes three product
candidates in preclinical development and a next generation
anthrax vaccine program with product candidates in preclinical
and Phase I clinical development. We are developing all of
our biodefense product candidates to address category A
biological agents, which are the class of biological agents that
the CDC has identified as the greatest possible threat to public
health.
BioThrax
(anthrax vaccine adsorbed)
Anthrax overview.
Anthrax is a potentially fatal
disease caused by the spore forming bacterium
Bacillus
anthracis
. Anthrax bacteria are naturally occurring, and
spores are found in soil throughout the world. Anthrax spores
can withstand extreme heat, cold and drought for long periods
without nutrients or air. Anthrax infections occur if the spores
enter the body through a cut, abrasion or open sore, referred to
as cutaneous anthrax, or by ingestion or inhalation of the
spores. Once inside the body, anthrax spores germinate into
bacteria that then multiply. Anthrax bacteria secrete three
toxin proteins, protective antigen, lethal factor and edema
factor, which are individually non-toxic but can become highly
toxic if allowed to interact on the surface of human or animal
cells.
Cutaneous anthrax, although rare in the United States, is the
most common type of naturally acquired anthrax. Cutaneous
anthrax is typically acquired through contact with contaminated
animals and animal products. The fatality rate for untreated
cases of cutaneous anthrax is estimated to be approximately 20%.
Inhalational anthrax is the most lethal form of anthrax. We
believe that aerosolized anthrax spores are the most likely
method to be used in a potential anthrax bioterrorism attack.
Inhalational anthrax has been reported to occur from one to
43 days after exposure to aerosolized spores. Initial
symptoms of inhalational anthrax are non-specific and may
include sore throat, mild fever, cough, achiness or weakness,
lasting up to a few days. After a brief period of improvement,
the release of anthrax toxins may cause an abrupt deterioration
of the infected person, with the sudden onset of symptoms,
including fever, respiratory failure as the lungs fill with
fluids and shock. Hemorrhagic meningitis is common. Death often
occurs within 24 hours of the onset of advanced respiratory
complications. The fatality rate for inhalational anthrax is
estimated to be between 45% and 90%, depending on whether
aggressive, early treatment is provided.
To date, the principal customer for anthrax vaccines has been
the U.S. government. Because of concerns regarding the use
of anthrax spores as a biological weapon during the first
Persian Gulf War, the DoD began administering BioThrax to
military personnel in 1990. Since 1998, we have been a party to
two supply agreements for BioThrax with the DoD. Pursuant to
these contracts, we supplied over nine million doses of
BioThrax through September 2006 to the DoD for immunization of
military personnel. Since March 1998, the DoD has vaccinated
more than 1.5 million military personnel with more than
5.7 million doses of BioThrax. Our current contract with
the DoD provides for the supply of a minimum of approximately
1.5 million additional doses of BioThrax to the DoD through
September 2007. We expect to deliver to the DoD approximately
480,000 of these doses by December 2006, with the balance to be
delivered by September 2007. In October 2006, the DoD announced
that it is resuming a mandatory vaccination program for BioThrax
for designated military personnel and emergency-essential and
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comparable civilian personnel. For personnel not deployed in
high threat areas or no longer assigned designated special
mission roles, vaccination will be on a voluntary basis.
In May 2005, we entered into an agreement to supply five million
doses of BioThrax to HHS for placement into the strategic
national stockpile for a fixed price of $123 million. We
completed delivery of all five million doses by February 2006,
seven months earlier than required. In May 2006, we entered into
a contract modification with HHS for the delivery of an
additional five million doses of BioThrax to HHS by May 2007 for
a fixed price of $120 million. We have delivered
approximately one million doses of BioThrax under this
contract modification through September 2006. We expect to
deliver to HHS between 1.25 million and 1.75 million
doses of BioThrax in each of November 2006 and December 2006,
with the balance to be delivered in the first half of 2007 prior
to expiration of the contract.
Following the October 2001 anthrax letter attacks, the CDC
provided BioThrax under an investigational new drug application,
or IND, protocol for administration on a voluntary basis to
Capitol Hill employees and others who may have been exposed to
anthrax. In addition, we have supplied small amounts of BioThrax
directly to several foreign governments. It is our understanding
that the DoD has sold BioThrax to the governments of a number of
other foreign countries for the protection of military
personnel. We believe that state and local governments and
several foreign governments are significant potential customers
for BioThrax. Our total revenues from BioThrax sales were
$55.5 million in 2003, $81.0 million in 2004,
$127.3 million in 2005 and $61.3 million in the nine
months ended September 30, 2006.
Current treatments.
The only FDA approved product
for pre-exposure prophylaxis of anthrax infection is BioThrax.
The only FDA approved products for post-exposure prophylaxis of
anthrax infection are antibiotics, which are typically
administered over a
60-day
period. Antibiotics prevent anthrax disease by killing the
anthrax bacteria before the bacteria can release anthrax toxins
into the body. However, antibiotics are not effective against
anthrax toxins after the toxins have been released into the body
and do not kill anthrax spores that may remain in the body for
extended periods after exposure. In addition, antibiotics may
not be effective against antibiotic resistant strains of
anthrax. Anthrax spores that remain in the body can potentially
lead to infection following the end of antibiotic treatment.
Infection also may occur if patients do not adhere to the
prolonged course of antibiotic treatment or are not able to
remain on antibiotics for extended periods of time. Because of
these limitations, the CDC recommends administering BioThrax in
combination with antibiotics under an IND with informed consent
of the patient as a post-exposure prophylaxis for anthrax
infection as an emergency public health intervention. While
BioThrax is not currently approved by the FDA for post-exposure
prophylaxis, as discussed below, we are actively pursuing a
label expansion for this indication.
Description and benefits of BioThrax.
BioThrax is
the only FDA approved vaccine for the prevention of anthrax
infection. It is approved by the FDA as a pre-exposure
prophylaxis for use in adults who are at high risk of exposure
to anthrax spores. BioThrax is manufactured from a culture
filtrate, made from a non-virulent strain of
Bacillus
anthracis,
and contains no dead or live bacteria. BioThrax
is administered by subcutaneous injection in three initial doses
followed by three additional doses, with an annual booster dose
recommended thereafter. The three initial doses are given two
weeks apart followed by three additional doses given at six, 12
and 18 months following the first vaccination. BioThrax
includes aluminum hydroxide, or alum, as an adjuvant.
The NIH originally approved the manufacture and sale of BioThrax
by the Michigan Department of Public Health in 1970. In 1972,
responsibility for approving biological products transferred
from the NIH to the FDA. Following that transfer of
responsibility, the FDA established procedures for reviewing the
safety and efficacy of biological products, including BioThrax,
that had been previously approved by the NIH. The FDA set out to
categorize the products according to evidence of safety and
effectiveness and determine if the products should remain
approved and on the market. In December 1985, the FDA issued a
proposed rule containing a finding that BioThrax was safe and
effective. However, the FDA did not finalize that proposed rule
pursuant
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to applicable notice and comment requirements. In December 2005,
based on a review of data from the study used to support the
original marketing approval of BioThrax and other studies of the
use of BioThrax in humans, including studies by the CDC and the
DoD, the FDA issued a final order regarding BioThrax. In the
final order, the FDA affirmed the approval of BioThrax and
found, among other things, that:
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BioThrax is safe and effective;
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the study used to support the original marketing approval of
BioThrax constituted a well controlled human efficacy study in
which BioThrax was 92.5% effective in preventing inhalational
and cutaneous anthrax;
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as reported by the Institute of Medicine, studies in humans and
animal models support the conclusion that BioThrax is effective
against anthrax strains that are dependent upon the anthrax
toxin as a mechanism of virulence by all routes of exposure,
including inhalation;
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periodic evaluations of reports in the vaccine adverse event
reporting system database maintained by the CDC and the FDA
confirm that BioThrax continues to be safe for its intended use;
and
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as reported by an independent advisory panel to the FDA, CDC
data suggest that BioThrax is fairly well tolerated with
systemic reactions and severe local reactions being relatively
rare.
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In a study published in 2002, the Institute of Medicine, which
is a component of The National Academy of Sciences and provides
independent, unbiased, evidence-based advice on matters
pertaining to public health, found that BioThrax is an effective
vaccine for protection against anthrax, including inhalational
anthrax, caused by any known or plausible engineered strains and
that no convincing evidence exists that people face an increased
risk of experiencing short-term life-threatening or permanently
disabling adverse effects from BioThrax or developing any
adverse effects from long-term use of BioThrax.
As with any pharmaceutical product, the use of vaccines carries
a risk of adverse health effects that must be weighed against
the expected health benefit of the product. The adverse
reactions that have been associated with the administration of
BioThrax are similar to those observed following the
administration of other adult vaccines and include local
reactions, such as redness, swelling and limitation of motion in
the inoculated arm, and systemic reactions, such as headache,
fever, chills, nausea and general body aches. In addition, some
serious adverse events have been reported to the vaccine adverse
event reporting system database maintained by the CDC and the
FDA with respect to BioThrax. The report of any such adverse
event to the vaccine adverse event reporting system database is
not proof that the vaccine caused such event. These serious
adverse events, including diabetes, heart attacks, autoimmune
diseases, including Guillian Barre syndrome, lupus and multiple
sclerosis, lymphoma and death, have not been causally linked to
the administration of BioThrax.
BioThrax development activities.
In its 2002 study,
the Institute of Medicine recommended characteristics for the
development of a new anthrax vaccine. Based on these
recommendations, we are actively pursuing label expansions and
improvements for BioThrax, including the following:
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Extend shelf life.
In 2005, the FDA approved an
extension of BioThrax shelf life from two to three years, which
will allow BioThrax to be stockpiled for a longer period of
time. We are conducting ongoing stability testing of BioThrax,
and, depending on the outcome of these tests, we may apply for a
further extension of BioThrax shelf life in late 2006.
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Reduce doses for pre-exposure prophylaxis.
We have
applied to the FDA to reduce the number of required doses of
BioThrax for pre-exposure prophylaxis from six to five, with an
annual booster dose thereafter. Our application is based on an
interim analysis of data from an ongoing clinical trial being
conducted by the CDC to evaluate whether as few as three doses
of BioThrax, administered over six months, will confer adequate
immune response over as long as 42 months. In April 2006, the
FDA issued a complete response letter to our application,
requesting clarification and requiring additional analysis of
the data that we submitted. We are in the process of responding
to this letter and amending our application. If the final data
from the CDC trial, which we expect at the end of 2007,
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are favorable, we plan to apply to the FDA in 2008 for approval
of a three dose regimen of BioThrax for pre-exposure
prophylaxis, with a booster dose once every three years
thereafter.
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Add second route of administration.
We have applied
to the FDA to add a second route of administration of BioThrax
to include intramuscular injection in addition to subcutaneous
injection. We believe that intramuscular injection will result
in fewer local reactions than subcutaneous injection.
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Single dose syringe.
We believe that products that
are administered in a single dose syringe are of significant
interest to HHS for inclusion in the strategic national
stockpile. As a result, we have initiated a development program
to make BioThrax available in single dose syringes.
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Post-exposure prophylaxis.
We also plan to seek
approval of BioThrax in combination with antibiotic therapy as a
post-exposure prophylaxis for anthrax infection. We expect that
we will use three doses of BioThrax given two weeks apart for
this indication. In 2005, NIAID completed a
proof-of-concept
study of BioThrax in which rabbits infected with anthrax were
treated with the antibiotic levofloxacin or with levofloxacin in
combination with two doses of BioThrax in one of three dose
amounts. One of the dose amounts tested was a dilution of
BioThrax designed to elicit an immune response that is
proportional to the effect of an undiluted dose in humans. This
is referred to as a humanized dose. Only 44% of the rabbits
treated with antibiotics alone survived, while 100% of the
rabbits treated with either humanized doses or undiluted human
doses of BioThrax in combination with levofloxacin survived. In
the trial, there were statistically significant increases in
survival rates for rabbits treated with all dose amounts of
BioThrax in combination with the antibiotic compared to rabbits
treated with levofloxacin alone. These results were consistent
with an earlier animal test conducted by the U.S. Army
Medical Research Institute of Infectious Diseases, or USAMRIID,
involving undiluted human doses of BioThrax in combination with
an antibiotic administered to nonhuman primates infected with
anthrax.
To advance the development of BioThrax for this additional
indication, we plan to conduct additional animal efficacy
studies in accordance with the FDA animal rule. We plan to
evaluate the effect of a humanized dose of BioThrax in
combination with an antibiotic compared to the antibiotic alone
in rabbits and nonhuman primates exposed by inhalation to
anthrax spores. We plan to initiate the rabbit efficacy study in
late 2006 and the nonhuman primate efficacy study in late 2007.
The timing of our nonhuman primate efficacy study depends upon
the successful development of a nonhuman primate model by
NIAID. In September 2006, we initiated a Phase I clinical
trial of BioThrax for this indication using three doses of
BioThrax given two weeks apart. The purpose of this trial is to
obtain additional immunogenicity data regarding BioThrax using
the planned three dose regimen. Depending on the results of this
ongoing clinical trial, the FDA could require us to conduct a
second human immunogenicity clinical trial. Under the FDA animal
rule, we believe that, if the results are favorable, the rabbit
and nonhuman primate animal efficacy studies together with the
human immungenicity clinical trial data would be sufficient to
support the filing with the FDA of a biologics license
application, or BLA, supplement for marketing approval of
BioThrax for this indication.
Next
generation anthrax vaccine
We are evaluating several potential product candidates in
connection with development of a next generation anthrax
vaccine, featuring attributes such as self administration and a
longer shelf life. In September 2006, we submitted three
separate proposals in response to a request for proposals issued
by NIAID in June 2006 for the advanced development and testing
of next generation anthrax vaccine candidates. One of our
proposals relates to BioThrax combined with VaxImmune.
VaxImmune, a product of Coley Pharmaceuticals Group, is an
adjuvant intended to enhance immune response. We are designing
our product candidate to be administered by needle-free
intramuscular injection.
The DoDs Defense Advanced Research Projects Agency, or
DARPA, previously funded a double-blind Phase I clinical
trial of this product candidate pursuant to a collaboration
among DARPA, Coley Pharmaceuticals and us. This trial, which was
completed in 2005 and involved 69 healthy volunteers, was
designed to evaluate the safety and immunogenicity of this
product
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candidate compared to BioThrax alone and VaxImmune alone. In
this trial, the product candidate was administered in three
doses by intramuscular injection. The immunogenicity results
from this trial were statistically significant.
The results of a clinical trial are statistically significant if
they are unlikely to have occurred by chance. We determined the
statistical significance of the trial results based on a widely
used, conventional statistical method that establishes the
p-value of the results. Under this method, a p-value of 0.05 or
less represents statistical significance. Immune responses
observed in a group of vaccine trial participants can be
compared with those observed in other groups of trial
participants or with an assumed response rate. Immunogenicity
alone does not establish efficacy for purposes of regulatory
approval. Immunogenicity data only provide indications of
efficacy and are neither required nor sufficient to enable a
product candidate to proceed to Phase II clinical
development. Phase I clinical trials are required to
establish the safety of a product candidate, not its
immunogenicity, before Phase II clinical trials may begin.
The immunogenicity parameters for this trial were the mean peak
antibody concentration in trial participants who received the
product candidate as compared to trial participants who received
BioThrax alone and the median time to achieve mean peak immune
response. In this trial, the mean peak concentration of
antibodies to anthrax protective antigen in participants who
received the product candidate was approximately 6.3 times
higher than in participants who received BioThrax alone. This
result was statistically significant, with a
p-value
of
less than 0.001. Participants who received BioThrax alone
achieved a mean peak concentration of antibodies to anthrax
protective antigen approximately 42.5 days after first
injection. Participants who received the product candidate
achieved this same mean antibody concentration approximately
21 days earlier. This result was statistically significant,
with a
p-value
of
less than 0.001. In this trial, there was a slightly higher
frequency of moderate injection site reactions and systemic
adverse events in the volunteers who received the product
candidate as compared to volunteers who received BioThrax alone
or VaxImmune alone. One volunteer withdrew from this trial
because of an adverse event. There were no serious adverse
events reported that the trial investigators considered related
to the product candidate, BioThrax or VaxImmune.
The second proposal that we submitted to NIAID relates to a
product candidate based on immunization with a gene encoding an
anthrax protective antigen followed by a dose of BioThrax using
a device that facilitates self administration. The third
proposal contemplates the use of recombinant protective antigen
combined with a novel adjuvant delivered by a device that
facilitates self administration.
The NIAID request for proposals specified properties desirable
for a biodefense vaccine to be stored in the strategic national
stockpile, including the following:
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shelf life of three years or longer at room temperature;
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the ability to generate protective immune response in one or two
doses; and
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the ability to be safely self administered or rapidly inoculated
into large numbers of people.
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The NIAID request stated that anthrax vaccine candidates should
maintain a superior safety profile to BioThrax, contain a
protective antigen that has been shown to be efficacious against
anthrax spore challenge in animal models and have progressed
through a proof-of-concept efficacy study in a relevant spore
challenged animal model. NIAID is not obligated to make any
award, and may decide not to make any award, for development
funding pursuant to this request for proposals or otherwise.
Anthrax immune
globulin
We are developing an anthrax immune globulin as a single dose
intravenous therapeutic for treatment of patients with manifest
symptoms of anthrax disease resulting from the release of
anthrax toxins into the body. If successfully developed, we
expect our anthrax immune globulin therapeutic to be prescribed
for administration in these circumstances either as a
monotherapy or in conjunction with an antibiotic.
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There are no approved products for the effective treatment of
anthrax disease after anthrax toxins have been released into the
body. Cangene, in collaboration with the CDC, is currently
developing an anthrax immune globulin for use in these
circumstances based on plasma collected from military personnel
who have been vaccinated with BioThrax. In August 2004, HHS
issued a request for proposals in which HHS indicated that it
was seeking between 10,000 and 200,000 therapeutic courses of
treatment of a product to treat inhalational anthrax disease.
The products sought by HHS included monoclonal antibodies,
polyclonal antibodies, including human immune globulin, and
other protein therapeutic products. Pursuant to this request for
proposals, HHS awarded a contract to Cangene in 2005 to supply
anthrax immune globulin for preliminary testing for evaluation
of efficacy as a post-exposure therapeutic for anthrax
infection. In July 2006, HHS exercised an option under this
contract for Cangene to supply 10,000 doses of anthrax immune
globulin for the strategic national stockpile. This contract
modification has a total value of approximately
$143 million. Cangene has announced that it expects to
deliver these doses of anthrax immune globulin to the strategic
national stockpile beginning in late 2007 through the end of
2009. HHS also awarded a contract to Human Genome Sciences in
2005 to supply a monoclonal antibody to
Bacillus
anthracis
for evaluation of efficacy as a post-exposure
therapeutic for anthrax infection. In June 2006, HHS exercised
an option under this contract for Human Genome Sciences to
supply 20,000 treatment courses of this monoclonal antibody,
referred to as ABthrax, for the strategic national stockpile.
This contract modification has a total value of approximately
$165 million. Human Genome Sciences has announced that it
expects to deliver ABthrax to the strategic national stockpile
in 2008. The FDA has granted ABthrax an orphan drug designation
for the treatment of inhalational anthrax.
Our plan is to develop our anthrax immune globulin therapeutic
using antibodies that are produced by healthy donors immunized
with BioThrax. We recently completed a plasma donor stimulation
program in which we collected plasma from our employees and
military personnel who had been vaccinated with BioThrax. We are
currently designing a civilian donor stimulation program. We
have collected a sufficient amount of plasma to initiate
manufacturing of the anthrax immune globulin under current good
manufacturing practice, or cGMP, requirements using a validated
and approved process. The manufacturing process entails
fractionating the plasma and purifying the immune globulin. We
have engaged Talecris Biotherapeutics, Inc. to perform the
plasma fractionation and purification processes and contract
filling for our anthrax immune globulin candidate at its FDA
approved facilities. We expect that the anthrax immune globulin
that we are manufacturing will be acceptable under the
FDAs rules for use in both preclinical studies and human
clinical trials. We have manufactured and filled the first
full-scale lot of this product candidate under cGMP requirements
at Talecris.
We plan to rely on the FDA animal rule in connection with the
development of our anthrax immune globulin candidate.
Specifically, we plan to conduct efficacy studies of this
product candidate in infected rabbits and then infected nonhuman
primates. Concurrently, we plan to file an IND for a
Phase I clinical trial to evaluate the safety and
pharmacokinetics of our anthrax immune globulin candidate in
healthy volunteers. We currently anticipate filing such an IND
in late 2006 or early 2007. We believe that favorable data from
these animal efficacy studies and the safety and pharmacokinetic
clinical trial would be sufficient to support an application to
the FDA for marketing approval. NIAID has provided us grant
funding of up to $3.7 million for the studies designed to
assess the tolerability, pharmacokinetics and efficacy of this
product candidate in infected rabbits and the development and
validation of product assays. We believe that our anthrax immune
globulin would be eligible to be procured by HHS under Project
BioShield for inclusion in the strategic national stockpile
after we file an IND and prior to receiving marketing approval.
Recombinant
bivalent botulinum vaccine
Disease overview.
Botulism is a frequently fatal
disease caused by botulinum toxins produced by the bacterium
Clostridium botulinum
.
Clostridium botulinum
is
widely distributed in soil and aquatic
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environments throughout the world. Botulinum bacteria produce
seven distinct serotypes, each of which elicits a distinct
antibody response. Naturally occurring outbreaks of botulism in
humans have been reported from exposure to four of the seven
serotypes: A, B, E and F. Botulism normally occurs when an
individual consumes contaminated food containing botulinum
toxin. Once consumed, the toxin rapidly attacks nerve cells,
resulting in paralysis of peripheral muscles, including the
muscles involved in respiration. Botulism can also be contracted
if botulinum bacteria contaminate wounds or colonize in the
intestine of infants, which is referred to as infant botulism.
Botulinum toxins are among the most potent and dangerous of
potential biological weapons. Exposure to very small quantities
of botulinum toxin can cause the rapid onset of life threatening
paralytic disease syndrome. It has been estimated that a single
gram of toxin evenly dispersed and inhaled could kill more than
one million people.
Market opportunity and current treatment.
Because
botulinum toxin is stable when purified and extremely potent
when administered in very small quantities, it has the potential
to be used as a biological weapon, either through deliberate
contamination of food supply or drinking water or as an aerosol.
As with anthrax vaccines, we believe that the
U.S. government will be the principal customer for a
botulinum vaccine, particularly in the near term. We believe
that state and local governments, which we expect will be
interested in a botulinum vaccine to protect first responders to
a bioterrorism attack, and several foreign governments are
significant potential customers for a botulinum vaccine.
The Michigan Department of Public Health first developed a
pentavalent botulinum toxoid vaccine in the late 1960s and began
manufacturing the pentavalent vaccine for use under an IND in
1969. This vaccine is called pentavalent because it addresses
five serotypes of botulinum neurotoxin. Since 1989, the CDC and
the DoD have distributed the pentavalent botulinum toxoid
vaccine under this IND for vaccination of at risk laboratory
workers and military personnel as an adjunct to other measures
of protection. The pentavalent botulinum toxoid vaccine
exhibited an acceptable safety profile in connection with the
immunization of over 5,000 individuals with more than 21,000
doses of the vaccine. Approximately 90% of injections were
followed by no, or mild, local reactions. Only 0.3% of
injections were followed by severe local reactions. A total of
5.1% of injections were followed by reported systemic reactions.
In connection with our acquisition of assets from the Michigan
Biologic Products Institute in 1998, we acquired rights to the
pentavalent vaccine, know-how relating to the development of the
pentavalent vaccine and rights to a master botulinum cell bank,
which provides starting materials for the pentavalent vaccine.
After more than 15 years of use, the supplies of
pentavalent botulinum toxoid vaccine are dwindling and in need
of replacement. In August 2003, HHS issued a pre-solicitation
notice for the acquisition of up to ten million doses of a
recombinant trivalent botulinum vaccine, which would address
botulinum serotypes A, B and E. HHS was seeking a trivalent
vaccine because botulinum serotype F is more difficult to
produce under cGMP conditions and does not appear to represent
the same level of threat as other serotypes of botulinum
neurotoxin. We also believe that botulinum serotype E does not
represent the same level of threat as serotypes A and B.
Botulinum serotypes A and B are responsible for approximately
85% of all cases of botulism.
In November 1997, the DoD, through its Joint Vaccine Acquisition
Program, awarded a contract for $322 million to DynPort
Vaccine Company for the development of various biodefense
vaccines. In April 2005, the DoD provided additional funding to
DynPort for the continued development of a recombinant bivalent
botulinum vaccine for protection against botulinum serotypes A
and B.
Description and development status.
We are
developing a recombinant protein subunit bivalent botulinum
vaccine for protection against botulinum serotypes A and B in
collaboration with HPA. We hold an exclusive license from HPA to
the recombinant technology that we are using in the development
of our vaccine
96
candidate. HPA is also providing us with process development and
toxicology expertise, access to its facilities and specialized
manufacturing capabilities. We are designing our vaccine
candidate to be administered by intramuscular injection with an
alum adjuvant in a three dose regimen. Our recombinant vaccine
candidate is based on a fragment of the botulinum toxin that we
have selected as an antigen because we believe it to be
non-toxic and immunogenic. We are producing this recombinant
antigen in an
E. coli
expression system. We believe that
our technology will allow us to develop a stable product with
possible cross-protection against a range of toxin subtypes and
ease of formulation into a multivalent vaccine.
We have completed initial
proof-of-concept
studies of this vaccine candidate in mice for botulinum
serotypes A and B. In these studies, the vaccine elicited
antibodies and provided protection against challenge with the
botulinum toxin. We plan to initiate additional
proof-of-concept
animal studies in mice for botulinum serotype E and then to
evaluate the toxicity of the vaccine in other animal studies so
that we will be in a position, if we determine to do so, to
develop a recombinant trivalent botulinum vaccine instead of a
recombinant bivalent botulinum vaccine.
We have established a small scale production process for
botulinum serotypes A and B. We anticipate that we will be able
to manufacture our recombinant vaccine in a cGMP facility that
will not require the high level of containment that is required
for the production of conventional, non-recombinant toxoid
vaccines that involve cultivation of the disease-causing
organism. We plan to rely on the FDA animal rule in connection
with the development of our recombinant bivalent botulinum
vaccine candidate.
Botulinum
immune globulin
We are developing our botulinum immune globulin candidate in
collaboration with HPA as an intravenous therapeutic for
treatment of symptomatic botulinum exposure. Because of the
rapid onset of symptoms following infection with botulinum
toxin, prophylactic vaccines, which take several weeks to create
an effective protective immune response, are not useful as
post-exposure treatments for botulism. In addition, antibiotics
are not effective post-exposure treatments since they work by
killing the botulinum bacteria that produce the toxin, but do
not act directly against the botulinum toxin.
We believe that an intravenous botulinum immune globulin has the
potential to provide immediate protection from the effects of
botulinum toxin. A third partys FDA approved botulinum
immune globulin was tested in a five-year, randomized,
double-blind, placebo controlled trial in 122 infants with
infant botulism and a subsequent six-year, open-label study in
382 infants. In the placebo controlled trial, infants treated
with the botulinum immune globulin had statistically significant
reductions in the average length of hospital stay, duration of
intensive care, duration of mechanical ventilation, duration of
tube or intravenous feeding and hospital charges. In the
open-label study, the early treatment of patients with infant
botulism shortened the average length of stay significantly more
than later treatment.
The only current recommended therapy for exposure to botulism
consists of passive immunization with an immune globulin derived
from equine plasma. The components of a previously approved
trivalent equine immune globulin that contained antibodies
against botulinum toxin types A, B, and E have been reformulated
into an approved bivalent product and an investigational
monovalent product. However, the equine immune globulin is
subject to important shortcomings. First, because the human body
recognizes the equine immune globulin as a foreign substance,
its efficacy may be limited. In addition, the antibody immune
response against the equine immune globulin can lead to
potential severe side effects, including anaphylactic shock, if
the equine immune globulin is administered more than once. To
screen for sensitivity to the equine immune globulin, patients
are given small challenge doses of the equine immune globulin
before receiving a full dose.
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In June 2006, HHS awarded a five-year development and supply
contract with a base value of $362 million to Cangene for a
heptavalent botulinum immune globulin derived from equine
plasma. The contract provides for the supply of 200,000 doses of
a botulinum immune globulin for the strategic national
stockpile. Cangene has announced that it expects to produce and
deliver usable product to the strategic national stockpile from
mid to late 2007. The contract also provides for optional task
orders worth up to an extra $234 million, which may be
awarded at the sole discretion of HHS. Cangene previously began
development work on the project under a research and development
contract with the CDC.
We plan to rely on the FDA animal rule in connection with the
development of our botulinum immune globulin candidate.
Specifically, we plan to conduct efficacy studies of this
product candidate in an infected rodent population and then
infected nonhuman primates. Concurrently, we expect to file an
IND for a Phase I clinical trial to evaluate the safety and
pharmacokinetics of the botulinum immune globulin in healthy
volunteers. We believe that favorable data from these animal
efficacy studies and the safety and pharmacokinetic clinical
trial would be sufficient to support an application to the FDA
for marketing approval.
As the first step in the development of our botulinum immune
globulin candidate, we are initiating production of a bivalent
botulinum toxoid vaccine using botulinum serotype B derived
from the starting material for the pentavalent vaccine developed
by the Michigan Department of Public Health and serotype A
from HPA. We are designing this botulinum toxoid vaccine to be
administered by injection with an alum adjuvant. We anticipate
that several doses will be needed to elicit a strong immune
response. We are performing development activities at existing
HPA facilities, which we expect may expedite production of
clinical material for the vaccine. HPA is also providing us with
process development and specialized manufacturing capabilities
for the vaccine.
We plan to conduct a preclinical
proof-of-concept
study of this vaccine candidate in mice to confirm the
suitability of the vaccine for further development. If the
results of this proof-of-concept study are favorable, based on a
demonstration of protective efficacy or an immune response
associated with protection, we plan to file an IND to initiate a
Phase I clinical trial to evaluate the safety of this
vaccine in healthy volunteers. We expect that the Phase I
clinical trial will provide data sufficient to support an
acceptable dose for the vaccine and the optimal dosing schedule.
If the results of the Phase I clinical trial are favorable,
we intend to initiate a donor stimulation program in which we
will immunize healthy volunteers with the vaccine and collect
plasma for fractionation for the manufacture of our botulinum
immune globulin candidate. We expect to rely on safety and
immunogenicity data from the pentavalent botulinum toxoid
vaccine previously manufactured by the State of Michigan in the
development of this bivalent botulinum toxoid vaccine. This data
includes the results of a Phase II safety and
immunogenicity clinical trial conducted by the DoD from July
1998 to May 2000, animal efficacy data and the extensive use of
the pentavalent vaccine by the CDC in immunizing at risk
laboratory personnel. As a result, we anticipate that the FDA
will not require us to conduct a Phase II clinical trial
for the bivalent botulinum toxoid vaccine before permitting us
to initiate the donor stimulation program. However, the FDA has
not approved our plan to proceed directly to a donor stimulation
program without conducting a Phase II clinical trial for
the botulinum toxoid vaccine and may not do so.
Our current plan is to develop the botulinum toxoid vaccine that
we are using in the development of our botulinum immune globulin
candidate through Phase I clinical trials. At that point,
we expect to assess our future development plans based on the
U.S. governments interest in providing funding for
the further development or procurement of this toxoid vaccine,
either instead of or in addition to a recombinant botulinum
vaccine, as a pre-exposure prophylaxis for botulinum toxin. We
believe that this type of government funding may become
available as there is currently no botulinum vaccine available
for the military or the strategic national stockpile. Moreover,
we believe that the well-established nature of the manufacturing
process for a toxoid vaccine, the availability of safety data
from the pentavalent
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botulinum vaccine, our access to know-how from the development
and manufacturing of the pentavalent botulinum vaccine by the
State of Michigan and access to HPA technology would all
facilitate our development of a bivalent botulinum toxoid
vaccine.
Commercial
business
In our commercial business, we are developing a range of
commercial immunobiotic product candidates for use against
infectious diseases with significant unmet or underserved
medical needs.
Typhoid
vaccine
Disease overview.
Typhoid, also known as typhoid
fever, is caused by infection with the bacterium
Salmonella
typhi.
Typhoid is characterized by fever, headache,
constipation, malaise, stomach pains, anorexia and myalgia.
Severe cases of typhoid can result in confusion, delirium,
intestinal perforation and death. Typhoid is transmitted by
consuming contaminated food or drinks. Contamination usually
results from poor hygiene and sanitation. Typhoid is often
endemic in developing countries in which there is limited access
to treated water supplies and sanitation.
Market opportunity and current treatment.
According
to the CDC, approximately 400 cases of typhoid are reported
annually in the United States, of which approximately 70% are
contracted abroad. An estimated 22 million cases of typhoid
occur per year worldwide, resulting in approximately 200,000
deaths annually. The CDC recommends that all persons from the
United States traveling to developing countries consider
receiving a typhoid vaccination, with travelers to Asia, Africa
and Latin America deemed to be especially at risk.
U.S. military personnel deployed in these areas are also at
risk of infection.
One oral typhoid vaccine and one injectable typhoid vaccine are
currently approved and administered in both the United States
and Europe. The approved oral typhoid vaccine is available in
liquid and capsule formulations. Both formulations require three
to four doses to generate a protective immune response. The
capsule formulation requires a booster every five years
thereafter. The liquid formulation has been reported to provide
77% of recipients in clinical trials with protection three years
after vaccination. The approved injectable vaccine requires only
a single dose. However, it is poorly immunogenic in children,
requires a booster dose every three years thereafter and was
effective in only 55% to 75% of recipients in clinical trials.
Both approved vaccines have good safety profiles with relatively
few adverse events reported. Antibiotics are used to treat
typhoid after infection and usually lead to recovery commencing
within four days. Without antibiotic therapy, the CDC estimates
that the mortality rate of a typhoid infection is as high as 20%.
Description and development status.
We are
developing a live attenuated typhoid vaccine that contains
deletions in two genes of the
Salmonella typhi
bacterium
designed to eliminate virulence. We have designed our vaccine
candidate to be administered in a single drinkable dose prior to
travel to countries where typhoid is endemic. We believe that,
if approved, the method of administration of our vaccine
candidate would provide a competitive advantage compared to both
currently approved typhoid vaccines.
We have completed preclinical studies in which we assessed the
immunogenicity and toxicity of our vaccine candidate, with the
following results:
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In
in vitro
tests in which human cells were exposed
to our vaccine candidate, the live attenuated bacteria contained
in the vaccine did not multiply.
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In pharmacology studies in mice, our vaccine candidate was
immunogenic and had higher relative immunogenicity when
delivered subcutaneously than the currently approved oral
typhoid vaccine.
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In safety and toxicity studies in mice, a strain of
Salmonella
that causes a disease similar to typhoid in
mice, which contained deletions in the genes that are also
deleted in our vaccine candidate, did not cause disease.
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We also have completed the following clinical trials of our
typhoid vaccine candidate in the United States and Europe:
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An open-label, non-placebo controlled, pilot study conducted in
the United Kingdom in nine healthy adult volunteers. The purpose
of this study was to evaluate the safety and immunogenicity of
our vaccine candidate. In this study, our vaccine candidate was
immunogenic, eliciting both cell mediated and humoral
immunogenicity, and well tolerated.
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A double-blind, placebo controlled, single dose escalating
Phase I clinical trial conducted in the United States in 60
healthy adult volunteers. The purpose of this trial was to
evaluate the safety, tolerability and immunogenicity of three
dose levels of our vaccine candidate. In this trial, our vaccine
candidate was immunogenic and well tolerated at all dose levels.
The immunogenicity parameter for this trial was the proportion
of trial participants with an immune response to the product
candidate on day seven after dosing or day 28 after dosing. To
be considered adequately immunogenic, 50% of the participants
receiving a vaccine dose had to satisfy the primary
immunogenicity endpoint. We performed analyses on both an intent
to treat and a per protocol basis. An intent to treat analysis
is based on the participants who receive a dose of vaccine. A
per protocol analysis is based on the participants who complete
a trial and substantially comply with the trial protocol. In
both the intent to treat population and the per protocol
population, 100% of the trial participants in the highest dose
group and 56% of the participants in the lowest dose group had
an immune response on day seven or day 28. The immune
response rate for the highest dose group was statistically
significantly greater than the immune response rate for the
lowest dose group. The p-value was 0.0068 in the intent to treat
population and 0.0073 in the per protocol population.
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An open-label, non-placebo controlled, single dose Phase I
clinical trial conducted in the United States in 32 healthy
adult volunteers. The purpose of this trial was to evaluate the
safety and immunogenicity of two different presentations of the
vaccine candidate, one using bottled water and another using tap
water. We vaccinated 16 subjects with each presentation. Because
one subject who received the tap water presentation of the
vaccine candidate was excluded from the trial results due to a
lack of post-baseline immunology data, the tap water
presentation data reflected data from only 15 subjects. The
immunogenicity parameter for this trial was the proportion of
trial participants with an immune response to
S. typhi
following administration of a single dose of the vaccine
candidate. The immune response rate was 94% for the participants
who received the bottled water presentation and 93% for the
participants who received the tap water presentation. The
response rate for both groups was statistically significantly
higher than the assumed response rate of 50%. The p-value was
0.0005 for the participants who received the bottled water
presentation and 0.0010 for the participants who received the
tap water presentation. Because the two presentations were
similarly immunogenic and both were well tolerated by trial
participants, we selected the tap water presentation for further
development based on its relative convenience.
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In these three clinical trials, our vaccine candidate
demonstrated immunogenicity response levels following a single
drinkable dose similar to those seen with multiple doses of the
currently approved oral vaccine. As a result of these trials, we
were able to establish the dose and regimen for our vaccine
candidate with a formulation that we believe is appropriate for
commercialization.
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We recently completed a single-blind, placebo controlled
Phase I clinical trial of our vaccine candidate in Vietnam
in 27 healthy adult volunteers using the dose and regimen
established in our Phase I clinical trials in the United
States. The Wellcome Trust provided funding for the trial. The
purpose of the trial was to evaluate the safety and
immunogenicity of the vaccine candidate in adults living in an
endemic area. Based on initial data from this trial, the vaccine
candidate met the criterion for immunogenicity, with
approximately 68% of subjects who received the vaccine candidate
mounting a humoral antibody response. The vaccine candidate was
well tolerated by trial participants, with no serious adverse
events reported. We are continuing to analyze the data from this
trial.
The remainder of our planned clinical development program for
this vaccine candidate consists of the following:
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Phase II clinical trial.
In the fourth quarter
of 2006, we plan to initiate a single-blind, placebo controlled
Phase II clinical trial in Vietnamese children between five
and 14 years of age. The Wellcome Trust has agreed to
provide funding for this trial. The purpose of this trial will
be to evaluate the safety and immunogenicity of our vaccine
candidate. The trial design calls for 100 subjects to receive
vaccine and 50 to receive placebo, with at least 70% of the
subjects being between five and ten years of age. We will assess
safety and immunogenicity up to 28 days after vaccination.
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Disease surveillance study.
Concurrently with the
planned Phase II clinical trial, we plan to conduct a
disease surveillance study in the areas where we are considering
conducting a Phase III clinical trial of our vaccine
candidate in order to confirm that a sufficient number of
subjects will be included in the Phase III trial.
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Phase III clinical trial.
We plan to conduct a
single-blind Phase III clinical trial in an area where
typhoid is endemic. The purpose of this trial will be to
evaluate the efficacy of our vaccine candidate in children who
are likely to be exposed to the typhoid bacterium. We expect to
undertake the primary analysis of the data from the trial after
approximately one year, which, if the results are favorable, we
plan to use to support the filing with the FDA of a BLA for
marketing approval of our vaccine candidate. We plan to continue
to monitor the incidence of typhoid in the trial participants
for several years after vaccination.
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Tolerability and immunogenicity study.
Concurrently
with our Phase III clinical trial in an endemic area, we
plan to conduct a Phase III clinical trial in the United
States or Europe in healthy volunteers. The purpose of this
trial will be to evaluate the safety and immunogenicity of our
vaccine candidate to support marketing approval in the United
Sates and Europe.
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Since typhoid fever in Asia is largely a disease of children, we
plan to conduct our Phase II and Phase III clinical
trials in this age group. We plan to conduct our Phase II
and Phase III clinical trials in endemic areas because
there are no agreed immune correlates of efficacy for live
attenuated typhoid vaccines and it is not practicable to
demonstrate clinical efficacy in travelers from the United
States or Europe due to the prohibitively large number of
subjects that would be needed. The currently approved typhoid
vaccines relied on similar clinical trials for regulatory
approval.
We plan to seek additional grant funding for development of this
product candidate.
Hepatitis B
therapeutic vaccine
Disease overview.
Hepatitis B is a highly infectious
virus transmitted from person to person by contact with blood
and bodily fluids. Most hepatitis B infections in adults result
in acute hepatitis, with the immune system eventually clearing
the infection. However, in approximately 8% to 10% of infected
adults and a much larger proportion of infected children, the
immune system fails to clear the virus,
101
resulting in immune tolerance of the virus and chronic
infection. In addition, pregnant women suffering from hepatitis
B can pass the infection on to their babies during childbirth.
Babies born infected rarely clear the infection, with over 90%
becoming chronically infected. According to the World Health
Organization, approximately 25% of people with chronic hepatitis
B infection develop serious liver disease, including cirrhosis
and liver cancer.
Market opportunity and current treatment.
Chronic
infection with the hepatitis B virus is a global problem,
with an estimated 350 million carriers worldwide. The World
Health Organization estimates that approximately one million
people per year worldwide die from complications of hepatitis B
infection. Infection rates are highest in the developing world,
posing an infection risk to travelers from industrialized
countries. Infection is less common in the United States and
Europe. In the United States, there are an estimated
1.2 million people with chronic hepatitis B infection,
resulting in approximately 4,000 to 5,000 deaths annually.
Prophylactic vaccines based on recombinant protein subunit
preparations are effective in preventing hepatitis B infection.
Childhood vaccination with these vaccines is common in
industrialized countries and in some of the developing world.
Childhood immunization programs have reduced the number of
carriers of chronic hepatitis B infection by up to 90% in parts
of the world where hepatitis B is most common. In the United
States, infection rates for acute hepatitis B have decreased by
approximately 77% over the past 20 years. However, these
existing vaccines have not proven to be effective in treating
people with chronic hepatitis B infection. As a result, there
remains a large number of people who are chronically infected
with hepatitis B and require treatment to prevent the
development of liver disease and reduce the risk of transmitting
the infection to others.
There is no vaccine currently on the market that is licensed for
therapeutic use for chronic hepatitis B infection. Currently
available therapies for this patient population consist mainly
of antiviral drugs and immunotherapies, such as interferons.
However, these treatments are subject to a number of
shortcomings. Both of these treatments can only be used in a
subset of patients, and their efficacy is limited. In addition,
the use of antiviral drugs may lead to the development of
resistant forms of the virus and interferons have side effects
that reduce patient compliance.
Description and development status.
We are
developing a live attenuated therapeutic vaccine for treatment
of patients with chronic hepatitis B infection. We have designed
our vaccine candidate to be administered in multiple drinkable
doses over several months. It may require further booster doses.
Because chronic carriers have weak cellular responses to the
hepatitis B virus, they cannot clear the virus. Our vaccine
candidate is intended to redirect the immune system to make
strong cellular responses to a hepatitis B antigen known as
hepatitis B core in chronic carriers, leading to suppression of
viral replication and associated liver damage.
Our vaccine candidate uses our proprietary
spi
-VEC
®
oral delivery system technology to deliver hepatitis B core
antigen to the human immune system.
Spi
-VEC is based on
our live attenuated typhoid vaccine and employs recombinant
technology to insert the gene for hepatitis B core into the live
attenuated S
almonella
bacteria. The bacteria produce the
antigen once inside the patient. Because we are relying on
recombinant technology to insert the gene for hepatitis B core
into a vector delivery system, we do not need to separately
purify the vaccine.
We have completed a program of pharmacology and toxicity studies
of our hepatitis B therapeutic vaccine candidate in animals. In
mice that were administered our vaccine candidate, the hepatitis
B core antigen was produced and immune responses were elicited
against the antigen. In separate toxicity studies also conducted
in mice, our vaccine candidate was non-toxic.
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In February 2004, we completed an open-label, dose escalating
Phase I clinical trial of our vaccine candidate in the
United Kingdom in 30 healthy adult volunteers. The purpose of
this trial was to evaluate the safety and immunogenicity of two
dose levels of our vaccine candidate. In this trial, we
administered the two doses of vaccine over a period of
approximately two months. The primary immunogenicity parameter
for this trial was the proportion of trial participants with an
immune response to the product candidate on day 28 after dosing
or day 84 after dosing. In this trial, 50% of the participants
in the low dose group and 40% of the participants in the high
dose group demonstrated an immune response on day 28 or day 84.
The results in the low dose group reflect a confidence interval
of 19.0% to 81.0%. The results in the high dose group reflect a
confidence interval of 18.5% to 61.5%. These confidence
intervals indicate a 95% likelihood that the true value is
within the range specified. The secondary immunogenicity
endpoint for this trial was the proportion of participants who
demonstrated the type of immune response known to be important
in promoting clearance of hepatitis B at any point during the
trial. In this trial, 100% of the participants in the high dose
group and 90% of the participants in the low dose group
demonstrated such a response. We did not conduct a statistical
analysis of the results from the secondary immunogenicity
endpoint. The vaccine candidate was well tolerated by trial
participants, with no serious adverse events reported.
In March 2006, the U.K. Medicines and Healthcare Products
Regulatory Agency approved our clinical trial application,
including a trial protocol to initiate a Phase II clinical
trial of our vaccine candidate in trial participants chronically
infected with hepatitis B. The protocol provides for a placebo
controlled, randomized, dose escalating study to be conducted in
the United Kingdom in 45 chronic carriers of hepatitis B. If
necessary, we may expand the study to additional sites in Europe
to increase the recruitment rate. The primary purpose of this
trial will be to evaluate the safety and tolerability of six
monthly doses of our vaccine candidate. The secondary purpose
will be to investigate whether the vaccine candidate can reduce
the hepatitis B viral DNA load, a recognized surrogate endpoint
for treatment of hepatitis B using current therapeutics. We
expect to begin dosing trial participants in the fourth quarter
of 2006.
If the results of this Phase II clinical trial are
favorable, we expect to submit an IND to the FDA to conduct one
or more clinical trials of this vaccine candidate in the United
States as may be appropriate. The IND must become effective
before we can conduct any clinical trials in the United States.
Group B
streptococcus vaccine
Disease overview.
Group B streptococcus is a
bacterium that causes illness in newborn babies, pregnant women,
the elderly and adults with other illnesses, such as diabetes or
liver disease. Group B streptococcus is the most common cause of
sepsis and meningitis in newborns in the developed world and is
a frequent cause of pneumonia in newborns. It affects more
babies than any other newborn health problem. Group B
streptococcus bacteria can cause bladder and womb infections in
pregnant women that in turn lead to infection of the fetus and
premature delivery and stillbirth. In pregnant women carrying
the group B streptococcus bacteria, the baby may become infected
either before or during birth.
In the United States, approximately half of all neonatal group B
streptococcus infections occur in newborns less than seven days
old and are categorized as early onset disease.
Infections in babies between seven days and three months old are
categorized as late onset disease. Early onset
disease is often associated with complicated or premature
deliveries and usually results in pneumonia and the blood
infection septicemia in the baby. It is also associated with
meningitis. Approximately 5% of babies with early onset disease
die. A high number of survivors of early onset disease are left
with significant permanent disabilities, including sight or
hearing loss and mental retardation. The majority of late onset
cases occur in the first month of life. Late onset disease
usually results in meningitis. Up to 5% of babies
103
with late onset disease die. A high number of survivors of late
onset disease are left with permanent disabilities, with up to
one-third suffering long-term mental or physical handicaps.
Group B streptococcus infections in the elderly cause blood
infections, skin or soft tissue infections and pneumonia.
Market opportunity and current treatment.
The NIH
has identified prevention of group B streptococcus infection in
newborns as a major vaccine objective. Concern about the number
of group B streptococcus neonatal infections prompted the CDC to
recommend routine screening of pregnant women for group B
streptococcus bacteria and preventative antibiotic treatment at
the time of labor for women found to be infected. Screening of
pregnant women for infection is recommended during weeks 35 to
37 of pregnancy. Approximately 10% to 30% of women are found to
be carrying the bacterium as a normal component of the vaginal
microflora. These women are offered intravenous antibiotics
throughout their labor as a preventative measure. In the absence
of antibiotic treatment, the CDC estimates that the risk is one
in 200 of delivering a baby with group B streptococcus
infection. While the level of group B streptococcus disease
decreased in the United States from 1.7 cases per 1,000 live
births in 1993 to 0.4 cases per 1,000 live births in 2002, the
CDC projects that there are approximately 2,750 neonatal
infections each year in the United States. In a study of 338 of
these cases of neonatal infections, the death rate was
approximately 6%. We expect the target market for our vaccine
candidate to be women of childbearing age.
The existing method of prevention of group B streptococcus
infection in neonates is the targeted administration of
intravenous antibiotics to women during labor. However, this
approach is invasive and only partially effective. In addition,
antibiotics create the risk of possible adverse reactions and
may lead to the development of antibiotic resistant strains of
the disease. Direct vaccination of newborns is not effective
because their immune system is too immature to respond to the
vaccine. Antibiotics are used to treat babies after infection.
Approximately 17,500 cases of group B streptococcus infection
occur each year in the U.S. population over one year of
age, with most occurring in those over age 50. According to
the CDC, the average death rates for invasive infections are
approximately 8% to 10% for adults 18 to 64 years of age
and 15% to 25% for adults 65 years of age and over.
Antibiotics are used to treat infected individuals.
Description and development status.
We are
developing a recombinant protein subunit group B streptococcus
vaccine initially for administration to women of childbearing
age for protection of the fetus and newborn babies. We are
designing our vaccine candidate to be administered by injection
with an alum adjuvant in a three dose regimen. We expect that a
booster dose may also be required. We anticipate that the
vaccine will elicit an antibody response resulting in the
production of antibody in the mother, which may then cross the
placenta to protect the fetus and the newborn baby by passive
immunity.
We have identified several novel surface associated proteins and
are working on the development of three of these proteins as
components of our vaccine candidate. We believe that a
combination of proteins will be required to provide effective
protection. We have completed preclinical studies in which we
evaluated the safety and immunogenicity of our vaccine
candidate, with the following results:
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In studies in rabbits and mice, the three protein components of
our vaccine candidate were immunogenic.
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In a passive immunization study in which we administered rabbit
antibody to rat pups, the rat pups were protected against
challenge with disease.
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Antibodies elicited by one of the protein components of our
vaccine candidate recognized a number of group B streptococcus
types, indicating that the protein component has potential to
generate immune responses with broad coverage.
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In a toxicology study in mice with one of the protein components
of our vaccine candidate, the protein was non-toxic.
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We have completed an open-label, dose escalating Phase I
clinical trial of the first protein component of our vaccine
candidate in the United Kingdom in 47 healthy adult volunteers.
The purpose of this trial was to evaluate the safety and
immunogenicity of this protein as an individual recombinant
protein. We adjuvanted the protein with alum and tested it at
four different strengths, with two doses given 28 days
apart. In this trial, the protein was immunogenic at all doses
tested. We performed analyses on both an intent to treat and a
per protocol basis. In both the intent to treat population and
the per protocol population, the immune response rate was 83% at
the lowest dose tested and 100% at the highest dose tested. The
response rate for both the highest dose group and the lowest
dose group was statistically significantly higher than the
assumed response rate of 50%. For the lowest dose group, the
p-value was 0.0386 in both the intent to treat population and
the per protocol population. For the highest dose group, the
p-value was 0.0039 in the intent to treat population and 0.0078
in the per protocol population. The vaccine candidate was well
tolerated by trial participants at all dose levels tested, with
no serious adverse events reported. None of the subjects
withdrew due to an adverse event.
As the next steps in our development plan, we plan to initiate
two additional Phase I clinical trials for the other two
proposed protein components of our vaccine candidate. First, we
plan to evaluate the safety and immunogenicity of the protein
that we already have tested together with one of these other
proteins in a Phase I clinical trial in healthy adults. If
the results of that trial are favorable, we plan to evaluate the
safety and immunogenicity of all three proteins together in a
further Phase I clinical trial. If the results of these
Phase I clinical trials are favorable, we expect to submit
an IND to the FDA to conduct more advanced clinical trials in
the United States. The IND must become effective before we can
conduct any clinical trials in the United States.
We are in active discussions with NIH for NIH to provide
clinical development support for this product candidate.
Chlamydia
vaccine
Disease overview.
Chlamydia is the most prevalent
sexually transmitted disease in the world. It is caused by
infection with the bacterium
Chlamydium trachomatis.
Chlamydia trachomatis
can cause urogenital disorders such as
uritheritis, cervicitis, pelvic inflammatory disease, ectopic
pregnancy and infertility among females and is the leading cause
of non-gonococcal uritheritis and epidemiditis in males.
Chlamydia trachomatis
also causes the ocular disease
trachoma, which is a form of vesicular conjunctivitis. Trachoma
is the leading cause of preventable blindness worldwide.
Market opportunity and current treatment.
The World
Health Organization estimates that approximately 92 million
new cases of
Chlamydia trachomatis
infection occur
annually worldwide, approximately four million of which occur in
North America.
Chlamydia trachomatis
infections are the
most commonly reported notifiable disease in the United States,
with an estimated 2.8 million Americans becoming infected
with
Chlamydia trachomatis
each year. Epidemiological
studies indicate that in the United States,
Chlamydia
trachomatis
infections are most prevalent among young
sexually active individuals between the ages of 15 to
24 years of age. There is no vaccine currently on the
market for
Chlamydia trachomatis
. However, screening
tests and effective antibiotic treatments have been effective at
containing
Chlamydia trachomatis
in the United States and
Europe. Although
Chlamydia trachomatis
infection can be
treated
105
with antibiotics, control measures based on antimicrobial
treatment alone are difficult due to the incidence of infection,
the percentage of asymptomatic infections and deficiencies in
diagnosis.
Description and development status.
We are
developing a recombinant protein subunit chlamydia vaccine for
all clinically relevant strains of
Chlamydia trachomatis
,
including strains that cause ocular disease. We are designing
our vaccine candidate to be administered by injection with a
novel adjuvant in a three dose regimen. We are currently
evaluating in license opportunities for the adjuvant. We have
cloned our vaccine candidate and produced it in
E. coli
.
In studies in mice, our vaccine candidate protected against both
upper reproductive tract disease and lower reproductive tract
infection induced by
Chlamydia trachomatis
. In addition,
there was no evidence of infertility in the mice following
treatment with our vaccine candidate.
Meningitis B
vaccine
Disease overview.
Meningococcal disease is a life
threatening condition caused by infection with the bacterium
Neisseria meningitidis. Neisseria meningitidis
is
classified into 12 groups based on differences in the surface
coating of the bacterium that elicit distinct immune responses.
According to the World Health Organization, group B is the most
common cause of endemic meningitis in industrialized countries,
accounting for 30% to 40% of cases in North America and 30% to
80% of cases in Europe. Meningococcal disease has a fatality
rate of approximately 10%. The infection can develop very
rapidly and cause death within 24 hours of the symptoms
first becoming apparent. Children from six months to two years
of age are at the highest risk of group B meningococcal
infection, with teenagers also at enhanced risk.
Market opportunity and current treatment.
The World
Health Organization estimates that approximately
1.2 million cases of bacterial meningitis occur annually
worldwide, resulting in approximately 135,000 deaths. The World
Health Organization estimates that approximately 500,000 of
these cases and 50,000 of these deaths are caused by the
bacterium
Neisseria meningitidis
. In the United States,
2,333 cases of meningococcal disease were reported in 2001, with
approximately one-third due to group B. In 2003, 1,756 cases of
meningococcal disease were reported in the United States.
Currently, there is no meningitis vaccine on the market that is
protective against group B meningococcal infection. Current
meningitis B treatments include antibiotics and clinical
support. The rapid progression of the infection means that
antibiotic therapy can be ineffective in preventing serious
morbidity and mortality.
Description and development status.
We are
developing a recombinant protein subunit meningitis B vaccine
for babies, children and adolescents. We are designing our
vaccine candidate to be administered by injection with an alum
adjuvant in a two dose regimen for children under age five and a
single dose regimen for children over age five. We do not expect
that a booster dose will be required. We anticipate that the
vaccine will consist of two or three protein antigens. We are
currently evaluating a pool of 46 protein candidates in a number
of preclinical studies. We are producing recombinant proteins in
E. coli.
We have entered into a collaboration agreement with Sanofi
Pasteur for this vaccine candidate.
Sanofi Pasteur
collaboration
In May 2006, we entered into a license and co-development
agreement effective April 1, 2006 with Sanofi Pasteur, the
vaccines business of Sanofi-Aventis, pursuant to which we
granted Sanofi Pasteur an exclusive, worldwide license to
develop and commercialize a meningitis vaccine that contains
program antigens evaluated and selected under the agreement. We
retain the right and obligation to conduct development
activities through Phase I clinical trials. Under specified
circumstances, we also retain the right to exploit antigens that
have been terminated from development under the agreement on an
106
exclusive basis and other specified antigens on a co-exclusive
basis. Sanofi Pasteur has agreed to use commercially reasonable
efforts to develop and commercialize a meningitis B vaccine in
the United States, the European Union and other major market
countries.
A steering committee made up of an equal number of
representatives from us and Sanofi Pasteur oversees all
development and commercialization activities under the
agreement. The steering committee has the authority to make
strategic decisions by unanimous vote relating to the
development of a meningitis vaccine. Sanofi Pasteur has ultimate
decision-making authority over matters that are not resolved at
the steering committee and executive officer levels, but does
not have the unilateral authority to amend the agreement or the
development plan in a manner that would alter our obligations.
In addition, Sanofi Pasteur has the right to make all strategic
decisions relating to the development of any combination product
and has sole discretion over the commercialization of any
meningitis vaccine developed under the agreement.
Under the agreement, Sanofi Pasteur paid us an initial fee of
3 million. In addition, Sanofi Pasteur has agreed to
pay all expenses incurred by us under the development program.
We are also eligible to receive payments of up to a maximum of
73 million upon the achievement of specified
research, development and commercialization milestones. Sanofi
Pasteur has agreed to pay royalties to us based on net sales by
Sanofi Pasteur, its affiliates and sublicensees of licensed
products from the collaboration, including specified minimum
royalties with respect to sales of any combination product. In
addition, Sanofi Pasteur has agreed to pay us a portion of
specified sublicense income received by Sanofi Pasteur or its
affiliates.
The term of the agreement ends, on a
country-by-country
basis, upon the later of ten years from first commercial sale or
the expiration of the
last-to-expire
patent covering a licensed product in such country. Sanofi
Pasteur may terminate the agreement for convenience beginning
April 1, 2007 upon six months prior written notice.
Sanofi Pasteur also may terminate the agreement upon any change
of control involving us or as a result of our uncured material
breach of the agreement or bankruptcy.
Facilities
The following table sets forth general information regarding our
materially important facilities.
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Approximate
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Location
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Use
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Segment
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square
feet
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Owned/leased
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Lansing, Michigan
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Manufacturing operations facilities
and office space
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Biodefense
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214,000
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Owned
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Frederick, Maryland
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Future manufacturing facilities and
office and laboratory space
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Biodefense/
Commercial
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290,000
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Owned
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Gaithersburg, Maryland
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Office and laboratory space
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Biodefense/
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36,000
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Leases expire 2008
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Commercial
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Rockville, Maryland
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Office space
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Biodefense/
Commercial
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23,000
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Lease expires 2016
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Wokingham, England
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Office and laboratory space
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Commercial
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16,000
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Leases expire 2016
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Lansing, Michigan.
We own a multi-building campus on
approximately 12.5 acres in Lansing, Michigan that includes
facilities for bulk manufacturing of BioThrax, including
fermentation, filtration and formulation, as well as for raw
material storage and in-process and final product warehousing.
The campus is secured through perimeter fencing, limited and
controlled ingress and egress and 24 hour
on-site
security personnel. We acquired these facilities in 1998 from
the Michigan Biologic Products Institute after the State of
Michigan, with the concurrence of the DoD, suspended the
production of BioThrax to renovate these manufacturing
facilities. Following our acquisition of BioThrax, we completed
107
the facility renovations initiated by the State of Michigan.
Our comprehensive renovations included the implementation of
work plans to systematically validate the manufacturing process
of BioThrax and improve our quality systems. In December 2001,
the FDA approved a supplement to our manufacturing facility
license for the manufacture of BioThrax at the renovated
facilities.
In February 2006, we began construction of a new
50,000 square foot manufacturing facility on our Lansing
campus. We expect the construction of the facility to cost
approximately $75 million, including approximately
$55 million for the building and associated capital
equipment, with the balance related to validation and
qualification activities required for regulatory approval and
initiation of manufacturing. We are constructing this new
facility as a large scale commercial manufacturing plant that we
can use to produce multiple vaccine products, subject to
complying with appropriate change-over procedures. Subject to
regulatory approval, we expect that the new manufacturing
facility will serve as our primary BioThrax manufacturing
facility. We anticipate that we will initiate large scale
manufacturing of BioThrax for commercial sale at the new
facility in 2008. Our plans assume that the FDA will not require
us to complete a human bridging trial demonstrating that
BioThrax manufactured at our new facility is bioequivalent to
BioThrax manufactured at our existing facility. We currently
expect to rely on nonclinical studies for these purposes.
However, the FDA has not approved our plan to rely on
nonclinical studies without conducting a human bridging trial
and may not do so. If the FDA requires us to conduct a human
bridging trial, the initiation of large scale manufacturing of
BioThrax at our new facility will be delayed and we will incur
additional unanticipated costs.
We are constructing this facility to accommodate production of
up to 40 million doses of BioThrax per year on a single
production line, which we could expand for production of up to
80 million doses per year through the addition of a second
production line. In comparison, our current facility has a
maximum production capacity of approximately nine million doses
of BioThrax per year. In addition to construction of a new
manufacturing facility, we recently commissioned a new pilot
plant on our Lansing campus. Our Lansing facilities and
substantially all of the other assets of our wholly owned
subsidiary, Emergent BioDefense Operations Lansing Inc., other
than accounts receivable under our DoD and HHS contracts, serve
as collateral for our financing obligations for our facility
expansion in Lansing. For more information, see
Managements discussion and analysis of financial
condition and results of operations Liquidity and
capital resources Debt financing.
Frederick, Maryland.
We own two buildings of
approximately 145,000 square feet each on a
15-acre
site
in Frederick, Maryland. We financed the purchase of these
buildings with a forgivable loan from the Department of Business
and Economic Development of the State of Maryland and mortgage
loans from commercial lenders. These buildings serve as
collateral for these financing obligations. For more
information, see Managements discussion and analysis
of financial condition and results of operations
Liquidity and capital resources Debt financing.
We are in the preliminary phase of establishing plans to build
out this site for product development and a portion of our
potential future product manufacturing requirements. Our
preliminary plans contemplate that the site would be designed to
provide laboratory space, product development and pilot plant
production capabilities, full scale commercial manufacturing
operations, warehouse and storage facilities, fill and finish
operations and administrative office space. We expect that we
will complete the build out of this site in several stages. Our
preliminary plans contemplate a build out of one of the two
buildings on this site to accommodate laboratory space, product
development, pilot plant, initial product launch capabilities
and administrative office space during 2008 and 2009. Our
preliminary plans also contemplate that we will build out
commercial manufacturing operations two to three years after
establishing initial product launch capabilities.
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Other.
We lease two separate product development
facilities. Our facility in Gaithersburg, Maryland of
approximately 36,000 square feet contains a combination of
laboratory and office space, including our current executive
offices. We conduct product development programs at this site
for both our biodefense and commercial product candidates. Our
facility in Wokingham, England of approximately
16,000 square feet contains a combination of laboratory and
office space. We conduct product development programs at this
site primarily for our commercial product candidates. Our
facility in Rockville, Maryland contains approximately
23,000 square feet of office space. We plan to relocate our
executive offices to our Rockville facility in late 2006.
Manufacturing
We manufacture BioThrax at our facilities in Lansing, Michigan
using well established vaccine manufacturing procedures. We
currently rely on contract manufacturers and other third parties
to manufacture the supplies of our immunobiotic product
candidates that we require for preclinical and clinical
development. We acquire these supplies on a purchase order
basis. We anticipate that we will use our existing plant
facilities in Michigan, including our recently commissioned
pilot plant, and, when constructed and approved, our planned new
plant facilities in Michigan and Maryland to support both
continued process development and the manufacture of clinical
supplies of our product candidates. However, we also expect that
we will continue to use third parties for production of
preclinical and clinical supplies of some of our product
candidates. We believe that manufacturing our products and
product candidates independently will provide us cost savings
and greater control over the manufacturing and regulatory
approval and oversight process, accelerate product development
timelines and allow us to expand our base of manufacturing
know-how that we can then apply to the development and
manufacture of future product candidates.
Hollister-Stier Laboratories LLC performs the contract filling
operation for BioThrax vials at its FDA approved facility
located in Spokane, Washington. Hollister-Stier has agreed to
meet all of our firm purchase orders for contract filling of
BioThrax based on a good faith annual estimate that we provide
prior to each calendar year. In addition, Hollister-Stier has
agreed to accommodate fill requests in excess of our annual
estimate subject to its available production capacity. Our
contract with Hollister-Stier expires December 31, 2007.
The contract also can be terminated by either party following an
uncured material breach by the other party.
Talecris Biotherapeutics has agreed to perform plasma
fractionation and purification and contract filling relating to
the manufacture of our anthrax immune globulin candidate at its
FDA approved facilities located in Melville, New York and
Clayton, North Carolina. Subject to limited exceptions, we have
agreed to obtain all of our anthrax immune globulin requirements
exclusively from Talecris. While our agreement with Talecris
remains in effect, Talecris has agreed not to market, sell or
acquire any competing product that contains anthrax immune
globulin as an active ingredient.
Talecris has agreed to perform plasma fractionation and
purification and contract filling for the manufacture of our
anthrax immune globulin candidate for preclinical or animal
studies, for clinical use or for non-clinical testing required
for clinical trials and for commercial sale. We have agreed to
pay Talecris royalties on net sales on a
country-by-country
basis for commercial product manufactured by Talecris under the
contract.
Our contract with Talecris expires December 31, 2013 or
five years following initiation of commercial manufacturing. We
have the option to extend the term for an additional five-year
period upon notice to Talecris at least 12 months prior to
the expiration of the initial term. After three years following
initiation of commercial manufacturing, either party may
terminate the contract upon two years advance notice. The
contract can also be terminated by either party following an
uncured material breach by the other party. We have the right to
terminate the contract, under specified circumstances, if we
discontinue our
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production of anthrax immune globulin source plasma or the
development of our anthrax immune globulin candidate.
We expect to engage one or more third parties to perform the
plasma fractionation and purification processes and contract
filling for our botulinum immune globulin candidate. We also
expect that we will rely on third parties for a portion of the
manufacturing process for commercial supplies of product
candidates that we successfully develop, including fermentation
for some of our vaccine product candidates and contract fill and
finish operations.
We rely on third parties for supplies and raw materials used for
the production of BioThrax and our immunobiotic product
candidates. We purchase these supplies and raw materials from
various suppliers in quantities adequate to meet our needs. We
believe that there are adequate alternative sources of supply
available if any of our current suppliers were unable to meet
our needs.
Marketing and
sales
We currently market and sell BioThrax directly to the DoD and
HHS with a small, targeted marketing and sales group. We plan to
continue to do so and expect that we will use a similar approach
for sales to the U.S. government of any other biodefense
product candidates that we successfully develop. We plan to
expand our sales and marketing organization as we broaden our
sales activities of biodefense products to state and local
governments, which we expect will be interested in these
products to protect first responders, such as police, fire and
emergency medical personnel. We have established marketing and
sales offices in Singapore and Munich, Germany to target sales
of biodefense products to foreign governments. We have engaged
third party marketing representatives to market BioThrax in the
Middle East, Turkey, India, Australia and several Scandinavian
countries in Europe.
We expect to establish a separate internal organization to
market and sell commercial products for which we retain
commercialization or co-commercialization rights. We anticipate
that our internal marketing and sales organization will be
complemented by selective co-promotion and other arrangements
with leading pharmaceutical and biotechnology companies.
We generally expect to retain commercial rights for our product
candidates that we successfully develop in situations in which
we believe it is possible to access the market through a
focused, specialized sales force. In particular, we believe that
such a sales force could address commercial markets, such as the
market for typhoid vaccines and other vaccines for travelers to
developing countries, that overlap with markets for our
biodefense products. We expect that we will selectively pursue
collaboration arrangements in situations in which the
collaborator has particular expertise or resources for the
development or commercialization of our products or product
candidates or to access particular markets.
Competition
The biotechnology and pharmaceutical industries are
characterized by rapidly advancing technologies, intense
competition and a strong emphasis on proprietary products. While
we believe that our technologies, knowledge, experience, and
resources provide us with competitive advantages, we face
potential competition from many different sources, including
commercial pharmaceutical and biotechnology companies, academic
institutions, government agencies and private and public
research institutions.
GlaxoSmithKline, Sanofi-Aventis, Wyeth, Merck and Chiron
generated approximately 85% of total vaccine revenues in 2005.
The concentration of the industry reflects a number of factors,
including:
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the need for significant, long-term investment in research and
development;
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the importance of manufacturing capacity, capability and
specialty know-how, such as techniques, processes and biological
starting materials; and
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the high regulatory burden for prophylactic products, which
generally are administered to healthy people.
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These factors have created a significant barrier to entry into
the vaccine industry.
Many of our competitors, including those named above, have
significantly greater financial resources and expertise in
research and development, manufacturing, preclinical testing,
conducting clinical trials, obtaining regulatory approvals and
marketing approved products than we do. These companies also
compete with us in recruiting and retaining qualified scientific
and management personnel, as well as in acquiring products,
product candidates and technologies complementary to, or
necessary for, our programs. Smaller or more focused companies,
including VaxGen, Cangene, Human Genome Sciences, Acambis, Avant
Immunotherapeutics and Avecia, may also prove to be significant
competitors, particularly through collaborative arrangements
with large and established companies.
Our commercial opportunity could be reduced or eliminated if our
competitors develop and commercialize products that are safer,
more effective, have fewer side effects, are more convenient or
are less expensive than any products that we may develop. In
addition, we may not be able to compete effectively if our
products and product candidates do not satisfy government
procurement requirements, particularly requirements of the
U.S. government with respect to biodefense products.
Any immunobiotic product candidates that we successfully develop
and commercialize is likely to compete with currently marketed
products, such as vaccines and therapeutics, including
antibiotics, and with other product candidates that are in
development for the same indications.
BioThrax.
Although BioThrax is the only
product approved by the FDA for human use for the prevention of
anthrax infection, we face significant competition for the
supply of this vaccine to the U.S. government. The NIAID
Biodefense Research Agenda for CDC Category A Agents includes
the development of an anthrax vaccine based on recombinant
protective antigen. In September 2003, NIAID awarded joint
three-year contracts totaling $151.6 million to VaxGen and
Avecia to fund development of a recombinant protective antigen
anthrax vaccine. In November 2004, HHS awarded VaxGen a contract
with a value of $877.5 million to supply 75 million
doses of recombinant protective antigen vaccine for the
strategic national stockpile. Avecia submitted a competing
proposal to supply vaccine for the strategic national stockpile,
which HHS did not accept. The HHS procurement request was
limited to a recombinant anthrax vaccine. Because BioThrax is
not a recombinant vaccine, BioThrax was precluded from
consideration under that procurement program.
VaxGen has not yet delivered any vaccine doses under its
contract with HHS. In May 2006, VaxGen announced that HHS
unilaterally modified its contract to provide its anthrax
vaccine for the strategic national stockpile. The contract
modification extends the deadlines by which VaxGen is required
to complete various milestones, including deliveries, and
imposes additional requirements for clinical and non-clinical
studies to be completed prior to the initiation of vaccine
deliveries to the strategic national stockpile. VaxGen announced
that meeting the new requirements would delay deliveries to the
strategic national stockpile to the end of 2007 at best or more
likely into 2008. VaxGen is obligated under the modified
contract to initiate deliveries no later than November 2008. In
May 2006, an HHS official stated in Congressional testimony that
delays in accelerated development programs are not unexpected or
unprecedented and that HHS maintains a commitment to develop a
next generation recombinant protective antigen anthrax vaccine.
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HPA manufactures an anthrax vaccine for use by the government of
the United Kingdom. In addition, other countries may have
anthrax vaccines for use by or in development for their own
internal purposes.
Other biodefense products.
The competition for our
biodefense immunobiotic product candidates includes the
following:
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Next generation anthrax vaccine.
We expect that
NIAID will issue multiple contracts to fund future development
and testing of a next generation anthrax vaccine pursuant to its
request for proposals issued in June 2006. We face significant
competition for NIAID funding from other companies that have
responded to this NIAID request for proposals. If we continue to
pursue the development of a next generation anthrax vaccine, we
also expect that we will face significant competition for the
supply of our product candidate to the U.S. government.
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Anthrax immune globulin.
Cangene, in collaboration
with the CDC, is currently developing an anthrax immune globulin
using plasma collected from military personnel who have been
vaccinated with BioThrax. In July 2006, HHS exercised an option
under a modification to an existing development and supply
contract for Cangene to supply 10,000 doses of anthrax immune
globulin for the strategic national stockpile. In June 2006, HHS
awarded a contract to Human Genome Sciences to supply 20,000
treatment courses of a monoclonal antibody to
Bacillus
anthracis
, referred to as ABthrax, for the strategic
national stockpile.
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Recombinant bivalent botulinum vaccine.
DynPort
Vaccine Company has a recombinant bivalent botulinum vaccine in
Phase I clinical development with funding from the DoD.
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Botulinum immune globulin.
The current recommended
therapy for clinical symptoms of botulism following exposure
consists of passive immunization with an immune globulin derived
from equine plasma. In June 2006, HHS awarded a five-year
development and supply contract to Cangene for a heptavalent
botulinum immune globulin derived from equine plasma. The
contract provides for the supply of 200,000 doses of a botulinum
immune globulin for the strategic national stockpile.
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BioThrax and our biodefense product candidates also face
competition for government funding from other defensive
measures, including medical countermeasures for biological,
chemical and nuclear threats, diagnostic testing systems and
other emergency preparedness countermeasures.
Commercial products.
The competition for our
commercial immunobiotic product candidates includes the
following:
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Typhoid vaccine.
One oral typhoid vaccine and one
injectable typhoid vaccine are currently approved and
administered in the United States and Europe. In addition,
combination vaccines are available for the prevention of
hepatitis A and typhoid infections. Antibiotics typically are
used to treat typhoid after infection. For more information, see
Products Commercial
business Typhoid vaccine. We believe that
Avant Immunotherapeutics Inc. has an oral, single dose, live
attenuated typhoid vaccine candidate in Phase I clinical
development with funding from NIAID.
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Hepatitis B therapeutic vaccine.
There is no vaccine
currently on the market that is licensed for therapeutic use for
hepatitis B infection. Currently available therapies for this
patient population consist mainly of antiviral drugs and
immunotherapies, such as interferons. For more information, see
Products Commercial
business Hepatitis B therapeutic vaccine.
Several other companies have vaccine candidates in clinical
development, including Enzo Biochem, Oxxon Therapeutics and
Genencor International.
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Group B streptococcus vaccine.
The existing method
of prevention of group B streptococcus infection in neonates is
the targeted administration of intravenous antibiotics to women
during labor. A number of competitors have passive immune
vaccines in preclinical development.
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Chlamydia vaccine.
There is no vaccine currently on
the market for chlamydia, and we are not aware of any competing
chlamydia vaccine candidate in clinical development. Several
competitors may have chlamydia vaccine candidates in preclinical
development. Screening tests and effective antibiotic treatments
have been effective at containing chlamydia in the United States
and Europe.
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Meningitis B vaccine.
Currently, there is no
meningitis vaccine on the market that is protective against
group B meningococcal infection. Novartis markets a meningitis B
vaccine in New Zealand to people under the age of 20 and is also
developing a broad coverage protein subunit vaccine candidate.
Current meningitis B treatment strategies include antibiotics
and clinical support.
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Intellectual
property and licenses
Our success, particularly with respect to our commercial
business, depends in part on our ability to obtain and maintain
proprietary protection for our product candidates, technology
and know-how, to operate without infringing the proprietary
rights of others and to prevent others from infringing our
proprietary rights. Our policy is to seek to protect our
proprietary position by, among other methods, filing U.S. and
foreign patent applications related to our proprietary
technology, inventions, and improvements that are important to
the development of our business. U.S. patents generally
have a term of 20 years from the date of nonprovisional
filing. We also rely on trade secrets, know-how, continuing
technological innovation and in-licensing opportunities to
develop and maintain our proprietary position.
As of October 20, 2006, we owned or licensed a total of
20 U.S. patents and 44 U.S. patent
applications relating to our biodefense and commercial product
candidates described in this prospectus, as well as numerous
foreign counterparts to many of these patents and patent
applications. Our patent portfolio includes patents and patent
applications with claims directed to compositions of matter,
pharmaceutical formulations and methods of use.
We consider the patent rights that we have licensed from HPA
relating to our recombinant bivalent botulinum vaccine candidate
and our botulinum toxoid vaccine, which we plan to use in the
development of our botulinum immune globulin candidate, to be
most important to the protection of our biodefense product
portfolio. These patents rights are described below under
License agreements HPA
agreements.
We consider the following patents that we own or license to be
most important to the protection of our vaccine candidates in
our commercial business that are in clinical development.
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Typhoid vaccine.
We hold five U.S. patents
relating to our typhoid vaccine candidate. Some of these patents
have claims to the composition of matter of the vaccine
candidate and methods of use of attenuated
Salmonella typhi
bacteria as vaccines for the treatment and prevention of
typhoid and for the delivery of vaccine antigens. In addition,
we have two pending U.S. patent applications with claims to
additional compositions and methods of therapy that are
generally related to our typhoid vaccine candidate. Our issued
U.S. patents expire, and, if issued, our U.S. patent
applications would expire, between 2015 and 2020. We hold 28
foreign counterparts to our issued U.S. patents relating to our
typhoid vaccine candidate, including counterparts under the
European Patent Convention and in Japan, that expire, and 34
foreign patent applications that, if issued, would expire,
between 2015 and 2020.
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Hepatitis B therapeutic vaccine.
Our hepatitis B
therapeutic vaccine candidate uses our proprietary
spi
-VEC oral delivery system technology to deliver
hepatitis B core antigen to the human immune system.
Spi
-VEC is based on our live attenuated typhoid vaccine
candidate and employs recombinant technology to insert the gene
for hepatitis B core into the live attenuated S
almonella
bacteria. As a result, the patents relating to our typhoid
vaccine candidate also protect our hepatitis B therapeutic
vaccine candidate. We also hold one U.S. patent with claims
to the use of attenuated
Salmonella
organisms for the
delivery of hepatitis B vaccine antigens, which expires in 2019.
In addition, we have
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one pending U.S. patent application relating to our
hepatitis B therapeutic vaccine candidate, which if issued also
would expire in 2019. We have four foreign patent applications
relating to our hepatitis B therapeutic vaccine candidate that,
if issued, would expire in 2019.
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Group B streptococcus vaccine.
We hold two
U.S. patents relating to our group B streptococcus vaccine
candidate with claims to the composition of matter of the
vaccine candidate and methods of use for the prevention or
treatment of infection caused by
Streptococcus
agalactiae
. In addition, we have four pending
U.S. patent applications with claims to additional
compositions and methods of therapy relating to our group B
streptococcus vaccine candidate. Our issued U.S. patents expire,
and, if issued, our U.S. patent applications would expire,
between 2019 and 2022. We hold 19 foreign counterparts to our
issued U.S. patents relating to our group B streptococcus
vaccine candidate, including counterparts under the European
Patent Convention and in Japan, that expire, and 40 foreign
patent applications that, if issued, would expire, in 2019.
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STM technology.
We jointly own with Imperial College
Innovations Limited patents with claims to methods for the
identification of virulence genes using our signature tagged
mutagenesis, or STM, technology, which we used to identify and
develop the gene mutations that form the basis of our typhoid
vaccine and hepatitis B therapeutic vaccine candidates. We also
jointly own with Imperial Innovations the composition of matter
patents covering these gene mutations. We have exclusive rights,
even as to Imperial Innovations, under these jointly owned
patents in all fields of use, except in the field of diagnosis,
prevention, treatment, or palliation of microbial diseases,
disorders and infections in humans and animals where our rights
are generally non-exclusive and are subject to existing license
agreements with third parties. Because our typhoid vaccine and
hepatitis B therapeutic vaccine candidates are outside of this
non-exclusive field of use, we have exclusive rights with
respect to these vaccine candidates. We exclusively own the
composition of matter patents covering the specific combination
of mutations employed in our typhoid vaccine and hepatitis B
therapeutic vaccine candidates.
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The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our technology will depend on our success in obtaining effective
claims and enforcing those claims once granted. We do not know
whether any of our patent applications or those patent
applications that we license will result in the issuance of any
patents. Our issued patents and those that may issue in the
future, or those licensed to us, may be challenged, invalidated
or circumvented, which could limit our ability to stop
competitors from marketing related products or the length of
term of patent protection that we may have for our products. In
addition, our competitors may independently develop similar
technologies or duplicate any technology developed by us, and
the rights granted under any issued patents may not provide us
with any meaningful competitive advantages against these
competitors. Furthermore, because of the extensive time required
for development, testing and regulatory review of a potential
product, it is possible that, before any of our products can be
commercialized, any related patent may expire or remain in force
for only a short period following commercialization, thereby
reducing any advantage of the patent.
We also rely on trade secrets relating to manufacturing
processes and product development to protect our business.
Because we do not have patent protection for BioThrax, the label
expansions and improvements that we are pursuing for BioThrax or
our anthrax immune globulin candidate, our only intellectual
property protection for BioThrax and our anthrax immune globulin
candidate is confidentiality regarding our manufacturing
capability and specialty know-how, such as techniques, processes
and biological starting materials. However, these types of trade
secrets can be difficult to protect. We seek to protect this
confidential information, in part, with agreements with our
employees, consultants, scientific advisors and contractors. We
also seek to preserve the integrity and confidentiality of our
data and trade secrets by maintaining physical security of our
premises and physical and electronic security of our information
technology systems. While we have confidence in these
individuals, organizations and
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systems, agreements or security measures may be breached, and we
may not have adequate remedies for any breach. In addition, our
trade secrets may otherwise become known or be independently
discovered by competitors. To the extent that our consultants or
contractors use intellectual property owned by others in their
work for us, disputes may arise as to the rights in related or
resulting know-how and inventions.
License
agreements
We are a party to a number of license agreements under which we
license patents, patent applications, and other intellectual
property. We enter into these agreements to augment our owned
intellectual property. These agreements impose various diligence
and financial payment obligations on us. We expect to continue
to enter into these types of license agreements in the future.
The only existing licenses that we consider to be material to
our current product portfolio or development pipeline are our
agreements with HPA, which are described below. We also have a
license agreement with the Bavarian State Ministry of the
Environment, Public Health and Consumer Protection, or StMUGV,
relating to a viral vector technology that we may use in the
development of future product candidates, which is also
described below.
HPA agreements.
In November 2004, we entered into
two separate license agreements with HPA for our botulinum
toxoid vaccine and our recombinant bivalent botulinum vaccine
candidate. Under the license agreements, we obtained the
exclusive, worldwide right to develop, manufacture and
commercialize pharmaceutical products that consist of botulinum
toxoid components or recombinant botulinum toxin components for
the prevention or treatment of illness in humans caused by
exposure to the botulinum toxin, subject to HPAs
non-exclusive right to make, use or sell recombinant botulinum
products to meet public health requirements in the United
Kingdom.
The licensed patent portfolio includes one U.S. patent with
claims to the composition of matter of recombinant components of
Clostridium botulinum
, which expires in 2016. Additional
composition of matter and method of use claims are pending in
three U.S. patent applications, which if issued as patents
also would expire in 2016. The licensed portfolio also includes
seven foreign applications, which if issued would expire in 2016.
Under each license agreement, we are required to pay HPA
royalties on sales of the licensed product by us, our affiliates
or third party sublicensees in the major market countries of the
United States, United Kingdom, France, Germany, Italy and Japan,
and a separate royalty on sales of the licensed product by us
and our affiliates in any other country.
Under each license agreement, we are generally obligated to use
commercially reasonable efforts to respond to applicable
solicitations or procurement proposals from, and to enter into
contracts with, governmental agencies in each of the major
market countries with respect to the licensed product. We may
satisfy this obligation by filing an IND with respect to a
licensed product by November 2009. If we fail to file an IND
within that time period under either of the license agreements,
we are obligated to pay HPA an annual fee until an IND has been
filed.
In November 2004, we also entered into two separate development
agreements with HPA pursuant to which HPA agreed to conduct
specified tests, studies and other development activities with
respect to the botulinum toxoid product and the recombinant
botulinum product in accordance with mutually-agreed development
plans. We have paid minimum contractual commitments of
$1.0 million under each development agreement to compensate
HPA for this development work. HPA also agreed to provide us
with clinical supplies of the botulinum toxoid product and the
recombinant botulinum product for clinical trials.
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The term of each development agreement lasts until the
development activities are completed. HPA may terminate each
development agreement as a result of our uncured material breach
or insolvency. Each of the development agreements automatically
terminates if the applicable license agreement is terminated.
The term of each license agreement lasts until the expiration of
all of our royalty obligations under the applicable license
agreement. We are obligated to pay royalties under each license
agreement, on a
product-by-product
and
country-by-country
basis, until the later of seven years from first commercial sale
of the first licensed product in that country and the expiration
of the
last-to-expire
licensed patent in that country. HPA may terminate each license
agreement if we terminate the applicable development agreement
without cause before we have paid, or if HPA terminates such
development agreement due to our failure to pay, the minimum
commitment amount set forth in such development agreement. In
addition, HPA may terminate each license agreement as a result
of our uncured material breach or insolvency.
MVAtor Platform Technology.
In July 2006, in
connection with our acquisition of ViVacs GmbH, a German limited
liability company, we acquired a license agreement with StMUGV
that provides us the non-exclusive, worldwide right to develop
and produce viruses and viral products, including recombinant
viral vectors, using the modified vaccinia Ankara virus, or MVA.
Our MVAtor platform technology, which is based on these licensed
rights, could potentially be used as a viral vector for delivery
of multiple vaccine antigens for different disease-causing
organisms, including influenza, using recombinant technology.
Under the license agreement, we are required to pay StMUGV:
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a percentage of the net revenue or license fees, as applicable,
that we receive from products developed using MVA that are used
for research or other purposes; and
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a percentage of the license fees that we receive from products
developed using MVA that are licensed as starting material for
the production of a smallpox vaccine.
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The license agreement does not have a specified term. Each party
may terminate the license agreement as a result of an uncured
material breach by the other party. In addition, StMUGV may
terminate the license agreement upon the insolvency or
liquidation of our wholly owned subsidiary, Emergent Product
Development GmbH, formerly ViVacs GmbH.
Government
contracts
We have an ongoing BioThrax supply contract with the DoD, which
purchases BioThrax for immunization of military personnel. In
addition, we supply BioThrax to HHS for placement into the
strategic national stockpile.
Department of Defense.
Since 1998, we have been a
party to two supply agreements for BioThrax with the DoD. We
have completed delivery of all of the doses of BioThrax under
our first contract with the DoD. In November 2003, we entered
into a follow-on, second supply contract with the DoD. This
second contract is referred to as an indefinite
delivery/indefinite quantity contract. Under this contract, the
DoD is obligated to acquire a minimum number of doses of
BioThrax and has the right to acquire up to a maximum number of
doses. We invoice the DoD for progress payments under the
contract upon reaching pre-determined process stages in the
manufacture of BioThrax. We amended this contract in October
2006. As amended, this contract provides for the supply of a
minimum of approximately 1.5 million additional doses of
BioThrax to the DoD through September 2007. We expect to deliver
to the DoD approximately 480,000 of these doses by December
2006, with the balance to be delivered by September 2007. The
DoD may submit additional orders under this contract through
February 2007.
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Department of Health and Human Services.
In May
2005, we entered into an agreement to supply five million doses
of BioThrax to HHS for placement into the strategic national
stockpile for a fixed price of $123 million. We completed
delivery of all five million doses of BioThrax by February 2006,
seven months earlier than required. In May 2006, we entered into
a contract modification with HHS for the delivery of an
additional five million doses of BioThrax to HHS by May 2007 for
a fixed price of $120 million. We expect to complete
delivery of all five million additional doses by the first half
of 2007. Our contract with HHS does not provide for progress
payments. We invoice HHS under the contract upon completing
delivery of the specified doses of BioThrax.
U.S. government indemnification.
Under our
BioThrax contracts with the DoD and HHS, the
U.S. government indemnifies us against claims by third
parties for death, personal injury and other damages related to
BioThrax, including reasonable litigation and settlement costs,
to the extent that the claim or loss results from specified
risks not covered by insurance or caused by our grossly
negligent or criminal behavior. As required under such
contracts, we have notified the DoD of personal injury claims
that have been filed against us as a result of the vaccination
of U.S. military personnel with BioThrax and are seeking
reimbursement from DoD for all costs incurred in defending these
claims.
Safety Act and other statutory protections.
In
August 2006, the Department of Homeland Security approved our
application under the Safety Act enacted by the
U.S. Congress in 2002 for liability protection for sales of
BioThrax. The Safety Act creates product liability limitations
for qualifying anti-terrorism technologies for claims arising
from or related to an act of terrorism. In addition, the Safety
Act provides a process by which an anti-terrorism technology may
be certified as an approved product by the
Department of Homeland Security and therefore entitled to a
rebuttable presumption that the government contractor defense
applies to sales of the product.
The government contractor defense, under specified
circumstances, extends the sovereign immunity of the United
States to government contractors who manufacture a product for
the government. Specifically, for the government contractor
defense to apply, the government must approve reasonably precise
specifications, the product must conform to those specifications
and the supplier must warn the government about known dangers
arising from the use of the product. We have successfully
asserted the government contractor defense in product liability
litigation in a federal district court in Michigan.
As part of the 2006 Defense Authorization Act, the
U.S. Congress adopted the Public Readiness and Emergency
Preparedness Act, which offers targeted liability protections to
those involved in the development, manufacturing and deployment
of pandemic and epidemic products and security countermeasures.
The Public Readiness and Emergency Preparedness Act provides
immunity, subject to limited exceptions, for claims arising out
of, related to or resulting from the administration or use of a
covered countermeasure.
Government
regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial
requirements for the preclinical and clinical development,
manufacture, distribution and marketing of pharmaceutical and
biological products, including immunobiotics. These agencies and
other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality
control, safety, effectiveness, labeling, storage, distribution,
recordkeeping, approval, advertising, sale, promotion, import,
and export of our products and product candidates.
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U.S. government
regulation
In the United States, BioThrax and our product candidates are
regulated by the FDA as biological products. Biologics are
subject to regulation under the Federal Food, Drug, and Cosmetic
Act, or the FDCA, the Public Health Service Act, or the PHSA,
the regulations promulgated under the FDCA and the PHSA and
other federal, state, and local statutes and regulations.
Violations of regulatory requirements at any stage may result in
various adverse consequences, including delay in approving or
refusal to approve a product. Violations of regulatory
requirements also may result in enforcement actions, including
withdrawal of approval, labeling restrictions, seizure of
products, fines, injunctions or civil or criminal penalties.
The process required by the FDA under these laws before our
product candidates may be marketed in the United States
generally involves the following:
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preclinical laboratory and animal tests;
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submission to the FDA of an IND, which must become effective
before clinical trials may begin;
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completion of human clinical trials and other studies to
establish the safety and efficacy of the proposed product for
each intended use;
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FDA review of whether the facility in which the product is
manufactured, processed, packed or held complies with cGMP
requirements designed to assure the products continued
quality; and
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submission to the FDA and approval of an NDA in the case of a
drug, or a BLA in the case of a biologic, containing preclinical
and clinical data, proposed labeling and information to
demonstrate that the product will be manufactured to appropriate
standards of identity, purity and quality.
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The research, development and approval process requires
substantial time, effort and financial resources, and approvals
may not be granted on a timely or commercially viable basis, if
at all.
Preclinical
studies
Preclinical studies include laboratory evaluation of the product
candidate, its chemistry, formulation and stability, as well as
animal studies to assess its potential safety and efficacy. We
submit the results of the preclinical studies, together with
manufacturing information, analytical data and any available
clinical data or literature to the FDA as part of an IND, which
must become effective before we may begin human clinical trials.
The IND submission also contains clinical trial protocols, which
describe the design of the proposed clinical trials. The IND
becomes effective 30 days after the FDA receives the
filing, unless the FDA, within the
30-day
time
period, raises concerns or questions about the conduct of the
preclinical trials or the design of the proposed clinical trials
as outlined in the IND. In such a case, the IND sponsor and the
FDA must resolve any outstanding concerns before clinical trials
can begin. In addition, an independent Institutional Review
Board charged with protecting the welfare of human subjects
involved in research at each medical center proposing to conduct
the clinical trials must review and approve any clinical trial.
Furthermore, study subjects must provide informed consent for
their participation in the clinical trial.
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Clinical
trials
Human clinical trials are typically conducted in three
sequential phases, which may overlap:
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In a Phase I clinical trial, the drug or biologic is
initially administered into healthy human subjects or subjects
with the target condition and tested for safety, dosage
tolerance, absorption, metabolism, distribution and excretion.
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In a Phase II clinical trial, the drug or biologic is
administered to a limited subject population to identify
possible adverse effects and safety risks, the efficacy of the
product for specific targeted diseases and dosage tolerance and
optimal dosage.
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A Phase III clinical trial is undertaken if a Phase II
clinical trial demonstrates that a dosage range of the drug or
biologic is effective and has an acceptable safety profile. In a
Phase III clinical trial, the drug or biologic is
administered to an expanded population, often at geographically
dispersed clinical trial sites, to further evaluate dosage and
clinical efficacy and to further test for safety.
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U.S. law requires that trials to support approval for
product marketing be adequate and well controlled.
In general, this means that pivotal clinical trials typically
must be prospective, randomized, blinded and controlled. The
design of the clinical trials must be described in appropriate
protocols submitted to the FDA and approved by an Institutional
Review Board. Clinical trials typically compare the experimental
product to either a placebo or, in some cases, a product already
approved for the treatment of the applicable disease or
condition. Trials must also be conducted in compliance with good
clinical practice, or GCP, requirements.
In the case of product candidates that are intended to treat
rare life-threatening diseases, such as infection caused by
exposure to the anthrax toxin, conducting controlled clinical
trials to determine efficacy may be unethical or infeasible.
Under regulations issued by the FDA in 2002, often referred to
as the animal rule, the FDA described the
circumstances under which it will rely on evidence from studies
in animals to provide substantial evidence of efficacy for
products for which human efficacy studies are not ethical or
feasible. The animal rule provides that, under these
circumstances, approval of the product can be based on clinical
data from trials in healthy subjects that demonstrate adequate
safety and immunogenicity and efficacy data from adequate and
well controlled animal studies. Among other requirements, the
animal studies must establish that the biological product is
reasonably likely to produce clinical benefits in humans.
Because the FDA must agree that data derived from animal studies
may be extrapolated to establish safety and effectiveness in
humans, these studies add complexity and uncertainty to the
testing and approval process. In addition, products approved
under the animal rule are subject to additional regulation not
normally required of other products. Additional regulation may
include post-marketing study requirements, restrictions imposed
on marketing or distribution or requirements to provide
information to patients.
We may not successfully complete Phase I, Phase II or
Phase III testing of our product candidates within any
specific time period, if at all. Furthermore, the FDA or the
Institutional Review Boards or the sponsor may prevent clinical
trials from beginning or may place clinical trials on hold or
terminate them at any point in this process if, among other
reasons, they conclude that study subjects are being exposed to
an unacceptable health risk.
Marketing
approval
In the United States, the results of product development,
preclinical studies and clinical trials must be submitted to the
FDA for review and approval prior to marketing and commercial
shipment of the product candidate. If the product is regulated
as a drug, an NDA must be submitted and approved before
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commercial marketing may begin. If the product is regulated as a
biologic, a BLA must be submitted and approved before commercial
marketing may begin. The NDA or BLA must include a substantial
amount of data and other information concerning the safety and
effectiveness and, in the case of a biologic, purity and potency
of the product candidate from laboratory, animal and clinical
testing, as well as data and information on the finished
product, including manufacturing, product stability and proposed
product labeling.
Each domestic and foreign manufacturing establishment, including
any contract manufacturers we may decide to use, must be listed
in the NDA or BLA and must be registered with the FDA. The FDA
generally will not approve an application until the FDA conducts
a manufacturing inspection, approves the applicable
manufacturing process for the drug or biological product and
determines that the facility is in compliance with cGMP
requirements. If the manufacturing facilities and processes fail
to pass the FDA inspection, we will not receive approval to
market these products.
Under applicable laws and FDA regulations, each NDA or BLA
submitted for FDA approval is usually reviewed for
administrative completeness and reviewability within 45 to
60 days following submission of the application. If deemed
complete, the FDA will file the NDA or BLA, thereby
triggering substantive review of the application. The FDA can
refuse to file any NDA or BLA that it deems incomplete or not
properly reviewable.
The FDA may deny an NDA or BLA if the applicable regulatory
criteria are not satisfied or may require additional clinical
data. Even if additional clinical data is submitted, the FDA may
ultimately decide that the NDA or BLA does not satisfy the
criteria for approval. If the FDA approves a product, it may
limit the approved therapeutic uses for the product as described
in the product labeling, require that contraindications, warning
statements or precautions be included in the product labeling,
require that additional studies be conducted following approval
as a condition of the approval, impose restrictions and
conditions on product distribution, prescribing or dispensing in
the form of a risk management plan or otherwise limit the scope
of any approval or post-approval, or limit labeling. Once
issued, the FDA may withdraw product approval if compliance with
regulatory standards is not maintained or if problems occur
after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect
of approved products that have been commercialized. The FDA has
the power to prevent or limit further marketing of a product
based on the results of these post-marketing programs.
Satisfaction of FDA requirements or similar requirements of
state, local and foreign regulatory agencies often takes many
years and the actual time required may vary substantially, based
upon the type, complexity and novelty of the product candidate.
Government regulation may delay or prevent marketing of
potential products for a considerable period of time or
permanently and impose costly procedures upon our activities.
The FDA or other regulatory agencies may not grant approval for
any of our product candidates on a timely basis, or on a
commercially viable basis, if at all. Success in preclinical
testing or early clinical trials does not ensure that later
clinical trials will be successful, and interim results of a
clinical trial do not necessarily predict final results. Data
obtained from preclinical and clinical activities is not always
conclusive and may be susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. Even if
a product candidate receives regulatory approval, the approval
may be significantly limited to specific indications.
Furthermore, later discovery of previously unknown problems with
a product may result in restrictions on the product or even
complete withdrawal of the product from the market.
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Ongoing
regulation
Any products manufactured or distributed by us pursuant to FDA
clearances or approvals are subject to pervasive and continuing
regulation by the FDA, including:
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recordkeeping requirements;
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periodic reporting requirements;
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cGMP requirements related to all stages of manufacturing,
testing, storage, packaging, labeling and distribution of
finished dosage forms of the product;
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reporting of adverse experiences with the drug or
biologic; and
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advertising and promotion restrictions.
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The FDAs rules for advertising and promotion require in
particular that we not promote our products for unapproved uses
and that our promotion be fairly balanced and adequately
substantiated. We must also submit appropriate new and
supplemental applications and obtain FDA approval for some
changes to the approved product, product labeling or
manufacturing process.
Drug and biologics manufacturers and their subcontractors are
required to register their establishments with the FDA and state
agencies. The cGMP requirements for biological products are
extensive and require considerable time, resources, and ongoing
investment to comply. The regulations require manufacturers to
establish validated systems to ensure that products meet high
standards of sterility, purity and potency. The requirements
apply to all stages of the manufacturing process, including the
synthesis, processing, sterilization, packaging, labeling,
storage and shipment of the biological product. The regulations
require investigation and correction of any deviations from cGMP
and impose documentation requirements upon us and any third
party manufacturers that we may decide to use. Manufacturing
establishments are subject to periodic unannounced inspections
by the FDA and state agencies for compliance with cGMP. The FDA
is authorized to inspect manufacturing facilities without a
warrant at reasonable times and in a reasonable manner. We or
our present or future suppliers may not be able to comply with
cGMP and other FDA regulatory requirements.
In addition, cGMP requirements are constantly evolving, and new
or different requirements may apply in the future. We, our
collaborators or third party contract manufacturers may not be
able to comply with the applicable regulations. After regulatory
approvals are obtained, the subsequent discovery of previously
unknown problems, or the failure to maintain compliance with
existing or new regulatory requirements, may result in:
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restrictions on the marketing or manufacturing of a product;
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warning letters;
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withdrawal of the product from the market;
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refusal to approve pending applications or supplements to
approved applications;
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voluntary or mandatory product recall;
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fines or disgorgement of profits or revenue;
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suspension or withdrawal of regulatory approvals;
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refusal to permit the import or export of products;
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product seizure; and
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injunctions or the imposition of civil or criminal penalties.
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The FDAs policies may change and additional government
regulations may be enacted that could prevent or delay
regulatory approval of our product candidates. Moreover,
increased attention to the containment of health care costs in
the United States and in foreign markets could result in new
government regulations. We cannot predict the likelihood, nature
or extent of adverse governmental regulation that might arise
from future legislative or administrative action in the United
States or abroad. We and our product candidates are also subject
to a variety of state laws and regulations in those states or
localities where they are or will be marketed. Any applicable
state or local regulations may hinder our ability to market our
product candidates in those states or localities.
BioThrax lot
release and FDA review
Because of the complex manufacturing processes for most
biological products, the FDA requires that each product lot of
an approved biologic, including vaccines, undergo thorough
testing for purity, potency, identity and sterility. Before a
lot of BioThrax can be used, we must submit a sample of the
vaccine lot and a lot release protocol to the FDA. The lot
release protocol documents reflect the results of our tests for
potency, safety, sterility and any additional assays mandated by
our BLA for BioThrax and a summary of relevant manufacturing
details. The FDA reviews the manufacturing and testing
information provided in the lot release protocol and may elect
to perform confirmatory testing on lot samples that we submit.
We cannot distribute a lot of BioThrax until the FDA releases
it. The length of the FDA review process depends on a number of
factors, including reviewer questions, license supplement
approval, reviewer availability, and whether our internal
testing of product samples is completed before or concurrently
with FDA testing.
Biologics review
for BioThrax
The NIH originally approved the manufacture and sale of BioThrax
in 1970 pursuant to the regulatory process in effect at the
time. In 1972, responsibility for approving biological products
was transferred from the NIH to the FDA. Following that transfer
of responsibility, the FDA established procedures for reviewing
the safety, efficacy and labeling of biological products,
including BioThrax, that had been approved by the NIH prior to
July 1, 1972. Under the biologics review process, the FDA
appointed advisory panels of independent experts to evaluate
previously approved biologic products and to advise the FDA as
to whether the products were safe, effective and not misbranded.
After reviewing a particular panels recommendation, the
FDA publishes the panels report, along with a proposed
order recommending classification of the biological product into
one of three categories: Category I, safe, effective and
not misbranded; Category II, unsafe, ineffective or
misbranded; or Category III, not within Category I or
Category II because further studies are required. After a
ninety-day comment period, the FDA reviews any comments and then
publishes a final rule or order classifying the product at issue
as Category I, II or III. Only after publishing a
final order does the FDA then take action with respect to
individual products. For example, if the biologics review
determines that a specific product is not safe and effective,
the FDA would initiate the process of revoking the approval for
the product. Likewise, if further study is required before the
status of a product can be determined, the sponsor would be
required to come forward with additional data within prescribed
time periods. The FDA completed the biologics review for
BioThrax in 2005, classifying the product as Category I,
safe, effective and not misbranded.
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Regulation of
immune globulin products
Products derived from humans, including our immune globulin
candidates, are subject to additional regulation. The FDA
regulates the screening and vaccination of human donors and the
process of collecting source plasma. FDA regulations require
that all donors be tested for suitability and provide informed
consent prior to vaccination or collection of source plasma for
the immune globulin. The vaccination and collection of source
plasma may also be subject to Institutional Review Board
approval or to an IND, depending on factors such as whether
donors are to be vaccinated according to the vaccines
approved schedule. The FDA also regulates the process of
testing, storage and processing of source plasma, which is used
to manufacture immune globulin candidates for use in clinical
trials and, after approval by the FDA, for commercial
distribution.
Regulation related
to bioterrorism counteragents and pandemic
preparedness
Because some of our products or product candidates are intended
for the treatment of diseases that may result from acts of
bioterrorism or for pandemic preparedness, they may be subject
to the specific requirements described below.
Project
BioShield
The Project BioShield Act of 2004 provides expedited procedures
for bioterrorism related procurement and awarding of research
grants, making it easier for HHS to quickly commit funds to
countermeasure projects. Project BioShield relaxes procedures
under the Federal Acquisition Regulation for procuring up to
$25 million of property or services used in performing,
administering or supporting biomedical countermeasure research
and development. In addition, if the Secretary of HHS deems that
there is a pressing need, Project BioShield authorizes the
Secretary to use an expedited award process, rather than the
normal peer review process, for grants, contracts and
cooperative agreements related to biomedical countermeasure
research and development activity. This power is limited to
awards of $1.5 million or less.
Under Project BioShield, the Secretary of HHS, with the
concurrence of the Secretary of the Department of Homeland
Security and upon the approval of the President, can contract to
purchase unapproved countermeasures for the strategic national
stockpile in specified circumstances. Congress is notified of a
recommendation for a stockpile purchase after Presidential
approval. Project BioShield specifies that a company supplying
the countermeasure to the strategic national stockpile is paid
on delivery of a substantial portion of the countermeasure. To
be eligible for purchase under these provisions, the Secretary
of HHS must determine that there is sufficient and satisfactory
clinical results or research data, including data, if available,
from preclinical and clinical trials, to support a reasonable
conclusion that the countermeasure will qualify for approval or
licensing within eight years. Project BioShield also allows the
Secretary of HHS to authorize the emergency use of medical
products that have not yet been approved by the FDA. To exercise
this authority, the Secretary of HHS must conclude that:
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the agent for which the countermeasure is designed can cause
serious or life-threatening disease;
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the product may reasonably be believed to be effective in
detecting, diagnosing, treating or preventing the disease;
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the known and potential benefits of the product outweigh its
known and potential risks;
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there is no adequate alternative to the product that is approved
and available; and
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any other criteria prescribed in regulations are met.
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Although this provision permits the Secretary of HHS to
circumvent the FDA approval process, its use would be limited to
rare circumstances. We cannot predict whether these authorities
would be applicable to any of our current product candidates.
Safety
Act
The Safety Act enacted by the U.S. Congress in 2002 creates
product liability limitations for qualifying anti-terrorism
technologies for claims arising from or related to an act of
terrorism. In addition, the Safety Act provides a process by
which an anti-terrorism technology may be certified as an
approved product by the Department of Homeland
Security and therefore entitled to a rebuttable presumption that
the government contractor defense applies to sales of the
product. The government contractor defense, under specified
circumstances, extends the sovereign immunity of the United
States to government contractors who manufacture a product for
the government. Specifically, for the government contractor
defense to apply, the government must approve reasonably precise
specifications, the product must conform to those specifications
and the supplier must warn the government about known dangers
arising from the use of the product. Although sales of BioThrax
are subject to the protections of the Safety Act, our product
candidates may not qualify for the protections of the Safety Act
or the government contractor defense.
Public
Readiness and Emergency Preparedness Act
The Public Readiness and Emergency Preparedness Act enacted by
the U.S. Congress in 2005 provides immunity for
manufacturers from all claims under state or federal law for
loss arising out of the administration or use of a
covered countermeasure. Covered
countermeasures include security countermeasures and
qualified pandemic or epidemic products, including
products intended to diagnose or treat pandemic or epidemic
disease, such as pandemic vaccines, as well as treatments
intended to address conditions caused by such products. For
these immunities to apply, the Secretary of HHS must issue a
declaration in cases of public health emergency or
credible risk of a future public health emergency.
In the declaration, the Secretary may recommend the manufacture,
administration or use of one or more countermeasures. Once the
Secretary issues a declaration invoking the immunity provisions
of the Act for the specified countermeasures, immunity applies
with regard to administration or use of those countermeasures
during the effective period of the declaration and for the
diseases specified in the declaration. However, injured persons
may still bring a suit for willful misconduct
against the manufacturer under some circumstances. A declaration
also triggers the establishment of a compensation program. If
Congress funds the compensation program, persons injured by a
qualified countermeasure must first seek compensation under the
program before they may bring a suit alleging willful
misconduct. We cannot predict whether our products or product
candidates would fall within the provisions of this law, whether
Congress would fund the relevant compensation program or if the
necessary prerequisites for immunity would be triggered.
Foreign
regulation
In addition to regulations in the United States, we will be
subject to a variety of foreign regulations governing clinical
trials and commercial sales and distribution of our products.
Whether or not we obtain FDA approval for a product, we must
obtain approval of a product by the comparable regulatory
authorities of foreign countries before we can commence clinical
trials or marketing of the product in those countries. The
actual time required to obtain clearance to market a product in
a particular foreign jurisdiction may vary substantially, based
upon the type, complexity and novelty of the pharmaceutical
product candidate and the specific requirements of that
jurisdiction. The requirements governing the
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conduct of clinical trials, marketing authorization, pricing and
reimbursement vary from country to country.
In the European Union, our products are subject to extensive
regulatory requirements. As in the United States, the marketing
of medicinal products has for many years been subject to the
granting of marketing authorizations by regulatory agencies.
European Union member states require both regulatory clearance
and a favorable ethics committee opinion prior to the
commencement of a clinical trial, whatever its phase. Under
European Union regulatory systems, we may submit marketing
authorization applications either under a centralized or
decentralized procedure.
The centralized procedure provides for the grant of a single
marketing authorization that is valid for all European Union
member states. The centralized procedure is currently mandatory
for products developed by means of a biotechnological process,
including recombinant DNA technology, the controlled expression
of genes coding for biologically active proteins and monoclonal
antibody methods, and new chemical entities for the treatment of
acquired immune deficiency syndrome, cancer and
neurodegenerative disorder or diabetes. Beginning in May 2008,
the centralized procedure will be mandatory for products for the
treatment of auto-immune diseases and other immune dysfunctions
and viral diseases. The centralized process is optional for
medicines that constitute a significant therapeutic,
scientific or technical innovation or for which a
centralized process is in the interest of patients.
The decentralized procedure provides for mutual recognition of
national approval decisions. Under this procedure, the holder of
a national marketing authorization may submit an application to
the remaining member states. Within 90 days of receiving
the applications and an assessment report, each member state
must decide whether to recognize approval. If a member state
does not recognize the marketing authorization, the disputed
points are eventually referred to the European Commission, whose
decision is binding on all member states.
Unlike the United States, the European Union member states do
not have separate rules or review procedures for biologics and
vaccines. Regulators apply broadly consistent principles and
standards when reviewing applications, although they accept that
the nature of the efficacy data supporting a vaccine application
is likely to differ from the data that would support
applications for the majority of therapeutic products. However,
there are special procedures for some types of vaccine products.
For example, influenza vaccines are subject to accelerated
review and approval each year, following the release by the
World Health Organization of the annual influenza strains.
European Union member states have the discretion to require that
marketing authorization holders submit samples of live vaccines
or other immunological products for examination and formal batch
release by a government control laboratory prior to release onto
the market.
Orphan
drugs
Under the Orphan Drug Act, special incentives exist for sponsors
to develop products for rare diseases or conditions, which are
defined to include those diseases or conditions that affect
fewer than 200,000 people in the United States. A vaccine also
can receive these incentives if it is expected to be
administered to fewer than 200,000 persons per year. Sponsors
may request that the FDA grant a drug orphan designation prior
to approval. Biologics may qualify for designation as an orphan
drug.
Products designated as orphan drugs are eligible for special
grant funding for research and development, FDA assistance with
the review of clinical trial protocols, potential tax credits
for research, reduced filing fees for marketing applications and
a special seven-year period of market exclusivity after
marketing approval. Orphan drug exclusivity prevents FDA
approval of applications by others for the same drug or biologic
intended for use for the designated orphan disease or condition.
The FDA may approve a
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subsequent application from another person if the FDA determines
that the application is for a different product or different
use, or if the FDA determines that the subsequent product is
clinically superior or that the holder of the initial orphan
drug approval cannot assure the availability of sufficient
quantities of the drug or biologic to meet the publics
need. The FDA also may approve another application for the same
drug or biologic that has orphan exclusivity but for a different
use, in which case the competing drug or biologic could be
prescribed by physicians outside its FDA approval for the orphan
use notwithstanding the existence of orphan exclusivity. A grant
of an orphan designation is not a guarantee that a product will
be approved.
The European Union operates an equivalent system to encourage
the development and marketing of medicinal products for rare
diseases. Applications for orphan designations are submitted to
the European Medicines Agency and reviewed by a Committee on
Orphan Medicinal Products, comprising representatives of the
member states, patient groups and other persons. The final
decision is made by the European Commission.
A product can be designated as an orphan drug if it is intended
for either a life-threatening or chronically debilitating
condition affecting not more than 5 in 10,000 persons in the
European Community when the application is made or a
life-threatening, seriously debilitating or serious and chronic
condition in the European Community for which, without
incentives, it is unlikely that the marketing of the product in
the Community would generate sufficient return to justify the
necessary investment. In either case, the applicant must also
demonstrate that there exists no satisfactory method of
diagnosis, prevention or treatment of the condition in question
that has been authorized in the European Community or, if such
method exists, that the medicinal product will be of significant
benefit to those affected by that condition.
After a marketing authorization has been granted in the European
Community for an orphan product, no similar product may be
approved for a period of ten years. At the end of the fifth
year, however, any member state can initiate proceedings to
restrict that period to six years if it believes the criteria
for orphan designation no longer apply, for example, because the
prevalence of disease has increased or the manufacturer is
earning an unreasonable profit. In addition, competitive
products can be approved during the marketing exclusivity period
if they are not similar to the original product or are safer,
more effective or otherwise clinically superior to it.
None of our products or product candidates have been designated
as orphan drugs.
Reimbursement and
pricing controls
In many of the markets where we or our potential collaborators
would commercialize a product following regulatory approval, the
prices of pharmaceutical products are subject to direct price
controls by law and to reimbursement programs with varying price
control mechanisms.
In the United States, there has been an increased focus on drug
and biologic pricing in recent years. Although there are
currently no direct government price controls over private
sector purchases in the United States, federal legislation
requires pharmaceutical manufacturers to pay prescribed rebates
on specified drugs and biologics to enable them to be eligible
for reimbursement under public health care programs such as
Medicaid. Vaccines are generally exempt from these programs.
Various states have adopted further mechanisms that seek to
control drug and biologic prices, including by disfavoring
higher priced products and by seeking supplemental rebates from
manufacturers. Managed care has also become a potent force in
the market place that increases downward pressure on the prices
of pharmaceutical products. Federal legislation, enacted in
December 2003, has altered the way in which
physician-administered drugs and biologics covered by Medicare
are reimbursed. Under the new
126
reimbursement methodology, physicians are reimbursed based on a
products average sales price. This new
reimbursement methodology has generally led to lower
reimbursement levels. The new federal legislation also has added
an outpatient prescription drug benefit to Medicare, which went
into effect in January 2006. These benefits will be provided
primarily through private entities, which we expect will attempt
to negotiate price concessions from pharmaceutical manufacturers.
Public and private health care payors control costs and
influence drug and biologic pricing through a variety of
mechanisms, including through negotiating discounts with the
manufacturers and through the use of tiered formularies and
other mechanisms that provide preferential access to particular
products over others within a therapeutic class. Payors also set
other criteria to govern the uses of a drug or biologic that
will be deemed medically appropriate and therefore reimbursed or
otherwise covered. In particular, many public and private health
care payors limit reimbursement and coverage to the uses that
are either approved by the FDA or that are supported by other
appropriate evidence, such as published medical literature, and
appear in a recognized compendium. Drug compendia are
publications that summarize the available medical evidence for
particular drug products and identify which uses are supported
or not supported by the available evidence, whether or not such
uses have been approved by the FDA.
Most non-pediatric commercial vaccines are purchased and paid
for, or reimbursed by, managed care organizations, other private
health plans or public insurers or paid for directly by
patients. In the United States, pediatric vaccines are funded by
a variety of federal entitlements and grants, as well as state
appropriations. The CDC currently distributes pediatric grant
funding on a discretionary basis under the Public Health Service
Act. Federal and state governments purchase the majority of all
pediatric vaccines produced in the United States, primarily
through the Vaccine for Children Program implemented by the
U.S. Congress in 1994. The Vaccine for Children Program is
designed to help pay for vaccinations to disadvantaged children,
including uninsured children, children on Medicaid and
underinsured children who receive vaccinations at federally
qualified health centers.
Different pricing and reimbursement schemes exist in other
countries. In the European Community, governments influence the
price of pharmaceutical products through their pricing and
reimbursement rules and control of national health care systems
that fund a large part of the cost of those products to
consumers. Some jurisdictions operate positive and negative list
systems under which products may only be marketed once a
reimbursement price has been agreed. Other member states allow
companies to fix their own prices for medicines, but monitor and
control company profits. The downward pressure on health care
costs in general, particularly prescription drugs, has become
very intense. As a result, increasingly high barriers are being
erected to the entry of new products. In addition, in some
countries cross-border imports from low-priced markets exert a
commercial pressure on pricing within a country.
Regulations
regarding government contracting
Our status as a government contractor in the United States and
elsewhere means that we are also subject to various statutes and
regulations, including the Federal Acquisition Regulation, which
govern the procurement of goods and services by agencies of the
United States and other countries. These governing statutes and
regulations can impose stricter penalties than those normally
applicable to commercial contracts, such as criminal and civil
damages liability and suspension and debarment from future
government contracting. In addition, pursuant to various
statutes and regulations, our government contracts can be
subject to unilateral termination or modification by the
government for convenience in the United States and elsewhere,
detailed auditing requirements, statutorily controlled pricing,
sourcing and subcontracting restrictions and statutorily
mandated processes for adjudicating contract disputes.
127
Vaccine Injury
Compensation Program
Because the cost of vaccine related litigation had reduced
significantly the number of manufacturers willing to sell
childhood vaccines, the U.S. Congress enacted the National
Childhood Vaccine Injury Act in 1986. The Vaccine Injury
Compensation Program established under the Vaccine Injury Act is
a no-fault compensation program funded by an excise tax on each
dose of a covered vaccine and is designed to streamline the
process of seeking compensation for those injured by childhood
vaccines. The Vaccine Injury Act requires all individuals
injured by a vaccine to go through the compensation program
before pursuing other remedies. Although claimants can reject
decisions issued under the compensation program and pursue
subsequent legal action through the courts, the Vaccine Injury
Act determines the circumstances under which a manufacturer may
be found liable in a civil action. The Vaccine Injury Act may
not protect us if our products or product candidates cause
injury.
Hazardous
materials and select agents
Our development and manufacturing processes involve the use of
hazardous materials, including chemicals, bacteria, viruses and
radioactive materials, and produce waste products. Accordingly,
we are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal
of these materials. In addition to complying with environmental
and occupational health and safety laws, we must comply with
special regulations relating to biosafety administered by the
CDC, HHS and the DoD.
The Public Health Security and Bioterrorism Preparedness and
Response Act and the Agricultural Protection Act require us to
register with the CDC and the Department of Agriculture our
possession, use or transfer of select biological agents or
toxins that could pose a threat to public health and safety, to
animal or plant health or to animal or plant products. This
legislation requires increased safeguards and security measures
for these select agents and toxins, including controlled access
and the screening of entities and personnel, and establishes a
comprehensive national database of registered entities.
In particular, this legislation and related regulations require
that we:
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develop and implement biosafety, security and emergency response
plans;
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restrict access to select agents and toxins;
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provide appropriate training to our employees for safety,
security and emergency response;
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comply with strict requirements governing transfer of select
agents and toxins;
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provide timely notice to the government of any theft, loss or
release of a select agent or toxin; and
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maintain detailed records of information necessary to give a
complete accounting of all activities related to select agents
and toxins.
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Other
regulations
In the United States and elsewhere, the research, manufacturing,
distribution, sale and promotion of drug and biological products
are potentially subject to regulation by various federal, state
and local authorities in addition to the FDA, including the
Centers for Medicare and Medicaid Services, other divisions of
HHS, such as the Office of Inspector General, the
U.S. Department of Justice and individual
U.S. Attorney offices within the Department of Justice and
state and local governments. For example, sales, marketing and
scientific and educational grant programs must comply with the
anti-kickback and fraud and abuse provisions of the Social
Security Act, the False Claims Act, the privacy provisions of
the Health Insurance Portability and Accountability Act and
similar state laws. Pricing and rebate programs must comply with
128
the Medicaid rebate requirements of the Omnibus Budget
Reconciliation Act of 1990 and the Veterans Health Care Act of
1992. All of these activities are also potentially subject to
federal and state consumer protection and unfair competition
laws.
Outside the United States, advertising and promotion of
medicinal products, along with associated commercial practices,
are often subject to significant government regulation. We are
subject to the Export Administration Regulations implemented by
the Bureau of Industry and Security governing the export of
BioThrax and technology for the development and use of pathogens
and toxins in the development and manufacture of BioThrax and
our product candidates. In connection with our international
sales activity, we are also subject to export regulations and
other sanctions imposed by the Office of Foreign Assets Control
of the Department of the Treasury, the antiboycott provisions of
the Export Administration Act and the Internal Revenue Code and
the Foreign Corrupt Practices Act.
Litigation
BioThrax product liability litigation.
We currently
are a defendant in three federal lawsuits filed on behalf of
three individuals vaccinated with BioThrax by the U.S. Army
on October 14, 2005, January 9, 2006 and
January 17, 2006 that claim damages resulting from personal
injuries allegedly suffered because of the vaccination. The
plaintiffs in each of these three lawsuits claim different
injuries and seek varying amounts of damages. The first
plaintiff alleges that the vaccine caused erosive rheumatoid
arthritis and requests damages in excess of $1 million. The
second plaintiff alleges that the vaccine caused Bells
palsy and other related conditions and requests damages in
excess of $75,000. The third plaintiff alleges that the vaccine
caused a condition that originally was diagnosed as encephalitis
related to a gastrointestinal infection and caused him to fall
into a coma for many weeks and requests damages in excess of
$10 million.
We have moved to dismiss these three lawsuits for lack of
personal jurisdiction, or, in the alternative to transfer the
lawsuits to federal court in Michigan. These lawsuits are in the
preliminary stages of litigation, and we believe that we are
entitled to indemnification under our contract with the DoD for
legal fees and any damages that may result from these claims. In
April 2006, the U.S. District Court for the Western
District of Michigan entered summary judgment in our favor in
four other lawsuits asserting similar claims brought by
approximately 120 individuals. These four lawsuits had
previously been consolidated in the Michigan District Court.
The District Courts ruling in the consolidated Michigan
cases was based on two grounds. First, the District Court found
that we are entitled to protection under a Michigan state
statute that provides immunity for drug manufacturers if the
drug was approved by the FDA and its labeling is in compliance
with FDA approval, unless the plaintiffs establish that the
manufacturer intentionally withheld or misrepresented
information to the FDA and the drug would not have been
approved, or the FDA would have withdrawn approval, if the
information had been accurately submitted. Second, the District
Court found that we are entitled to the immunity afforded by the
government contractor defense, which, under specified
circumstances, extends the sovereign immunity of the United
States to government contractors who manufacture a product for
the government. Specifically, the government contractor defense
applies when the government approves reasonably precise
specifications, the product conforms to those specifications and
the supplier warns the government about known dangers arising
from the use of the product. The District Court found that we
established each of those factors. We intend to rely on similar
defenses with respect to the substantive claims asserted in our
three pending lawsuits. We expect to rely on contractual
indemnification provisions with the DoD and statutory
protections to limit our potential liability resulting from
these three lawsuits.
129
MilVax litigation.
In 2003, six unidentified
plaintiffs filed suit in the U.S. District Court for the
District of Columbia against the U.S. government seeking to
enjoin the Anthrax Vaccine Immunization Program administered
under MilVax under which all military personnel were required to
be vaccinated with BioThrax. On October 27, 2004, the
District Court enjoined the DoD from administering BioThrax to
military personnel on a mandatory basis without their informed
consent or a Presidential waiver. This ruling was based in part
on the District Courts finding that the FDA, as part of
its review of all biological products approved prior to 1972,
had not properly issued a final order determining that BioThrax
is safe and effective and not misbranded. In December 2005, the
FDA issued a final order determining that BioThrax is safe and
effective and not misbranded. On February 9, 2006, the
U.S. Court of Appeals for the District of Columbia, on
appeal of the injunction by the government, ruled that the
injunction had dissolved by its own terms as a result of the
FDAs final order. Although we are not a party to this
lawsuit, if the District Court institutes another injunction or
otherwise restricts the administration of BioThrax by the DoD,
the amount of future purchases of BioThrax by the DoD could be
limited. In October 2006, the DoD announced that it is resuming
a mandatory vaccination program for BioThrax for designated
military personnel and emergency-essential and comparable
civilian personnel.
Other.
We are, and may in the future become,
subject to other legal proceedings, claims and litigation
arising in the ordinary course of our business in connection
with the manufacture, distribution and use of our products and
product candidates. For example, Emergent BioDefense Operations
is a defendant, along with many other vaccine manufacturers, in
a series of lawsuits that have been filed in various state and
federal courts in the United States alleging that thimerosal, a
mercury-containing preservative used in the manufacture of some
vaccines, caused personal injuries, including brain damage,
central nervous system damage and autism. No specific dollar
amount of damages has been claimed. Emergent BioDefense
Operations is currently a named defendant in 41 lawsuits
pending in two jurisdictions: four in California and 37 in
Illinois. The products at issue in these lawsuits are pediatric
vaccines and immune globulins. Because we are not currently and
have not historically been in the business of manufacturing or
selling pediatric vaccines, we do not believe that we
manufactured the pediatric vaccines at issue in the lawsuits.
Under a contractual obligation to the State of Michigan, we
manufactured one batch of vaccine suitable for pediatric use.
However, the contract required the State to use the vaccine
solely for Michigan public health purposes. One plaintiff in a
thimerosal lawsuit alleges that he was injured by immune
globulin containing thimerosal. We previously manufactured human
immune globulin that contained thimerosal. We no longer
manufacture any products that contain thimerosal. We believe
that our defense costs for these thimerosal lawsuits will be
covered by applicable product liability insurance and have
submitted a request for coverage to our carriers for defense
costs incurred to date.
Personnel
As of October 20, 2006, we had 470 employees, including
123 employees engaged in product development,
243 employees engaged in manufacturing, six employees
engaged in sales and marketing and 98 employees engaged in
general and administrative activities. We believe that our
future success will depend in part on our continued ability to
attract, hire and retain qualified personnel. None of our
employees is represented by a labor union or covered by
collective bargaining agreements. We believe that our relations
with our employees are good.
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Management
Our executive officers and directors and their respective ages
and positions as of October 20, 2006 are as follows:
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Name
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Age
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Position
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Fuad El-Hibri
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48
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President, Chief Executive Officer
and Chairman of the Board of Directors
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Edward J. Arcuri, Ph.D.
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55
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Executive Vice President and Chief
Operating Officer
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Robert G. Kramer, Sr.
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49
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President and Chief Executive
Officer, Emergent BioDefense Operations Lansing Inc.
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Steven N.
Chatfield, Ph.D.
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49
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President, Emergent Product
Development UK Limited, and Chief Scientific Officer
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Daniel J. Abdun-Nabi
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52
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Senior Vice President Corporate
Affairs, General Counsel and Secretary
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Kyle W. Keese
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44
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Senior Vice President Marketing
and Communications
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Thomas K. Zink, M.D.
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50
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Senior Vice President and Chief
Medical Officer
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R. Don Elsey
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53
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Vice President Finance, Chief
Financial Officer and Treasurer
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Joe M. Allbaugh
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55
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Director
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Zsolt Harsanyi, Ph.D.(1)(2)(3)
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62
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Director
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Jerome M. Hauer
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54
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Director
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Shahzad Malik, M.D.(1)(2)
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39
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Director
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Ronald B. Richard(1)(2)(3)
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50
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Director
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Louis W. Sullivan, M.D.
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72
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Director
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(1)
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Member of the Audit Committee.
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(2)
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Member of the Compensation Committee.
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(3)
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Member of the Nominating and Corporate Governance Committee.
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Fuad El-Hibri.
Mr. El-Hibri has served as chief
executive officer and as chairman of our board of directors
since June 2004 and as president since March 2006.
Mr. El-Hibri served as chief executive officer and chairman
of the board of directors of BioPort Corporation from May 1998
until June 2004, when, as a result of our corporate
reorganization, BioPort became a wholly owned subsidiary of
Emergent. We subsequently renamed BioPort as Emergent BioDefense
Operations Lansing Inc.
Mr. El-Hibri
served as chairman of Digicel Holdings, Ltd., a privately held
telecommunications firm, from August 2000 to October 2006. He
served as president of Digicel from August 2000 to February
2005. Mr. El-Hibri has served as chairman of East West
Resources Corporation, a venture capital and financial
consulting firm, since June 1990. He served as president of
East West Resources from September 1990 to January 2004.
Mr. El-Hibri is a member of the board of trustees of
American University and a member of the board of directors of
the International Biomedical Research Alliance, an academic
joint venture among the NIH, Oxford University and Cambridge
University. He also serves as chairman and treasurer of El-Hibri
Charitable Foundation. Mr. El-Hibri received a
masters degree in public and private management from Yale
University and a B.A. in economics from Stanford University.
131
Edward J. Arcuri, Ph.D.
Dr. Arcuri has
served as executive vice president and chief operating officer
since January 2005. Dr. Arcuri served as senior vice
president of manufacturing operations from September 2003 to
January 2005 and senior vice president of vaccine manufacturing
from January 2002 to September 2003 for MedImmune, Inc., a
biotechnology company. Dr. Arcuri served as senior vice
president, operations from May 1999 to January 2002, vice
president, manufacturing from July 1999 to May 2000 and chief
operating officer from May 2001 to January 2002 at Aviron, Inc.,
a biotechnology company, which was acquired by MedImmune in
January 2002. Prior to joining Aviron, Dr. Arcuri served in
various management positions at North American Vaccine, Inc.,
Merck & Co. and SmithKline Beecham Pharmaceuticals,
formerly SmithKline & French Laboratories.
Dr. Arcuri received both a Ph.D. and an M.S. in biology
from Rensselaer Polytechnic Institute and a B.S. in biology from
the State University of New York at Albany.
Robert G. Kramer, Sr.
Mr. Kramer has
served as president and chief executive officer of Emergent
BioDefense Operations Lansing Inc., formerly BioPort
Corporation, since July 2004. Mr. Kramer served as chief
financial officer of BioPort from February 1999 to August 2000,
as chief operating officer of BioPort from September 2000
to June 2004 and as president of BioPort from
October 2001 to June 2004. Prior to joining BioPort,
Mr. Kramer served in various financial management positions
at Pharmacia Corp., which was subsequently acquired by Pfizer
Inc., and with subsidiaries of Northwest Industries.
Mr. Kramer received an M.B.A. from Western Kentucky
University and a B.S. in industrial management from Clemson
University.
Steven N. Chatfield, Ph.D.
Dr. Chatfield
has served as chief scientific officer since January 2005 and as
president of our wholly owned subsidiary, Emergent Product
Development UK Limited, since June 2005. Dr. Chatfield
served as development director and chief scientific officer of
Microscience Limited, a U.K. biotechnology company, from March
1999 to December 2004. We acquired Microscience in June 2005.
Prior to joining Microscience, Dr. Chatfield held various
positions in the field of vaccine research and development,
including director of biotechnology at Medeva plc, director of
research at Evans Medical and several positions at Wellcome
Biotechnology and the Wellcome Foundation. Dr. Chatfield
received a Ph.D. from the Council for National Academic Awards
in association with the University of Birmingham in the United
Kingdom.
Daniel J. Abdun-Nabi.
Mr. Abdun-Nabi has served
as senior vice president corporate affairs, general counsel and
secretary since December 2004. Mr. Abdun-Nabi served as
vice president and general counsel from May 2004 to December
2004. Mr. Abdun-Nabi served as general counsel for IGEN
International, Inc., a biotechnology company, and its successor
BioVeris Corporation, from September 1999 to May 2004. Prior to
joining IGEN, Mr. Abdun-Nabi served as senior vice
president, legal affairs, general counsel and secretary of North
American Vaccine, Inc. Mr. Abdun-Nabi received an L.L.M. in
taxation from Georgetown University Law Center, a J.D. from the
University of San Diego School of Law and a B.A. in
political science from the University of Massachusetts, Amherst.
Kyle W. Keese.
Mr. Keese has served as
senior vice president marketing and communications since March
2006. Mr. Keese served as vice president of sales and
marketing of Emergent from June 2004 to March 2006 and of
BioPort Corporation from June 2003 to June 2004. Mr. Keese
served as vice president, business development for Antex
Biologics, Inc., a biotechnology company, from March 2001 to May
2003, when we acquired substantially all of the assets of Antex.
Prior to joining Antex, Mr. Keese served in various
business development, marketing and sales management positions
at IGEN International and Abbott Laboratories and as an officer
in the U.S. Navy. Mr. Keese received an M.B.A. from
National University and a B.A. in mathematics and computer
science from Tulane University.
Thomas K. Zink, M.D.
Dr. Zink has
served as senior vice president of medical affairs and chief
medical officer since May 2006. Dr. Zink served as the
director of immunization practices and scientific affairs of
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GlaxoSmithKline Vaccines, USA, a subsidiary of GlaxoSmithKline
plc
,
a pharmaceutical company, from September 1999 to
November 2004. After leaving GlaxoSmithKline and prior to
joining Emergent, Dr. Zink served as a pro bono consultant
on issues of patient safety and consumer-driven healthcare.
Prior to joining GlaxoSmithKline, Dr. Zink served as the
medical director for Prudential HealthCare of Kansas City,
Missouri Region and as the chief medical officer of the Medicare
Peer Review Organization of the State of Missouri. Dr. Zink
also spent over a decade as a practicing physician specializing
in emergency medicine. Dr. Zink received his joint
B.A./M.D. from the University of Missouri-Kansas City and holds
a current medical license as a physician and surgeon in good
standing.
R. Don Elsey.
Mr. Elsey has served
as chief financial officer since March 2006 and as vice
president finance and treasurer since June 2005. Mr. Elsey
served as the director of finance and administration at IGEN
International, Inc., a biotechnology company, and its successor
BioVeris Corporation, from April 2000 to June 2005. Prior to
joining IGEN, Mr. Elsey served as director of finance at
Applera, a genomics and sequencing company, and in several
finance positions at International Business Machines, Inc.
Mr. Elsey received an M.B.A. in finance and a B.A. in
economics from Michigan State University. Mr. Elsey is a
certified management accountant.
Joe M. Allbaugh.
Mr. Allbaugh has served
as a director since June 2006. Mr. Allbaugh has served as
president of Ecosphere Systems, Inc., a subsidiary of Ecosphere
Technologies, a technology company serving the homeland
security, disaster response and defense markets, since
September 2006. Mr. Allbaugh has served as president
and chief executive officer of The Allbaugh Company, LLC, a
corporate strategy and consulting services firm, since March
2003. Mr. Allbaugh served as director of the Federal
Emergency Management Agency from February 2001 to March 2003.
Previously, Mr. Allbaugh served as deputy secretary of
transportation of the Oklahoma Department of Transportation and
manager of a number of state and federal political campaigns.
Mr. Allbaugh serves on the boards of directors of Citadel
Security Software Inc., a publicly held enterprise security
software company, and UltraStrip Systems, Inc., a publicly held
technology company in the defense, homeland security and global
ship repair markets. Mr. Allbaugh also serves on the board
of advisors of Compressus Inc., a privately held software
company. Mr. Allbaugh received a B.A. in political science
from the Oklahoma State University.
Zsolt Harsanyi, Ph.D.
Dr. Harsanyi
has served as a director since August 2004. Dr. Harsanyi
has served as chief executive officer and chairman of the board
of directors of Exponential Biotherapies Inc., a private
biotechnology company, since December 2004. Dr. Harsanyi
served as president of Porton International plc, a
pharmaceutical and vaccine company, from January 1983 to
December 2004. Dr. Harsanyi was a founder of Dynport
Vaccine Company LLC in September 1996. Prior to joining Porton
International, Dr. Harsanyi was vice-president of corporate
finance at E.F. Hutton, Inc. Previously, Dr. Harsanyi
directed the first assessment of biotechnology for the
U.S. Congress Office of Technology Assessment, served
as a consultant to the Presidents Commission for the Study
of Ethical Problems in Medicine and Biomedical and Behavioral
Research and was on the faculties of Microbiology and Genetics
at Cornell Medical College. Dr. Harsanyi received a Ph.D.
from Albert Einstein College of Medicine and a B.A. from Amherst
College.
Jerome M. Hauer.
Mr. Hauer has served as
a director since June 2005. Mr. Hauer has served as chief
executive officer at The Hauer Group, a consulting services
firm, since March 2006. Mr. Hauer served as senior vice
president and co-chair of the homeland security practice of
Fleishman-Hillard Government Relations, a government relations
service firm, from January 2005 to March 2006. Prior to joining
Fleishman-Hillard, Mr. Hauer served as the director of
Response to Disaster and Emergencies Institute and assistant
professor at the George Washington University School of Public
Health from November 2003 to December 2004. Mr. Hauer
served as acting assistant secretary for public health emergency
preparedness of HHS from June 2002 to November 2003 and as
director of the office of public health preparedness of HHS from
May 2002 to June 2002. He also served as managing director of
the crisis and consequence management group at Kroll Associates,
a risk consulting firm, from October 2000 to February 2002.
133
Mr. Hauer served as the first director of the New York City
Mayors Office of Emergency Management under Mayor Rudolph
Giuliani. He also served as the director of Emergency Medical
Services and Emergency Management as well as director of the
Department of Fire and Buildings for the State of Indiana under
Governor Evan Bayh. Mr. Hauer serves on the board of
directors of Hollis Eden Pharmaceuticals, Inc., a publicly held
pharmaceutical company. Mr. Hauer previously served as a
member of the Health Advisory Board of the Johns Hopkins School
of Public Health and as a member of the National Academy of
Sciences Institute of Medicines Committee to
Evaluate the R&D Needs for Improving Clinical Medical
Response to Chemical or Biological Terrorism Incidents.
Mr. Hauer received an M.H.S. in public health from Johns
Hopkins University School of Hygiene and Public Health and a
B.A. from New York University.
Shahzad Malik, M.D.
Dr. Malik has
served as a director since June 2005. Dr. Malik has served
as a general partner of Advent Venture Partners, a venture
capital firm, since April 1999. Prior to joining Advent Venture
Partners, Dr. Malik spent two years at McKinsey &
Company where he focused on healthcare and investment banking
and six years as a practicing physician specializing in
cardiology. Dr. Malik also serves on the board of directors
for several private biotechnology companies. Dr. Malik
received his M.D. from Cambridge University and an M.A. in
physiological sciences from Oxford University.
Ronald B. Richard.
Mr. Richard has served
as a director since January 2005. Mr. Richard has served as
the president and chief executive officer of the Cleveland
Foundation, the nations oldest community foundation, since
June 2003. From August 2002 to February 2003,
Mr. Richard served as president of Stem Cell Preservation,
Inc., a start-up medical research company. After leaving Stem
Cell Preservation and prior to joining Emergent,
Mr. Richard served as a strategic business advisor for IGEN
International, Inc., a biotechnology company. Mr. Richard
served as chief operating officer of In-Q-Tel, a venture capital
fund that provides technologies to the Central Intelligence
Agency, from March 2001 to August 2002. Prior to joining
In-Q-Tel, Mr. Richard served in various senior management
positions at Matsushita Electric Industrial Co., a consumer
electronics company. Mr. Richard is a former
U.S. foreign service officer. He served in Osaka/Kobe,
Japan and as a desk officer for North Korean, Greek and Turkish
affairs at the U.S. Department of State in
Washington, D.C. Mr. Richard previously served as
chairman of the board of trustees of the International
Biomedical Research Alliance, an academic joint venture among
the NIH, Oxford University and Cambridge University.
Mr. Richard received an M.A. in international relations
from Johns Hopkins University School of Advanced International
Studies and a B.A. in history from Washington University. He
holds an honorary doctorate in humane letters from Notre Dame
College.
Louis W. Sullivan, M.D.
Dr. Sullivan
has served as a director since June 2006. Dr. Sullivan has
served as president emeritus of Morehouse School of Medicine
since July 2002. Dr. Sullivan served as president of
Morehouse School of Medicine from 1981 to 1989 and from 1993 to
2002. From 1989 to 1993, Dr. Sullivan was Secretary of HHS.
Dr. Sullivan also serves on the boards of directors of
United Therapeutics Corporation, BioSante Pharmaceuticals,
Inhibitex, Inc. and Henry Schein, Inc., publicly traded
biotechnology companies. He is a founder and chairman of Medical
Education for South African Blacks, Inc., a trustee of Morehouse
School of Medicine and Africare and a director of the National
Center on Addiction and Substance Abuse at Columbia University.
Dr. Sullivan recently retired from the boards of directors
of Bristol-Myers Squibb Company, 3-M Corporation, Georgia
Pacific Corporation, Cigna Corporation and Equifax, Inc.
Dr. Sullivan received his M.D. from Boston University and a
B.S. from Morehouse College.
134
Board composition
and election of directors
Our board of directors is currently authorized to have and
currently has seven members. Upon completion of this offering,
our board of directors will be divided into three classes, each
of whose members will serve for staggered three-year terms:
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Mr. El-Hibri, Mr. Hauer and Mr. Richard will
serve as class I directors, and their terms will expire at our
2007 annual meeting;
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Dr. Harsanyi and Dr. Sullivan will serve as
class II directors, and their terms will expire at our 2008
annual meeting; and
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Mr. Allbaugh and Dr. Malik will serve as
class III directors, and their terms will expire at our
2009 annual meeting.
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Upon the expiration of the term of a class of directors,
directors in that class will be eligible to be elected for a new
three-year term at the annual meeting of stockholders in the
year in which their term expires.
Until the fifth anniversary of the completion of this offering,
any change in the number of directors serving on our board and
the appointment and removal of the chairman of our board will
require the vote of at least 75% of the directors then in
office. Our directors may be removed from office only for cause
and only by the affirmative vote of holders of our capital stock
representing at least 75% of the voting power of all outstanding
stock entitled to vote. Mr. El-Hibri, through his ownership
interests in our common stock and voting arrangements among our
significant stockholders, will be able to control the election
of directors following this offering. See Description of
capital stock Anti-takeover effects of Delaware law
and our certificate of incorporation and by-laws.
Under the rules of the New York Stock Exchange, a director will
only qualify as independent if our board of
directors affirmatively determines that he has no material
relationship with us, either directly or as a partner,
stockholder or officer of an organization that has a
relationship with us. Our board of directors has established
guidelines to assist it in determining whether a director has a
material relationship with us. Under these guidelines, a
director is not considered to have a material relationship with
us if he is independent under Section 303A.02(b) of the
NYSE Listed Company Manual, even if he:
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is an executive officer of another company which is indebted to
us, or to which we are indebted, unless the total amount of
either companys indebtedness to the other is more than one
percent of the total consolidated assets of the company he
serves as an executive officer; or
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serves as an officer, director or trustee of a tax exempt
organization to which we make contributions, unless our
discretionary charitable contributions to the organization are
more than the greater of $1 million or 2% of that
organizations consolidated gross revenues. Our matching of
employee charitable contributions would not be included in the
amount of our contributions for this purpose.
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In addition, ownership of a significant amount of our stock, by
itself, does not constitute a material relationship.
For relationships not covered by the guidelines set forth above,
the determination of whether a material relationship exists is
made by the other members of the board of directors who are
independent.
Applying the guidelines described above, our board of directors
has affirmatively determined that the following directors are
independent: Mr. Allbaugh, Dr. Harsanyi,
Dr. Malik, Mr. Richard and Dr. Sullivan. We refer
to these directors as our independent directors.
There are no family relationships among any of our directors or
executive officers.
135
In October 2006, Mr. Hauer was hospitalized with a serious,
unexpected medical condition from which he is beginning to
recover. We cannot determine when, or if, Mr. Hauer will be
able or willing to resume active participation as a member of
our board of directors.
Board
committees
Audit
committee
The members of our audit committee are Dr. Harsanyi,
Dr. Malik and Mr. Richard. Dr. Harsanyi chairs
the committee. Our audit committee assists our board of
directors in its oversight of our accounting and financial
reporting processes and the integrity of our financial
statements, our compliance with legal and regulatory
requirements, the audits of our financial statements and the
qualifications, independence and performance of our independent
registered public accounting firm.
Upon the completion of this offering, our audit committees
responsibilities will include:
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appointing, approving the compensation of, and assessing the
independence of our independent registered public accounting
firm;
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overseeing the work of our independent registered public
accounting firm, including through the receipt and consideration
of reports from our independent registered public accounting
firm;
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reviewing and discussing with management and the independent
registered public accounting firm our annual and quarterly
financial statements and related disclosures;
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coordinating our board of directors oversight of internal
control over financial reporting, disclosure controls and
procedures and code of business conduct and ethics;
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establishing procedures for the receipt and retention of
accounting related complaints and concerns;
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meeting independently with our independent registered public
accounting firm and management; and
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preparing the audit committee report required by Securities and
Exchange Commission rules.
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All audit services to be provided to us and all non-audit
services, other than de minimis non-audit services, to be
provided to us by our independent registered public accounting
firm must be approved in advance by our audit committee.
Our board of directors has determined that Dr. Harsanyi and
Dr. Malik qualify as audit committee financial
experts. We believe that the composition of our audit
committee meets the requirements for independence under current
New York Stock Exchange and Securities and Exchange Commission
rules and regulations.
Compensation
committee
The members of our compensation committee are Dr. Harsanyi,
Dr. Malik and Mr. Richard. Mr. Richard chairs the
committee. Our compensation committee assists the board of
directors in the discharge of its responsibilities relating to
the compensation of our executive officers and establishing and
maintaining broad-based employee benefit plans and programs.
Upon the completion of this offering, our compensation
committees responsibilities will include:
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annually reviewing and approving corporate goals and objectives
relevant to the compensation of our chief executive officer;
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136
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determining the compensation of our chief executive officer;
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reviewing and approving, or making recommendations to the board
of directors with respect to, the compensation of our other
executive officers;
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overseeing the evaluation of the performance of our senior
executives;
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overseeing and administering our broad-based compensation
programs and our cash and equity incentive plans;
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reviewing and making recommendations to the board of directors
with respect to director compensation; and
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preparing the compensation committee report required by
Securities and Exchange Commission rules.
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Nominating and
corporate governance committee
The members of our nominating and corporate governance committee
are Dr. Harsanyi and Mr. Richard. Dr. Harsanyi
chairs the committee.
Upon the completion of this offering, our nominating and
corporate governance committees responsibilities will
include:
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identifying individuals qualified to become members of the board
of directors;
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recommending to the board of directors the persons to be
nominated for election as directors or to fill vacancies and to
be appointed to each of the boards committees;
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overseeing an annual review by the board of directors with
respect to management succession planning;
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developing and recommending to the board of directors corporate
governance principles and guidelines; and
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overseeing an annual evaluation of the board of directors.
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Compensation
committee interlocks and insider participation
None of our executive officers serves as a member of the board
of directors or compensation committee, or other committee
serving an equivalent function, of any entity that has one or
more executive officers who serve as members of our board of
directors or our compensation committee. None of the members of
our compensation committee has ever been our employee.
Director
compensation
Under our director compensation program, we pay each of our
non-employee directors an annual retainer of $20,000 for service
as a director. Each non-employee director also receives a fee
for each board and committee meeting attended. The board meeting
fee is $1,500 for attendance in person and $500 for attendance
by telephone. The audit committee meeting fee is $1,500 for
attendance in person and $500 for attendance by telephone. The
compensation committee meeting fee is $1,000 for attendance in
person and $300 for attendance by telephone. The nominating and
corporate governance committee meeting fee is $1,000 for
attendance in person and $300 for attendance by telephone. Each
member of our audit committee receives an additional annual
retainer of $5,000. Each member of our
137
compensation committee receives an additional annual retainer of
$3,000. Each member of our nominating and corporate governance
committee receives an annual retainer of $3,000. We reimburse
our non-employee directors for
out-of-pocket
expenses incurred in connection with attending our board and
committee meetings.
Under the director compensation program, we have granted a
non-qualified option to purchase 43,156 shares of our
class B common stock to each of our independent directors,
unless the directors appointment was pursuant to any
transaction or other arrangement requiring such appointment, and
to each of our non-employee directors who does not qualify as an
independent director if our board of directors determined that
the option grant was necessary to attract such non-employee
director to join the board. These options vest over three years
and expire ten years from the date of grant, subject to the
directors continued service as a director. Upon a change
in control, as defined in each director stock option agreement,
we will have the option to purchase and redeem all the options
owned by the director, or held for the benefit of the director,
for a purchase price equal to the difference between the option
exercise price and the fair market value. In the event we
exercise such repurchase option, any unvested options will be
deemed fully vested on the day preceding the date of repurchase.
We have granted the following non-qualified stock options to our
independent and non-employee directors:
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On December 1, 2004, we granted a stock option to purchase
43,156 shares at an exercise price of $2.74 per share
to Dr. Harsanyi.
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On January 26, 2005, we granted a stock option to purchase
43,156 shares at an exercise price of $2.74 per share
to Mr. Richard.
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On June 15, 2005, we granted a stock option to purchase
43,156 shares at an exercise price of $3.50 per share
to Mr. Hauer.
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On June 30, 2006, we granted a stock option to purchase
43,156 shares at an exercise price of $10.28 per share
to Dr. Sullivan.
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On June 30, 2006, we granted a stock option to purchase
43,156 shares at an exercise price of $10.28 per share
to Mr. Allbaugh.
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Following the completion of this offering, pursuant to automatic
option grants to non-employee directors under our 2006 stock
incentive plan, we will grant each of our non-employee directors
a nonstatutory option to purchase:
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21,600 shares of common stock upon commencement of service
on our board of directors;
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14,400 shares of common stock, on the date of each of our
annual meetings of stockholders, provided that the director
continues serving as a director after the annual meeting and has
served on our board of directors for at least six
months; and
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if the non-employee director is serving as the chair of one or
more committees of our board of directors, an additional
7,200 shares of common stock, on the date of each of our
annual meetings of stockholders, provided that the director
continues serving as a director after the annual meeting and has
served on our board of directors for at least six months.
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See Stock option and other compensation
plans 2006 stock incentive plan for additional
information regarding option grants to non-employee directors
under our 2006 stock incentive plan.
138
Executive
compensation
The following table sets forth a summary of the compensation
paid or accrued during the year ended December 31, 2005 to
our chief executive officer and to our four most highly
compensated executive officers other than our chief executive
officer who were serving as executive officers as of
December 31, 2005. We refer to these individuals as our
named executive officers.
Summary
compensation table
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Long-term
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compensation
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Annual
compensation
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Shares
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Other annual
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underlying
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All other
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Name and
principal position
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Salary
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Bonus
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compensation
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options
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compensation
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Fuad El-Hibri
President, Chief Executive Officer and Chairman of the Board of
Directors
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$
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490,818
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$
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237,215
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$
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215,782
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$
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7,000
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(1)
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Edward J. Arcuri, Ph.D.
Executive Vice President and Chief Operating Officer
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280,192
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94,517
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115,083
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Robert G. Kramer, Sr.
President and Chief Executive Officer, Emergent BioDefense
Operations Lansing Inc.
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371,192
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140,816
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115,083
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7,000
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(1)
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Steven N. Chatfield, Ph.D.
President, Emergent Product Development UK Limited and Chief
Scientific Officer
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225,162
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82,250
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38,752
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(2)
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57,542
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Daniel J. Abdun-Nabi
Senior Vice President Corporate Affairs, General Counsel and
Secretary
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272,631
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110,400
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7,000
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(1)
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(1)
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Represents the value of our contributions on behalf of the named
executive officer to our 401(k) savings plan.
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(2)
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Represents a relocation payment of $15,000 and a living
allowance of $23,752.
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139
Stock option
grants
The following table sets forth information regarding grants of
stock options to purchase shares of our common stock to our
named executive officers during the year ended December 31,
2005. Immediately prior to the completion of this offering, each
outstanding option to purchase shares of our class B common
stock automatically will become an option to purchase an equal
number of shares of our common stock.
Potential realizable values are calculated using the assumed
initial public offering price of $15.00 per share, which is
the midpoint of the price range set forth on the cover page of
this prospectus, and assuming that the market price appreciates
from this price at the indicated rate for the entire term of
each option and that each option is exercised and sold on the
last day of its term at the assumed appreciated price. The
assumed 5% and 10% rates of stock price appreciation are
required by the rules of the Securities and Exchange Commission
and do not represent our estimate or projection of the future
price of our common stock. Actual gains, if any, on stock option
exercises depend on the future performance of our common stock
and the date on which the options are exercised.
Option grants in
last fiscal year
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Potential
realizable
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value at
assumed
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Percentage of
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annual rates
of
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Number of
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total options
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stock price
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shares
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granted to
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Exercise
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appreciation
for
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underlying
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employees in
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price per
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Expiration
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option
term(1)
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Name
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options
granted
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fiscal
year
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share
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date
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5% ($)
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10% ($)
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Fuad El-Hibri
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215,782
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(2)
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30.0
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%
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$
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3.50
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5/25/10
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$
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3,375,742
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$
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4,457,549
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Edward J. Arcuri, Ph.D.
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115,083
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(3)
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16.0
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2.74
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2/9/10
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1,887,847
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2,464,807
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Robert G. Kramer, Sr.
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115,083
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(2)
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16.0
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3.50
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5/25/10
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1,800,384
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2,377,344
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Steven N. Chatfield, Ph.D.
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57,542
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(3)
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8.0
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2.74
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2/9/10
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943,932
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1,232,414
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Daniel J. Abdun-Nabi
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(1)
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The dollar amounts under these columns are the result of
calculations at rates set by the Securities and Exchange
Commission and, therefore, are not intended to forecast possible
future appreciation, if any, in the price of the underlying
common stock.
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(2)
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These options vest in three annual installments, with 40% of the
original number of shares having vested on December 31,
2005 and 30% of the original number of shares vesting on each of
December 31, 2006 and December 31, 2007.
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(3)
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These options vest in three equal annual installments beginning
on December 31, 2005.
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Option exercises
and year-end option values
The following table sets forth information regarding the number
of shares of our common stock issued upon option exercises by
our named executive officers during the year ended
December 31, 2005 and the value realized by our named
executive officers. In addition, the table sets forth
information regarding the number and value of unexercised
options held by our named executive officers at
December 31, 2005. There was no public trading market for
our common stock as of December 31, 2005. Accordingly, as
permitted by the rules of the Securities and Exchange
Commission, we have calculated the value of unexercised
in-the-money
options at December 31, 2005 assuming that the fair market
value of our
140
common stock as of December 31, 2005 was equal to the
assumed initial public offering price of $15.00 per share,
which is the midpoint of the price range set forth on the cover
page of this prospectus, less the aggregate exercise price.
Aggregated option
exercises in last fiscal year and
fiscal year-end option values
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Number of
securities
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underlying
unexercised
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Value of
unexercised
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Number of
shares
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|
options at
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in-the-money
options at
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|
|
acquired on
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Value
|
|
December 31,
2005
|
|
December 31,
2005
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Name
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exercise
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realized
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Exercisable
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|
Unexercisable
|
|
Exercisable
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Unexercisable
|
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|
Fuad El-Hibri
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86,312
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129,470
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$
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992,588
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$
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1,488,905
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Edward J. Arcuri, Ph.D.
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38,361
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76,722
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|
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470,306
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|
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940,612
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Robert G. Kramer, Sr.
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513,561
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69,050
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7,495,547
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794,075
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Steven N.
Chatfield, Ph.D.
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19,181
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38,361
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235,159
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470,306
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Daniel J. Abdun-Nabi
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74,516
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31,936
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913,566
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391,535
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Employment
agreement with Steven Chatfield, Ph.D.
In September 2006, our wholly owned subsidiary, Emergent Product
Development UK Limited, formerly Emergent Europe Limited,
entered into an employment contract with Dr. Chatfield to
serve as president of Emergent Product Development UK. Under
this agreement, Dr. Chatfield is entitled to an annual base
salary of £149,914, which may be reviewed annually in the
discretion of Emergent Product Development UK.
Dr. Chatfield is also eligible to participate in any bonus
plan established by Emergent Product Development UK from time to
time. Under the agreement, Emergent Product Development UK
agreed to contribute 10% of Dr. Chatfields salary,
which amount will be capped at Inland Revenue Limits, in equal
monthly installments to a qualified pension plan, subject to
Dr. Chatfield making monthly contributions to the qualified
pension plan in an amount equal to 2.5% of his salary. Either
party may terminate the agreement upon not less than six
months prior written notice. Emergent Product Development
UK may terminate Dr. Chatfields employment without
prior notice for conduct amounting to gross misconduct or any
other equivalent conduct or performance issues. Emergent Product
Development UK may terminate Dr. Chatfields
employment for cause, as defined in the agreement, upon
providing the statutory minimum period of notice required under
English law. Subject to any contrary provision of applicable
law, Dr. Chatfields employment will end automatically
without the need for notice of termination at the end of the
month in which Dr. Chatfield reaches the age of 65.
Under the agreement, Dr. Chatfield is entitled to
protections substantially similar to those in our severance plan
and termination protection program, except Dr. Chatfield is
not entitled to a
gross-up
payment with respect to applicable taxes in the circumstances
provided in the severance plan and termination protection
program. See Severance plan and termination
protection program for additional information about our
severance plan and termination protection program. If Emergent
Product Development UK terminates Dr. Chatfields
employment without cause, as defined in the agreement, then
Dr. Chatfield is entitled to 75% of his annual base salary
and continued eligibility for employee benefits for a period of
nine months following the date of termination.
Dr. Chatfield is entitled to 100% of his annual base salary
and continued eligibility for employee benefits for a period of
12 months following the date of termination of his
employment under the circumstances described in the
141
severance plan and termination protection program in connection
with a change of control, as defined in the agreement.
Under the terms of a prior employment contract with us, which
has been superseded in all other respects, Dr. Chatfield
remains subject to the following noncompetition obligations.
Dr. Chatfield is prohibited from competing with us during
the term of his employment and for a period thereafter of not
less than six months and not more than 12 months as may be
required by us, provided that we notify Dr. Chatfield in
writing not less than three months prior to expiration of
employment or any severance pay period, or in the event of
termination by us for cause, at the time of termination, and
that we continue to pay Dr. Chatfield 50% of his base
salary in effect at termination during the additional period.
Dr. Chatfield is also prohibited, during his term of
employment and for a period of six months after termination of
employment, from inducing or soliciting our employees, including
any employees who left our employ within the previous six
months, to leave our employ or inducing or soliciting customers,
clients or business partners to reduce their relationship or
breach their agreements with us. Dr. Chatfield is also
bound by the terms of Emergent Product Development UKs
standard non-disclosure, invention and assignment agreement.
Dr. Chatfield currently serves as our chief scientific
officer pursuant to a letter agreement dated July 11, 2006.
Severance plan
and termination protection program
In May 2006, our board of directors approved a severance plan
and termination protection program effective April 1, 2006
for the benefit of employees with the title of chief executive
officer, president, executive vice president, senior vice
president or vice president who have been designated to
participate in the severance plan by our board of directors or,
with the authorization of our board of directors, by our chief
executive officer. Our chief executive officer may designate the
greater of 7% of the total number of our employees or 35
employees to be participants in the severance plan at any
particular time, on the basis of name, title, function or
compensation level. Our chief executive officer will at all
times be a participant under the severance plan and shall have
no less favorable rights under the severance plan than any other
participant. Each of our executive officers based in the United
States is currently a participant in the severance plan.
The severance plan is effective through December 31, 2009.
Commencing on December 31, 2009, and on December 31 of
each year thereafter, the severance plan will automatically
extend for additional one-year periods unless we provide
90 days prior written notice that the term will not
be extended.
If during the term of the severance plan, we terminate a
participants employment without cause, as defined in the
severance plan, then the participant will be entitled to:
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any unpaid base salary and accrued paid time-off through the
date of termination;
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a pro rata target annual bonus in respect of the year of
termination;
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any bonus earned but unpaid as of the date of termination for
any previously completed year;
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reimbursement for any unreimbursed expenses incurred by the
participant prior to the date of termination;
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an amount equal to a specified percentage of the
participants annual base salary;
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employee and fringe benefits and perquisites, if any, to which
the participant may be entitled as of the date of termination
under our relevant plans, policies and programs; and
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continued eligibility for the participant and his or her
eligible dependents to receive employee benefits, for a stated
period following the participants date of termination,
except when the provision of employee benefits would result in a
duplication of benefits provided by any subsequent employer.
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The following table sets forth the percentage of base salary and
the stated period for continued employee benefits that each of
our executive officers who participates in the plan is entitled
if we terminate the executive officers employment without
cause.
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Stated period
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Percentage of
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for continued
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annual base
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employee
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Name
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salary
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benefits
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Fuad El-Hibri
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150
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%
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18 months
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Robert G. Kramer, Sr.
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100
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12 months
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Edward J. Arcuri, Ph.D.
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100
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12 months
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Daniel J. Abdun-Nabi
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100
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12 months
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Kyle W. Keese
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100
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12 months
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Thomas K. Zink, M.D.
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75
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9 months
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R. Don Elsey
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75
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9 months
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We may pay any amount under the severance plan, in our sole and
absolute discretion, either in a single lump sum amount within
30 days following termination or in equal monthly
installments over the same stated period during which we have
agreed to provide continued employee benefits to the terminated
employee.
As a condition to payment of any amounts under the severance
plan, the participant is required:
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for the same stated period during which we have agreed to
provide continued employee benefits to the terminated employee,
not to:
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induce, counsel, advise, solicit or encourage our employees to
leave our employ or to accept employment with any other person
or entity,
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induce, counsel, advise, solicit or encourage any person who we
employed within six months prior to that time to accept
employment with any person or entity besides us or hire or
engage that person as an independent contractor,
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solicit, interfere with or endeavor to cause any of our
customers, clients or business partners to cease or reduce its
relationship with us or induce any such customer, client or
business partner to breach any agreement that such customer,
client or business partner may have with us, and
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engage in or have a financial interest in any business competing
with us within any state, region or locality in which we are
then doing business or marketing products;
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upon reasonable notice and at our expense, to cooperate fully
with any reasonable request that may be made by us in connection
with any investigation, litigation or other similar activity to
which we are or may be a party or may otherwise be involved and
for which the participant may have relevant information; and
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to sign and deliver a suitable waiver and release under which
the participant will release and discharge us from and on
account of any and all claims that relate to or arise out of our
employment relationship.
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In connection with our implementation of the severance plan, in
August 2006, we agreed to the following modifications and
clarifications to Mr. El-Hibris contractual
obligations and duties:
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Mr. El-Hibris service as chairman of Digicel
Holdings, which service terminated in October 2006, and his
service as chairman of East West Resources, general manager of
Intervac, L.L.C. and Intervac Management, L.L.C., a member of
the board of trustees of American University, a member of the
board of directors of the International Biomedical Research
Alliance and director and treasurer of El-Hibri Charitable
Foundation and his management of his personal investments at
levels of time and attention comparable to those that
Mr. El-Hibri provided to such entities within the preceding
twelve months, do not violate his contractual obligations to us
or interfere with his ability to perform his duties to us;
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it is not a violation of
Mr. El-Hibris
contractual obligations to us if he pursues a business
transaction or opportunity where such transaction or opportunity
was first presented to
Mr. El-Hibri
in his capacity as an officer or director of the entities listed
above or where such transaction or opportunity was first
presented to us and our board of directors declined to pursue
such transaction or opportunity; and
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with respect to three employees who, at
Mr. El-Hibris
invitation, left their employment with East West Resources to
accept employment with us, it is not a violation of
Mr. El-Hibris
non-solicitation agreement to induce, counsel, advise, solicit
or encourage, or attempt to induce, counsel, advise, solicit or
encourage those employees to return to employment with East West
Resources.
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If during the term of the severance plan, we terminate a
participants employment with cause, then the participant
will not be entitled to receive any compensation, benefits or
rights under the severance plan, and any stock options or other
equity participation benefits vested on or prior to the date of
the termination, but not yet exercised, will immediately
terminate.
If during the term of the severance plan, we terminate a
participants employment without cause or a participant
resigns for good reason, as defined in the severance plan, in
each case within 18 months following a change of control,
as defined in the severance plan, or we terminate a
participants employment prior to a change of control,
which subsequently occurs, at the request of a party involved in
the change of control, or otherwise in connection with or in
anticipation of a change of control, then the participant will
be entitled to:
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a lump sum amount, payable within 30 days following the
date of termination, equal to the sum of:
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any unpaid base salary and accrued paid time-off through the
date of termination,
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a pro rata target annual bonus in respect of the year of
termination,
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any bonus earned but unpaid as of the date of termination for
any previously completed year,
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any unreimbursed expenses incurred by the participant prior to
the date of termination, and
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an amount equal to a specified percentage of the sum of the
participants base salary and the greater of the annual
bonus that was paid to the participant in respect of the most
recently completed year or the maximum annual bonus that could
have been paid to the participant under an established bonus
plan for the most recently completed year;
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employee and fringe benefits and perquisites, if any, to which
the participant may be entitled as of the date of termination of
employment under our relevant plans, policies and programs;
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any unvested stock options held by the participant that are
outstanding on the date of termination will become fully vested
as of that date, and the period, during which any stock options
held by the participant that are outstanding on that date may be
exercised, shall be extended to a date that is the later of the
15th day of the third month following the termination date,
or December 31 of the calendar year in which the stock
option would otherwise have expired if the exercise period had
not been extended, but not beyond the final date the stock
option could have been exercised if the participants
employment had not terminated, in each case based on the term of
the option at the original grant date;
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continued eligibility for the participant and his or her
eligible dependents to receive employee benefits, for a stated
period following the participants date of termination,
except when the provision of employee benefits would result in a
duplication of benefits provided by any subsequent employer;
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a
gross-up
payment with respect to applicable taxes on any payment to the
participant;
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the retention for the maximum period permitted by applicable law
of all rights the participant has to indemnification from us
immediately prior to the change of control and the continuation
throughout the period of any applicable statute of limitations
of any directors and officers liability insurance
covering the participant immediately prior to the change of
control; and
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the advancement to the participant of all costs and expenses,
including attorneys fees and disbursements, incurred by
the participant in connection with any legal proceedings that
relate to the termination of employment or the interpretation or
enforcement of any provision of the severance plan, for which
the participant will have no obligation to reimburse us if the
participant prevails in the proceeding with respect to at least
one material issue or the proceeding is settled.
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The following table sets forth the percentage of base salary and
the stated period for continued employee benefits that each of
our executive officers who participates in the plan is entitled
under the circumstances described above in connection with a
change of control.
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Stated period
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Percentage of
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for continued
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annual base
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employee
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Name
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salary
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benefits
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Fuad El-Hibri
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250
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%
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30 months
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Robert G. Kramer, Sr.
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200
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24 months
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Edward J. Arcuri, Ph.D.
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200
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24 months
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Daniel J. Abdun-Nabi
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150
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18 months
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Kyle W. Keese
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100
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12 months
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Thomas K. Zink, M.D.
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75
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9 months
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R. Don Elsey
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75
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9 months
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Our chief executive officer may designate up to two participants
for whom any reason for resigning within the
30-day
period following the first anniversary of a change of control
shall also constitute good reason. Mr. El-Hibri has been
designated as a participant to receive this benefit.
All payments under the severance plan will be reduced by any
applicable taxes required by applicable law to be paid or
withheld by us. All payments and benefits provided under the
severance plan are intended to either comply with or be exempt
from Section 409A of the Internal Revenue Code. If at the
time a participants employment is terminated, the
participant is a specified employee within the meaning of
145
Section 409A(a)(2)(B)(ii), then any payments to the
participant that constitute non-qualified deferred compensation
within the meaning of Section 409A will be delayed by a
period of six months. All such payments that would have been
made to the participant during the six-month period will be made
in a lump sum in the seventh month following the date of
termination, and all remaining payments will commence in the
seventh month following the date of termination.
Our board of directors or any committee thereof designated by
our board of directors is authorized to administer the plan and
has authority to adopt, amend and repeal the administrative
rules, guidelines and practices relating to the severance plan
as it deems advisable.
Limitation of
liability and indemnification
Our certificate of incorporation that will be in effect upon the
completion of this offering limits the personal liability of
directors for breach of fiduciary duty to the maximum extent
permitted by the General Corporation Law of Delaware. Our
certificate of incorporation provides that no director will have
personal liability to us or to our stockholders for monetary
damages for breach of fiduciary duty or other duty as a
director. However, these provisions do not eliminate or limit
the liability of any of our directors:
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for any breach of their duty of loyalty to us or our
stockholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for voting or assenting to unlawful payments of dividends or
other distributions; or
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for any transaction from which the director derived an improper
personal benefit.
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Any amendment to or repeal of these provisions will not
eliminate or reduce the effect of these provisions in respect of
any act or failure to act, or any cause of action, suit or claim
that would accrue or arise prior to any amendment or repeal or
adoption of an inconsistent provision. If the General
Corporation Law of Delaware is amended to provide for further
limitations on the personal liability of directors of
corporations, then the personal liability of our directors will
be further limited to the greatest extent permitted by the
General Corporation Law of Delaware.
In addition, our certificate of incorporation provides that we
must indemnify our directors and officers and we must advance
expenses, including attorneys fees, to our directors and
officers in connection with legal proceedings, subject to
limited exceptions.
We have entered into agreements to indemnify our directors and
executive officers. These agreements, among other things,
provide that we will indemnify the director or executive officer
to the fullest extent permitted by law for claims arising in his
or her capacity as our director, officer, manager, employee,
agent or representative and advance expenses, including
attorneys fees, to these individuals in connection with
legal proceedings, subject to limited exceptions. The
indemnification agreements also establish the procedures that
will apply in the event a director or officer makes a claim for
indemnification.
Stock option and
other compensation plans
Employee stock
option plan
Our employee stock option plan was adopted by our board of
directors and approved by our stockholders on June 30, 2004
and amended and restated on January 26, 2005. We refer to
this
146
employee stock option plan, as amended and restated, as our
employee stock option plan. Our employee stock option plan
became effective on the date that our board of directors adopted
the plan. We assumed all options outstanding under the BioPort
Corporation employee stock option plan as of June 30, 2004
and granted option holders replacement stock options to purchase
an equal number of shares of our class B common stock under
our employee stock option plan. Under our employee stock option
plan, the exercise period for options under the BioPort
Corporation employee stock option plan that would have otherwise
expired on June 30, 2004 was extended to June 30,
2007. For incentive stock options, the extension of the exercise
period caused the options to be considered non-qualified stock
options after June 30, 2004. Under our employee stock
option plan, 3,596,375 shares of our class B common
stock are reserved for issuance. Our board of directors has
authorized our compensation committee to administer our employee
stock option plan. Immediately prior to the completion of this
offering, each outstanding option to purchase shares of our
class B common stock automatically will become an option to
purchase an equal number of shares of our common stock, with no
other changes to the option.
If a merger or other reorganization event occurs, options
granted under our employee stock option plan may be substituted
or assumed. In the event of our merger, consolidation or
combination with or into another corporation, other than a
merger, consolidation or combination in which we are the
surviving corporation and which does not result in any
reclassification or other change in the number of outstanding
shares of our common stock, each option holder will have the
right after the merger, consolidation or combination and during
the term of the option to receive upon exercise of the option,
for each share of common stock as to which the option could be
exercised, the kind and amount of shares of the surviving or new
corporation, cash, securities, evidence of indebtedness, other
property or any combination which would have been received upon
the merger, consolidation or combination by the holder of a
share of common stock immediately prior to the merger,
consolidation or combination. Upon the occurrence of a change in
control, as defined in our employee stock option plan, we have
the option to purchase and redeem from any option holder all the
options owned by the option holder for a purchase price equal to
the difference between the option exercise price and the fair
market value of the common stock. In the event that we exercise
our right to repurchase the options, any unvested options will
be deemed fully vested on the day preceding the date we exercise
our repurchase option. We may exercise this option at any time
during the six-month period following the date of change in
control or such longer period of time as is reasonable.
Under our employee stock option plan, no award may be granted
under the plan after June 30, 2009, unless the plan is
terminated sooner. Our board of directors may amend, suspend or
discontinue the employee stock option plan at any time, except
that stockholder approval will be required for any revision that
would increase the number of shares reserved for issuance under
the plan, or otherwise as required to comply with applicable law
or stock market requirements. No amendment may materially impair
any rights or materially increase any obligations of an option
holder under an outstanding option without the consent of the
option holder.
As of October 20, 2006, options to purchase
3,109,932 shares of our class B common stock at a
weighted average exercise price of $2.54 were outstanding under
our employee stock option plan, options to purchase
229,275 shares of class B common stock have been
exercised and options to purchase 411,505 shares of
class B common stock have been forfeited. After the
effective date of our 2006 stock incentive plan, which is
described below, we will grant no additional options under our
employee stock option plan.
147
2006 stock
incentive plan
Our 2006 stock incentive plan was adopted by our board of
directors on October 25, 2006 and approved by our
stockholders on October 27, 2006. The 2006 stock incentive plan
will become effective immediately prior to the completion of
this offering. The 2006 stock incentive plan provides for the
grant of incentive stock options, non-statutory stock options,
stock appreciation rights, restricted stock, restricted stock
units and other stock unit awards. Our 2006 stock incentive plan
provides that 503,500 shares of common stock, plus the
number of shares of common stock reserved for issuance under our
existing employee stock option plan that remain available for
grant immediately prior to the completion of this offering, will
be reserved for issuance under the 2006 stock incentive plan
immediately following this offering.
In addition, our 2006 stock incentive plan contains an
evergreen provision that allows for increases in the
number of shares available for issuance under our 2006 stock
incentive plan on the first day of the first and third quarter
of each year from 2007 though 2009. Each semi-annual increase in
the number of shares will be equal to the lowest of a specified
number of shares, a specified percentage of the aggregate number
of shares outstanding and an amount determined by our board of
directors. The following table sets forth the maximum specified
number of shares and maximum specified percentage of outstanding
shares for each semi-annual increase in the number of shares.
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Maximum
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Maximum
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specified
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specified
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percentage of
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number of
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outstanding
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shares
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shares
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First Quarter of 2007
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428,700
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1.5
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%
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Third Quarter of 2007
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463,200
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1.5
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First Quarter of 2008
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926,400
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3.0
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Third Quarter of 2008
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466,100
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1.5
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First Quarter of 2009
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937,900
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3.0
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Third Quarter of 2009
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471,800
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1.5
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Our employees, officers, directors, consultants and advisors are
eligible to receive awards under our 2006 stock incentive plan.
Incentive stock options may only be granted to our employees.
The maximum number of shares of common stock with respect to
which awards may be granted to any participant under the plan is
287,700 per fiscal year.
In accordance with the terms of the 2006 stock incentive plan,
our board of directors has authorized our compensation committee
to administer the plan. Our compensation committee selects the
recipients of awards and determines:
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the number of shares of common stock covered by options and the
dates upon which the options become exercisable;
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the exercise price of options, which may not be less than 100%
of the fair market value of the stock on the date of grant;
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the duration of options, which may not be in excess of
10 years;
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the method of payment of the exercise price; and
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148
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the number of shares of common stock subject to any stock
appreciation right, restricted stock, restricted stock units or
other stock-unit awards and the terms and conditions of such
awards, including conditions for exercise, repurchase, issue
price and repurchase price.
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If our board of directors delegates authority to an executive
officer, the executive officer has the power to make awards to
all of our employees, except to executive officers. Our board of
directors will fix the terms of the awards to be granted by such
executive officer, including the exercise price of such awards
and the maximum number of shares subject to awards that such
executive officer may make.
Our 2006 stock incentive plan provides for an automatic grant of
options to non-employee directors as follows:
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21,600 shares of common stock, upon the commencement of
service on our board of directors;
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14,400 shares of common stock, on the date of each of our
annual meetings of stockholders, provided that the director
continues serving as a director after the annual meeting and has
served on our board of directors for at least six
months; and
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if the non-employee director is serving as the chair of one or
more committees of our board of directors, an additional
7,200 shares of common stock, on the date of each of our
annual meetings of stockholders, provided that the director
continues serving as a director after the annual meeting and has
served on our board of directors for at least six months.
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Automatic option grants to directors will:
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have an exercise price equal to the closing sale price of the
common stock on the New York Stock Exchange, the Nasdaq Stock
Market or the national securities exchange on which the common
stock is then traded on the trading date immediately prior to
the date of grant, or the fair market value of the common stock
on such date as determined by our board of directors, if the
common stock is not then traded on the New York Stock Exchange,
the Nasdaq Stock Market or on a national securities exchange;
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vest in three equal annual installments beginning on the
anniversary of the date of grant provided that the individual is
serving on our board of directors on such date, or, with respect
to annual grants, on the date which is one business day prior to
the date of our next annual meeting, if earlier, provided that
no additional vesting will take place after the individual
ceases to serve as a director and that our board of directors
may provide for accelerated vesting in the case of death,
disability, attainment of mandatory retirement age or retirement
following at least 10 years of service;
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expire on the earlier of 10 years from the date of grant or
three months following cessation of service on our board of
directors; and
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contain other terms and conditions as our board of directors
determines.
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Our board of directors may increase or decrease the number of
shares subject to automatic option grants to directors.
If a merger or other reorganization event occurs, our board of
directors will provide that all of our outstanding options are
to be assumed or substituted by the successor corporation. If
the merger or reorganization event also constitutes a change in
control event, as defined under our 2006 stock incentive plan,
the assumed or substituted options will become immediately
exercisable in full if on or prior to the first anniversary of
the reorganization event an option holders employment with
us or our succeeding corporation is terminated by the option
holder for good reason or is terminated by us or the
149
succeeding corporation without cause, each as defined in our
2006 stock incentive plan. In the event the succeeding
corporation does not agree to assume, or substitute for,
outstanding options, then our board of directors will provide
that all unexercised options will become exercisable in full
prior to the completion of the merger or other reorganization
event and that these options will terminate immediately prior to
the completion of the merger or other reorganization event if
not previously exercised. Our board of directors may also
provide for a cash out of the value of any outstanding options.
In addition, upon the occurrence of a change in control event
that does not also constitute a reorganization event under our
2006 stock incentive plan, each option will continue to vest
according to its original vesting schedule, except that an
option will become immediately exercisable in full if on or
prior to the first anniversary of the change in control event an
option holders employment with us or our succeeding
corporation is terminated by the option holder for good reason
or is terminated by us or our succeeding corporation without
cause.
No award may be granted under the 2006 stock incentive plan
after December 31, 2009, but the vesting and effectiveness
of awards granted before that date may extend beyond that date.
Our board of directors may amend, suspend or terminate the 2006
stock incentive plan at any time, except that stockholder
approval will be required for any revision that would materially
increase the number of shares reserved for issuance, expand the
types of awards available under the plan, materially modify plan
eligibility requirements, extend the term of the plan or
materially modify the method of determining the exercise price
of options granted under the plan, or otherwise as required to
comply with applicable law or stock market requirements.
401(k)
retirement plan
We maintain a 401(k) retirement plan that is intended to be a
tax-qualified defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. Substantially
all of our employees are eligible to participate. The 401(k)
plan includes a salary deferral arrangement pursuant to which
participants may elect to reduce their current compensation by
up to the statutorily prescribed limit, equal to $15,000 in
2006, and have the amount of the reduction contributed to the
401(k) plan. We are permitted to match employees 401(k)
plan contributions. For the year ended December 31, 2005,
we have elected to match 50% of the first 6% of the eligible
employees contributions to the 401(k) plan.
Rule 10b5-1
trading plans
We expect that many of our executive officers and directors will
adopt written plans, known as
Rule 10b5-1
trading plans, in which they will contract with a broker to buy
or sell shares of our common stock on a periodic basis. Under a
Rule 10b5-1
trading plan, a broker executes trades pursuant to parameters
established by the director or officer when entering into the
plan, without further direction from them. The officer or
director may amend or terminate the plan in some circumstances.
Our executive officers and directors may also buy or sell
additional shares outside of a
Rule 10b5-1
plan when they are not in possession of material nonpublic
information. Under the terms of the
lock-up
agreements that our executive officers and directors have signed
with the underwriters for this offering, our executive officers
and directors can enter into
Rule 10b5-1
trading plans during the
180-day
lock-up
period, provided that such plan does not provide for any
transfers of common stock during the
lock-up
period or any extension thereof pursuant to the
lock-up
agreement.
150
Certain
relationships and related party transactions
Since January 1, 2003, we have engaged in the following
transactions with our executive officers, directors and holders
of more than 5% of our voting securities, and affiliates of our
executive officers, directors and holders of more than 5% of our
voting securities. We believe that all of these transactions
were on terms as favorable as could have been obtained from
unrelated third parties.
Corporate
reorganization
On June 30, 2004, we completed a corporate reorganization
in which:
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|
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Emergent BioSolutions Inc., a newly formed Delaware corporation,
issued 18,666,479 shares of class A common stock to
stockholders of BioPort Corporation in exchange for
18,017,994 shares of BioPort class A common stock and
648,485 shares of BioPort class B common stock;
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|
|
we repurchased and retired all other issued and outstanding
shares of BioPort class B common stock; and
|
|
|
we assumed all outstanding stock options to purchase BioPort
class B common stock and granted option holders replacement
stock options to purchase an equal number of shares of our
class B common stock under our employee stock option plan.
|
As a result of this reorganization, BioPort became a wholly
owned subsidiary of Emergent. We subsequently renamed BioPort as
Emergent BioDefense Operations Lansing Inc.
Issuance of
class A common stock
The following table sets forth the number of shares of our
class A common stock that we issued to the former
stockholders of BioPort in our corporate reorganization.
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Number of shares
of
|
Name
|
|
class A
common stock
|
|
|
Intervac, L.L.C.
|
|
|
8,314,819
|
BioPharm, L.L.C.
|
|
|
4,065,043
|
Michigan Biologic Products,
Inc.
|
|
|
1,934,849
|
BioVac, L.L.C.
|
|
|
1,599,155
|
Biologika, L.L.C.
|
|
|
1,375,084
|
Intervac Management, L.L.C.
|
|
|
719,275
|
ARPI, L.L.C.
|
|
|
658,254
|
|
|
Intervac, BioPharm, Michigan Biologic Products, Biovac,
Biologika, Intervac Management and ARPI are parties to a voting
agreement dated June 30, 2004. We refer to these
stockholders collectively as the voting group. Under the voting
agreement, each stockholder in the voting group has agreed to
vote all shares of our capital stock owned by it for and against
and abstain from voting with respect to any matter as directed
by a majority in interest of the voting group as measured by the
aggregate percentage of ownership of our capital stock. Fuad
El-Hibri, our president, chief executive officer and chairman of
our board of directors, has the power to direct the voting of a
majority in interest of the voting group. As a result,
Mr. El-Hibri is considered the beneficial owner of all of
the shares held by Intervac, BioPharm,
151
Michigan Biologic Products, BioVac, Biologika, Intervac
Management and ARPI. See Principal and selling
stockholders for additional information regarding the
beneficial ownership of our common stock.
Grant of
options to purchase class B common stock
The following table sets forth the number of shares of our
class B common stock underlying options that we granted
under our employee stock option plan to our executive officers
and directors contemporaneously with our corporate
reorganization.
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|
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Number of shares
of
|
|
|
class B
common stock
|
|
|
underlying
options
|
Name
|
|
granted
|
|
|
Robert G. Kramer, Sr.
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|
|
467,528
|
Daniel J. Abdun-Nabi
|
|
|
106,452
|
Kyle W. Keese
|
|
|
43,156
|
|
|
Special cash
dividend
On June 15, 2005, our board of directors declared a special
cash dividend to the holders of our outstanding shares of common
stock in an aggregate amount of approximately $5.4 million.
Our board of directors declared this special dividend in order
to distribute the net proceeds of a payment that we received as
a result of the settlement of litigation that we initiated
against Elan Pharmaceuticals, Inc., Athena Neurosciences, Inc.
and Solstice Neurosciences, Inc. We filed the lawsuit in 2002 in
an effort to clarify intellectual property rights and recover
royalties that we asserted were owed under a series of
agreements regarding the development of botulinum toxin
products. We paid the special cash dividend on July 13,
2005 to stockholders of record as of June 15, 2005. The
following table sets forth the amount of the special cash
dividend that we paid to our 5% stockholders and their
affiliates.
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|
|
|
|
|
|
Amount of
special
|
Name
|
|
cash
dividend
|
|
|
Intervac, L.L.C.
|
|
$
|
2,402,864
|
BioPharm, L.L.C.
|
|
|
1,174,739
|
Michigan Biologic Products,
Inc.
|
|
|
559,144
|
BioVac, L.L.C.
|
|
|
462,133
|
Biologika, L.L.C.
|
|
|
397,380
|
Intervac Management, L.L.C.
|
|
|
207,860
|
ARPI, L.L.C.
|
|
|
190,226
|
|
|
See Principal and selling stockholders for
additional information regarding the beneficial ownership of our
common stock.
Microscience
acquisition
On June 23, 2005, we acquired all of the outstanding shares
of capital stock of Microscience Limited from Microscience
Investments Limited, formerly Microscience Holdings plc, in
exchange for
152
3,636,801 shares of our class A common stock. We
subsequently renamed Microscience Limited as Emergent Product
Development UK Limited.
Registration
rights
Upon the completion of this offering, holders of
22,303,280 shares of our common stock as of
October 20, 2006 will have the right to require us to
register these shares of common stock under the Securities Act
of 1933, as amended, or the Securities Act, under specified
circumstances. In connection with our acquisition of
Microscience Limited, we granted to Microscience Investments
registration rights with respect to the shares of our common
stock that we issued to Microscience Investments in the
acquisition. We also have granted registration rights with
respect to shares of our common stock to the holders of our
previously existing class A common stock, in addition to
Microscience Investments. The following table sets forth the
number of shares of our common stock subject to these
registration rights that are held by our 5% stockholders and
their affiliates.
|
|
|
|
|
|
|
Number of shares
of
|
Name
|
|
common
stock
|
|
|
Intervac, L.L.C.
|
|
|
8,314,819
|
BioPharm, L.L.C.
|
|
|
4,065,043
|
Microscience Investments Limited
|
|
|
3,636,801
|
Michigan Biologic Products,
Inc.
|
|
|
1,934,849
|
BioVac, L.L.C.
|
|
|
1,599,155
|
Biologika, L.L.C.
|
|
|
1,375,084
|
Intervac Management, L.L.C.
|
|
|
719,275
|
ARPI, L.L.C.
|
|
|
658,254
|
|
|
See Description of capital stock Registration
rights for additional information regarding these
registration rights. See Principal and selling
stockholders for additional information regarding the
beneficial ownership of our common stock.
Consulting
agreements
In January 2005, we entered into an agreement with
Fleishman-Hillard Inc. under which Fleishman-Hillard provided us
government relations, strategic consulting and communication
services. Jerome Hauer, a member of our board of directors, was
a senior vice president of Fleishman-Hillard until March 2006.
Under the agreement, we have agreed to pay Fleishman-Hillard
$20,000 per month for its services. The monthly fee
increased to $30,000 per month in March 2005. We paid
Fleishman-Hillard $342,663 in 2005 and $87,059 in the three
months ended March 31, 2006 for these services. The
agreement terminated on March 31, 2006.
In March 2006, we entered into an agreement with The Hauer Group
under which The Hauer Group provides us strategic consulting and
domestic marketing advice. Jerome Hauer is the chief executive
officer of The Hauer Group. Mr. Hauer and his wife are the
sole owners of The Hauer Group. Under the terms of the
agreement, we agreed to pay The Hauer Group $15,000 per
month for its services. The agreement expires on March 31,
2007.
In November 2004, we entered into a consulting services
agreement with Yasmine Gibellini to provide public relations
services. Ms. Gibellini is the sister of Fuad El-Hibri, our
president, chief executive officer
153
and chairman of our board of directors. Under the agreement, we
agreed to pay Ms. Gibellini $220 per hour for a
maximum of 20 hours per week, as needed, for her services,
the total of which was not to exceed $60,000, and reimburse her
reasonable
out-of-pocket
expenses. The agreement expired in June 2005. In March 2005, we
entered into a separate consulting agreement with
Ms. Gibellini to provide sales and marketing services. We
agreed to pay Ms. Gibellini $700 per day for a time
commitment of approximately two to three days per week, as
needed, for her services, the total of which was not to exceed
$60,000, and reimburse her reasonable
out-of-pocket
expenses. In addition, we agreed to pay Ms. Gibellini a
sales commission equal to 4% of BioThrax net sales, not to
exceed $2.00 per dose, from contracts to any customer in which
Ms. Gibellini had direct involvement. The agreement
terminated on August 31, 2005. We paid Ms. Gibellini
$39,353 in 2005 and $25,200 in 2006 under these agreements.
From September 2004 through November 2004, we retained
Louis W. Sullivan, M.D., a member of our board of
directors, to provide consulting services for a fixed fee of
$25,000 per month.
Agreements with
Intergen N.V.
In November 1997, Emergent BioDefense Operations entered into a
marketing agreement, which was amended and restated in January
2000, with Intergen N.V. Yasmine Gibellini, the chairperson of
Intergen N.V., is the sister of Fuad El-Hibri, our president,
chief executive officer and chairman of our board of directors.
Ibrahim El-Hibri, the president of Intergen, is the father of
Fuad El-Hibri. Ibrahim El-Hibri and his wife are the sole
stockholders of Intergen. Under the agreement, Intergen is the
sole and exclusive marketing representative for BioThrax and any
other biodefense vaccine that Emergent BioDefense Operations
becomes licensed to manufacture or sell in countries in the
Middle East and North Africa, except Israel and those countries
to which export is prohibited by the U.S. government. Under
the agreement, we agreed to pay Intergen a fee equal to 40% of
the gross sales in these countries. We have not paid Intergen
any fee under the agreement. The term of the agreement is
scheduled to expire in November 2007. The agreement will
automatically extend for an additional five years if Emergent
BioDefense Operations achieves $5.0 million of sales in the
territory during the initial three-year term of the agreement.
In January 2000, Emergent BioDefense Operations entered into a
termination and settlement agreement with Intergen. Under the
agreement, Emergent BioDefense Operations is obligated to pay
Intergen a $70,000 settlement payment when it receives more than
$3.0 million pursuant to a contract for sale of anthrax
vaccine to a party other than the U.S. government. The
settlement payment is in consideration for Intergens
agreement to terminate a consulting agreement entered into
between the parties in November 1997 and reduce the scope of its
rights under the marketing agreement described above. This
settlement payment has not yet become due and has not been paid.
Agreements with
East West Resources Corporation
In January 2004, Emergent BioDefense Operations entered into a
consulting agreement with East West Resources Corporation under
which East West Resources provided financial analysis, business
modeling and corporate and business development consulting
services. Fuad El-Hibri is the chairman of East West Resources
and was president of East West Resources from September 1990 to
January 2004. Fuad El-Hibri and his wife are the sole
stockholders of East West Resources. The agreement terminated in
September 2005. We paid East West Resources $180,000 in 2004 and
$135,000 in 2005 under the agreement.
In January 2004, Emergent BioDefense Operations entered into an
amended and restated sublease and office services agreement with
East West Resources under which East West Resources leased us
office
154
space in Rockville, Maryland and provided us administrative,
transportation and logistics support. Under the agreement, we
agreed to pay East West Resources monthly rent of $10,707. The
monthly rent increased by 3% each year. In September 2004, we
terminated in part the agreement with respect to the lease of
office space for a settlement fee of $69,687, an amount equal to
eight months rent, including the 3% escalation fee, but
excluding the portion of monthly rent applicable to
transportation and logistics support. We paid East West
Resources $120,000 in 2003, $173,647 in 2004, $33,750 in 2005
and $19,741 in the nine months ended September 30, 2006
under the agreement. The agreement expired on July 31,
2006.
In August 2006, we entered into a services agreement with East
West Resources under which East West Resources agreed to provide
us transportation and logistics support. Under the agreement, we
agreed to pay East West Resources a fee of $2,450 per month and
reimburse fees and expenses associated with these services. We
paid East West Resources $5,482 in the nine months ended
September 30, 2006 under the agreement. The term of the
agreement ends on July 31, 2007. The agreement will
automatically extend for additional successive terms of one year
unless terminated by either party with at least
60 days notice. Under the agreement, the monthly fee
increases by 3% each year upon extension of the term.
Airplane charter
from Simba LLC
From time to time from March 2004 until April 2006, we chartered
a private airplane for business purposes from Simba LLC. Fuad
El-Hibri and his wife hold 100% of the ownership interests in
Simba. Mr. El-Hibri also is the managing member of Simba.
Simba sold the airplane in May 2006. The plane was managed and
chartered by Frederick Aviation and was available for charter by
the general public. We paid Simba $32,148 in 2004, $33,999 in
2005 and $13,283 in 2006 for charter fees and reimbursement of
costs. Frederick Aviation provided us with a discount of
$300 per hour from its commercial charter rate. In all
other respects, the fees and expenses that we paid to Simba were
equivalent to fees charged to third parties for charter flights.
Employee
relationships
Mauro Gibellini, a
brother-in-law
of Fuad El-Hibri, is our vice president corporate planning and
business development. In addition, Mauro Gibellini and his wife,
Yasmine Gibellini, as tenants by the entirety, hold 100% of the
ownership interests in Biologika, L.L.C., one of our 5%
stockholders, and have the power to dispose of all shares of our
capital stock held by Biologika. We paid total cash compensation
to Mr. Gibellini of $228,994 in 2003 and $320,765 in 2004.
We paid total cash compensation to Mr. Gibellini of
$278,969 for 2005, including an annual bonus for 2005 paid in
2006. Mr. Gibellinis current annual base salary is
$195,624. He is also eligible for an annual bonus for 2006.
Mr. Gibellini is a participant in our severance plan and
termination protection program. As of October 20, 2006, we
have granted Mr. Gibellini options to purchase 71,927
shares of our class B common stock at a weighted average
exercise price of $1.68 per share.
Mark Grunenwald, a
brother-in-law
of Fuad El-Hibri, is our manager of information systems. We paid
total cash compensation to Mr. Grunenwald of $1,115 in 2003
and $63,282 in 2004. We paid total cash compensation to
Mr. Grunenwald of $69,337 for 2005, including an annual
bonus for 2005 paid in 2006. Mr. Grunenwalds current
annual base salary is $74,000. He is also eligible for an annual
bonus for 2006.
Robert Myers, who serves as senior policy and science advisor
and director of Emergent BioDefense Operations, is also the
President of Michigan Biologic Products, Inc., one of our 5%
stockholders, and has the power to direct the disposition of all
shares of our capital stock held by Michigan Biologic Products.
155
We paid total cash compensation to Dr. Myers of $492,351 in
2003, $258,369 in 2004 and $204,655 in 2005. In June 2005,
Emergent BioDefense Operations entered into an employment
agreement with Dr. Myers in his role as senior policy and
science advisor to Emergent BioDefense Operations. Under this
employment agreement, Dr. Myers is entitled to an annual
base salary of $180,000 and an annual bonus of $15,000. The
employment agreement terminates upon the completion of this
offering. Upon the completion of this offering, Dr. Myers
is entitled to the following termination benefits:
|
|
|
payment of any previously unpaid base salary and accrued paid
time off and other benefits through the date of termination;
|
|
|
payment of any unpaid, pro-rated bonus through the date of
termination; and
|
|
|
a lump sum payment in the amount of $100,000, less applicable
withholding and related taxes.
|
As of October 20, 2006, we have granted Dr. Myers
options to purchase 459,196 shares of our common stock at
an exercise price of $0.09 per share.
Executive
compensation
See Management Executive compensation
and Management Stock option grants for
additional information regarding compensation of our executive
officers.
Director
compensation
See Management Director compensation for
a discussion of options granted and other compensation to our
non-employee directors.
Severance plan
and termination protection program
Our executive officers participate in our severance plan and
termination protection program. See Management
Severance plan and termination protection program for
additional information regarding these arrangements.
Indemnification
agreements
We have entered into an indemnification agreement with each of
our executive officers and directors. See
Management Limitation of liability and
indemnification for additional information regarding these
agreements.
156
Principal and
selling stockholders
The following table sets forth information with respect to the
beneficial ownership of our common stock as of October 20,
2006 by:
|
|
|
each of our named executive officers;
|
|
|
each of our directors;
|
|
|
all of our executive officers and directors as a group; and
|
|
|
each person, or group of affiliated persons, who is known by us
to beneficially own more than 5% of our common stock.
|
The information in the following table assumes that our
previously existing class A common stock has been
reclassified as common stock and all previously outstanding
shares of class B common stock have been converted into
shares of common stock prior to the completion of this offering.
The column entitled Percentage of shares beneficially
owned before offering is based on 22,420,404 shares
of our common stock outstanding as of October 20, 2006. The
column entitled Percentage of shares beneficially
owned after offering is based on shares of our common
stock to be outstanding immediately after the completion of this
offering, including the 5,000,000 shares of common stock
that we are selling in this offering. The underwriters have an
option to purchase up to 750,000 additional shares of our common
stock to cover over-allotments, including 480,000 shares from
the selling stockholders. For more information regarding the
shares that may be sold by the selling stockholders, see
Selling stockholders below. No other
stockholder is participating in the offering.
Beneficial ownership is determined in accordance with the rules
and regulations of the Securities and Exchange Commission and
includes voting or investment power with respect to our common
stock. In computing the number of shares of common stock
beneficially owned and percentage ownership, shares subject to
options held by a person are deemed to be outstanding and
beneficially owned by that person if the options are currently
exercisable or exercisable within 60 days of
October 20, 2006. Shares subject to options are not deemed
to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as otherwise noted, the
persons and entities in this table have sole voting and
investing power with respect to all of the shares of common
stock beneficially owned by them, subject to community property
laws, where applicable. Except as otherwise set forth below, the
address of the beneficial owner is c/o Emergent
BioSolutions Inc., 300 Professional Drive, Suite 250,
Gaithersburg, Maryland 20879.
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
shares
|
|
|
|
Number of
shares
|
|
beneficially
owned
|
|
Name of
beneficial owner
|
|
beneficially
owned
|
|
Before
offering
|
|
|
After
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive officers and
directors
|
|
|
|
|
|
|
|
|
|
|
|
Fuad El-Hibri(1)
|
|
|
22,389,592
|
|
|
99.5
|
%
|
|
|
81.4
|
%
|
Edward J. Arcuri, Ph.D.(2)
|
|
|
38,361
|
|
|
*
|
|
|
|
*
|
|
Robert G. Kramer, Sr.(3)
|
|
|
513,561
|
|
|
2.2
|
|
|
|
1.8
|
|
Steven N. Chatfield, Ph.D.(4)
|
|
|
19,181
|
|
|
*
|
|
|
|
*
|
|
Daniel J. Abdun-Nabi(5)
|
|
|
74,516
|
|
|
*
|
|
|
|
*
|
|
Joe M. Allbaugh
|
|
|
|
|
|
|
|
|
|
|
|
Zsolt Harsanyi, Ph.D.(6)
|
|
|
28,770
|
|
|
*
|
|
|
|
*
|
|
Jerome M. Hauer(7)
|
|
|
14,385
|
|
|
*
|
|
|
|
*
|
|
Shahzad Malik, M.D.
|
|
|
|
|
|
|
|
|
|
|
|
Ronald B. Richard(8)
|
|
|
14,385
|
|
|
*
|
|
|
|
*
|
|
Louis W. Sullivan, M.D.
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and
directors as a group (14 persons)(9)
|
|
|
23,128,714
|
|
|
99.5
|
|
|
|
81.9
|
|
5% stockholders
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder voting group under
voting agreement dated June 30, 2004(10)
|
|
|
22,303,280
|
|
|
99.5
|
|
|
|
81.3
|
|
Microscience Investments
Limited(11)
|
|
|
3,636,801
|
|
|
16.2
|
|
|
|
13.3
|
|
Robert Myers, D.V.M.(12)
|
|
|
2,394,045
|
|
|
10.5
|
|
|
|
8.6
|
|
Mauro and Yasmine Gibellini(13)
|
|
|
1,447,011
|
|
|
6.4
|
|
|
|
5.3
|
|
|
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
Consists of the following shares of our common stock:
|
|
|
|
8,314,819 shares held by Intervac, L.L.C.;
|
|
|
|
4,065,043 shares held by BioPharm, L.L.C.;
|
|
|
|
1,934,849 shares held by Michigan Biologic
Products, Inc.;
|
|
|
|
1,599,155 shares held by Biovac, L.L.C.;
|
|
|
|
1,375,084 shares held by Biologika, L.L.C.;
|
|
|
|
719,275 shares held by Intervac Management,
L.L.C.;
|
|
|
|
658,254 shares held by ARPI, L.L.C.;
|
|
|
|
3,636,801 shares held by Microscience
Investments Limited; and
|
|
|
|
|
|
86,312 shares subject to stock options held by
Mr. El-Hibri exercisable within 60 days of
October 20, 2006.
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, Mr. El-Hibri will beneficially own
21,909,593 shares of our common stock after this offering,
or 78.9% of our outstanding common stock, consisting of the
following shares of our common stock:
|
|
|
|
8,014,819 shares held by Intervac, L.L.C.;
|
158
|
|
|
|
|
4,065,043 shares held by BioPharm, L.L.C.;
|
|
|
|
1,844,849 shares held by Michigan Biologic
Products, Inc.;
|
|
|
|
1,599,155 shares held by Biovac, L.L.C.;
|
|
|
|
1,315,084 shares held by Biologika, L.L.C.;
|
|
|
|
719,275 shares held by Intervac Management,
L.L.C.;
|
|
|
|
628,254 shares held by ARPI, L.L.C.;
|
|
|
|
3,636,801 shares held by Microscience
Investments Limited; and
|
|
|
|
86,313 shares subject to stock options held by
Mr. El-Hibri exercisable within 60 days of
October 20, 2006.
|
|
|
|
Robert Myers has the power to direct the disposition of all
shares of our capital stock held by Michigan Biologic Products.
|
|
|
|
Mauro and Yasmine Gibellini, as tenants by the entirety, have
the power to dispose of all shares of our capital stock held by
Biologika.
|
|
|
|
Janice Mugrditchian has the power to dispose of all shares of
our capital stock held by ARPI.
|
|
|
|
The holders of series B preferred ordinary shares of
Microscience Investments have the power to dispose of all shares
of our capital stock held by Microscience Investments and share
the power to vote these shares with BioPharm, L.L.C.
|
|
|
|
For more information regarding the beneficial ownership of these
shares, see Stockholder arrangements
below.
|
|
|
|
(2)
|
|
Consists of 38,361 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
|
|
(3)
|
|
Consists of 513,561 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
|
|
(4)
|
|
Consists of 19,181 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
(5)
|
|
Consists of 74,516 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
|
|
(6)
|
|
Consists of 28,770 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
|
|
(7)
|
|
Consists of 14,385 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
(8)
|
|
Consists of 14,385 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
|
|
(9)
|
|
Includes 825,434 shares of common stock subject to stock
options exercisable within 60 days of October 20, 2006.
|
|
|
|
(10)
|
|
Consists of the following shares of our common stock:
|
|
|
|
8,314,819 shares held by Intervac, L.L.C.;
|
|
|
|
4,065,043 shares held by BioPharm, L.L.C.;
|
|
|
|
1,934,849 shares held by Michigan Biologic
Products, Inc.;
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|
|
|
1,599,155 shares held by Biovac, L.L.C.;
|
159
|
|
|
|
|
1,375,084 shares held by Biologika, L.L.C.;
|
|
|
|
719,275 shares held by Intervac Management,
L.L.C.;
|
|
|
|
658,254 shares held by ARPI, L.L.C.; and
|
|
|
|
3,636,801 shares held by Microscience
Investments Limited.
|
|
|
|
If the underwriters exercise their over-allotment option in
full, these stockholders will beneficially own
21,823,280 shares of our common stock after this offering,
or 78.8% of our outstanding common stock, consisting of the
following shares of our common stock:
|
|
|
|
8,014,819 shares held by Intervac, L.L.C.;
|
|
|
|
4,065,043 shares held by BioPharm, L.L.C.;
|
|
|
|
1,844,849 shares held by Michigan Biologic
Products, Inc.;
|
|
|
|
1,599,155 shares held by Biovac, L.L.C.;
|
|
|
|
1,315,084 shares held by Biologika, L.L.C.;
|
|
|
|
719,275 shares held by Intervac Management,
L.L.C.;
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|
|
|
628,254 shares held by ARPI, L.L.C.; and
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|
|
|
3,636,801 shares held by Microscience
Investments Limited.
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|
|
|
Intervac, BioPharm, Michigan Biologic Products, Biovac,
Biologika, Intervac Management and ARPI are parties to a voting
agreement dated June 30, 2004. BioPharm also is a party to
separate voting agreements with Michigan Biologic Products,
Biologika and Microscience Investments.
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|
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Robert Myers has the power to direct the disposition of all
shares of our capital stock held by Michigan Biologic Products.
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|
Mauro and Yasmine Gibellini, as tenants by the entirety, have
the power to dispose of all shares of our capital stock held by
Biologika.
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Janice Mugrditchian has the power to dispose of all shares of
our capital stock held by ARPI.
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|
The holders of series B preferred ordinary shares of
Microscience Investments have the power to dispose of all shares
of our capital stock held by Microscience Investments.
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For more information regarding the beneficial ownership of these
shares, see Stockholder arrangements
below.
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|
(11)
|
|
The holders of series B preferred ordinary shares of
Microscience Investments have the power to dispose of all shares
of our capital stock held by Microscience Investments and share
the power to vote these shares with BioPharm, L.L.C. Investment
funds affiliated with Apax Funds Nominees Limited, Advent
Private Equity Funds, JP Morgan Partners LLC and The Merlin
Biosciences Funds are the holders of the Microscience
Investments series B preferred ordinary shares. No holder
or group of affiliated holders of series B preferred
ordinary shares of Microscience Investments alone has the power
to direct the disposition of the shares of our capital stock
held by Microscience Investments. Microscience Investments is a
party to a voting agreement with BioPharm. For more information
regarding this voting agreement, see
Stockholder arrangements below.
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|
(12)
|
|
Consists of the following shares of our common stock:
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|
|
|
1,934,849 shares held by Michigan Biologic
Products, Inc.; and
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|
|
|
459,196 shares subject to stock options held by
Dr. Myers exercisable within 60 days of
October 20, 2006.
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160
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|
|
|
|
If the underwriters exercise their over-allotment option in
full, Dr. Myers will beneficially own 2,304,045 shares
of our common stock after this offering, or 8.2% of our
outstanding common stock, consisting of the following shares of
our common stock:
|
|
|
|
1,844,849 shares held by Michigan Biologic
Products, Inc.; and
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|
|
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459,196 shares subject to stock options held by
Dr. Myers exercisable within 60 days of
October 20, 2006.
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|
|
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Dr. Myers has the power to direct the disposition of all
shares of our capital stock held by Michigan Biologic Products.
Mr. El-Hibri has the power to direct the voting of all
shares of our capital stock held by Michigan Biologic Products.
For more information regarding the beneficial ownership of these
shares, see Stockholder arrangements
below.
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(13)
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|
Consists of the following shares of our common stock:
|
|
|
|
|
|
1,375,084 shares held by Biologika,
L.L.C.; and
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|
|
|
|
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71,927 shares subject to stock options held by
Mr. Gibellini exercisable within 60 days of
October 20, 2006.
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|
|
|
If the underwriters exercise their over-allotment option in
full, Mr. and Mrs. Gibellini will beneficially own
1,387,011 shares of our common stock after this offering,
or 5.2% of our outstanding common stock, consisting of the
following shares of our common stock:
|
|
|
|
1,315,084 shares held by Biologika,
L.L.C.; and
|
|
|
|
71,927 shares subject to stock options held by
Mr. Gibellini exercisable within 60 days of
October 20, 2006.
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|
|
|
Mr. and Mrs. Gibellini, as tenants by the entirety, have
the power to dispose of all shares of our capital stock held by
Biologika. Mr. El-Hibri has the power to direct the voting
of all shares of our capital stock held by Biologika. For more
information regarding the beneficial ownership of these shares,
see Stockholder arrangements below.
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Selling
stockholders
The stockholders listed in the following table have granted an
option to the underwriters to purchase up to an aggregate of
480,000 additional shares of our common stock to cover
over-allotments. The following table sets forth for each selling
stockholder the number of shares of our common stock subject to
the over-allotment option.
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|
|
|
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Number of shares
of
|
Name
|
|
common
stock
|
|
|
Intervac, L.L.C.
|
|
|
300,000
|
Michigan Biologic Products,
Inc.
|
|
|
90,000
|
Biologika, L.L.C.
|
|
|
60,000
|
ARPI, L.L.C.
|
|
|
30,000
|
|
|
|
|
Total
|
|
|
480,000
|
|
|
Stockholder
arrangements
Our principal stockholders are parties to voting agreements that
result in Mr. El-Hibri having the power to direct the
voting of all shares of our capital stock owned by the
stockholders who are party to these
161
voting agreements. A description of these voting agreements and
additional information regarding the beneficial ownership of the
shares held by our principal stockholders are set forth below.
Voting
agreement dated June 30, 2004
Intervac, BioPharm, Michigan Biologic Products, Biovac,
Biologika, Intervac Management and ARPI are parties to a voting
agreement dated June 30, 2004. We refer to these
stockholders collectively as the voting group. Under the voting
agreement, each stockholder in the voting group has agreed to
vote all shares of our capital stock owned by it for and against
and abstain from voting with respect to any matter as directed
by a majority in interest of the voting group as measured by the
aggregate percentage of ownership of our capital stock. As
described below, Mr. El-Hibri has the power to direct the
voting of a majority in interest of the voting group. In
addition, under the voting agreement, each stockholder in the
voting group has appointed Mr. El-Hibri, in his capacity as
the general manager of Intervac, as proxy to vote the shares of
our capital stock in the manner provided in the voting
agreement. The voting agreement automatically terminates on
June 30, 2014. Under the voting agreement, any person to
whom any stockholder in the voting group transfers any shares of
our capital stock must agree to be bound by the terms of the
voting agreement, other than as a result of a transfer pursuant
to an effective registration statement filed with the Securities
and Exchange Commission under the Securities Act or pursuant to
Rule 144 under the Securities Act.
Intervac,
L.L.C.
Mr. El-Hibri is the general manager of Intervac and in that
capacity has the power to vote and dispose of all shares of our
capital stock held by Intervac. The board of executive directors
of Intervac, consisting of William J. Crowe, Jr.,
Mr. El-Hibri and Nancy El-Hibri, supervises the management
of the company and has the power to remove the general manager.
Nancy El-Hibri is the wife of Mr. El-Hibri. A majority of
the executive directors of Intervac is required to decide any
matter on which the board of executive directors may take
action, including the removal of the general manager. Any member
of the board of executive directors may be removed by members of
Intervac holding more than 50% of the aggregate ownership
interests in Intervac. Mr. El-Hibri and his wife, as
tenants by the entirety, hold 32.5% of the ownership interests
in Intervac. Under a voting agreement with the William J.
Crowe, Jr. Revocable Living Trust, Mr. El-Hibri has
the power to vote an additional 18.0% of the ownership interests
in Intervac on any matter. As a result,
Mr. El-Hibri
has the power to direct the voting of more than 50% of the
aggregate ownership interests in Intervac. The voting agreement
between Mr. El-Hibri and the William J.
Crowe, Jr. Revocable Living Trust automatically terminates
on October 21, 2010.
BioPharm,
L.L.C.
Mr. El-Hibri is the holder of more than 50% of the
class B ownership units of BioPharm and in that capacity
has the power to direct the voting and disposition of all shares
of our capital stock held by BioPharm.
Michigan
Biologic Products, Inc.
Michigan Biologic Products has agreed, pursuant to a separate
voting agreement with BioPharm, to vote all shares of our
capital stock owned by it for and against and abstain from
voting with respect to any matter in the same manner and to the
same extent as BioPharm. As a result, Mr. El-Hibri has the
power to direct the voting of all shares of our capital stock
held by Michigan Biologic Products. The voting agreement
automatically terminates on June 30, 2014. Under the voting
agreement, any person to
162
whom Michigan Biologic Products transfers any shares of our
capital stock must agree to be bound by the terms of the voting
agreement, other than as a result of a transfer in a
brokers transaction or directly with a market maker,
subject to BioPharms right to purchase at fair market
value the shares that Michigan Biologic Products proposes to
sell. Robert Myers, the president of Michigan Biologic Products,
who also serves as senior science and policy advisor and
director of our wholly owned subsidiary, Emergent BioDefense
Operations Lansing Inc., has the power to direct the disposition
of all shares of our capital stock held by Michigan Biologic
Products.
Biovac,
L.L.C.
Mr. El-Hibri and his wife, as tenants by the entirety, hold
89.2% of the ownership interests in Biovac and have the power to
vote and dispose of all shares of our capital stock held by
Biovac.
Biologika,
L.L.C.
Biologika has agreed, pursuant to a separate voting agreement
with BioPharm, to vote all shares of our capital stock owned by
it for and against and abstain from voting with respect to any
matter in the same manner and to the same extent as BioPharm. As
a result, Mr. El-Hibri has the power to direct the voting
of all shares of our capital stock held by Biologika. The voting
agreement automatically terminates on June 30, 2014. Under
the voting agreement, any person to whom Biologika transfers any
shares of our capital stock must agree to be bound by the terms
of the voting agreement, other than as a result of a transfer in
a brokers transaction or directly with a market maker,
subject to BioPharms right to purchase at fair market
value the shares that Biologika proposes to sell. Mauro
Gibellini and Yasmine Gibellini, as tenants by the entirety,
hold 100% of the ownership interests in Biologika and have the
power to dispose of all shares of our capital stock held by
Biologika. Yasmine Gibellini is the sister of Mr. El-Hibri.
Mauro Gibellini is the
brother-in-law
of Mr. El-Hibri.
Intervac
Management, L.L.C.
Mr. El-Hibri is the general manager of Intervac Management
and in that capacity has the power to vote and dispose of all
shares of our capital stock held by Intervac Management.
Mr. El-Hibri is appointed as general manager pursuant to
the terms of the operating agreement of Intervac Management,
which may only be amended with the unanimous consent of the
members of Intervac Management. Mr. El-Hibri and his wife,
as tenants by the entirety, hold 31.1% of the ownership
interests in Intervac Management.
ARPI,
L.L.C.
Janice Mugrditchian holds 100% of the ownership interests in
ARPI and has the power to vote and dispose of all shares of our
capital stock held by ARPI.
Microscience
Investments Limited
Microscience Investments has agreed, pursuant to a separate
voting agreement with BioPharm, to vote all shares of our common
stock owned by it for and against and abstain from voting with
respect to any proposal in the same manner and to the same
extent as BioPharm. The voting agreement automatically
terminates upon the conclusion of our first annual meeting of
stockholders following the completion of this offering.
163
Description of
capital stock
The following description of our capital stock and provisions of
our restated certificate of incorporation, which we refer to as
our certificate of incorporation, and our amended and restated
by-laws, which we refer to as our by-laws, are summaries and are
qualified by reference to the certificate of incorporation and
the by-laws that will be in effect upon completion of this
offering. We have filed copies of these documents with the
Securities and Exchange Commission as exhibits to our
registration statement of which this prospectus forms a part.
The descriptions of the common stock and preferred stock reflect
changes to our capital structure that will occur prior to and
upon completion of this offering.
Upon the completion of this offering, our authorized capital
stock will consist of 100,000,000 shares of common stock,
$0.001 par value per share, and 15,000,000 shares of
preferred stock, $0.001 par value per share.
As of October 20, 2006, we had issued and outstanding
22,303,280 shares of class A common stock and
117,124 shares of class B common stock, held by 34
stockholders of record. As of October 20, 2006, we also had
outstanding options to purchase 3,109,932 shares of
class B common stock at a weighted average exercise price
of $2.54 per share.
Prior to the completion of this offering:
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|
|
our class A common stock will be reclassified as common
stock and each outstanding share of our class B common
stock will be converted into one share of common stock; and
|
|
|
each outstanding option to purchase shares of our class B
common stock will automatically become an option to purchase an
equal number of shares of common stock at the same exercise
price per share.
|
Common
stock
The holders of our common stock are entitled to one vote per
share with respect to each matter presented to our stockholders
on which the holders of common stock are entitled to vote and do
not have cumulative voting rights. An election of directors by
our stockholders shall be determined by a plurality of the votes
cast by the stockholders entitled to vote on the election.
Holders of common stock are entitled to receive proportionately
any dividends as may be declared by our board of directors,
subject to any preferential dividend rights of outstanding
preferred stock.
In the event of our liquidation or dissolution, the holders of
common stock are entitled to receive ratably all assets
available for distribution to stockholders after the payment of
all debts and other liabilities and subject to the prior rights
of any outstanding preferred stock. Holders of common stock have
no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of common
stock are subject to and may be adversely affected by the rights
of the holders of shares of any series of preferred stock that
we may designate and issue in the future.
Preferred
stock
Under the terms of our certificate of incorporation, our board
of directors is authorized to issue shares of preferred stock in
one or more series without stockholder approval. Our board of
directors has the discretion to determine the rights,
preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
preferred stock.
164
Authorizing our board of directors to issue preferred stock and
determine its rights and preferences has the effect of
eliminating delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock or of rights
to purchase preferred stock, while providing flexibility in
connection with possible acquisitions, future financings and
other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or could discourage
a third party from seeking to acquire, a majority of our
outstanding voting stock. Currently, we have no shares of
preferred stock outstanding. Our board of directors has
authorized 100,000 shares of series A junior
participating preferred stock for issuance under our stockholder
rights plan. See Stockholder rights plan
below. We have no current plans to issue any preferred stock
other than as may be provided for by the stockholder rights plan.
Options
Upon the completion of this offering, based on options
outstanding as of October 20, 2006, we will have
outstanding options to purchase an aggregate of
3,109,932 shares of our common stock at a weighted average
exercise price of $2.54 per share.
Anti-takeover
effects of Delaware law and our certificate of incorporation and
by-laws
Our certificate of incorporation and by-laws and Delaware law
contain provisions that could have the effect of delaying,
deferring or discouraging another party from acquiring control
of us. These provisions, which are summarized below, are
expected to discourage coercive takeover practices and
inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first
negotiate with our board of directors.
Immediately prior to this offering, Fuad El-Hibri, our
president, chief executive officer and chairman of our board of
directors, was the beneficial owner of 99.5% of our outstanding
common stock. Immediately following this offering,
Mr. El-Hibri will be the beneficial owner of 81.4% of our
outstanding common stock, or 78.9% of our outstanding common
stock if the underwriters exercise their over-allotment option
in full. As a result, Mr. El-Hibri will be able to control
the election of the members of our board of directors following
this offering. In addition, some of the provisions summarized
below may further enhance Mr. El-Hibris control of
our corporate affairs for at least the next several years,
including control of our board of directors. This control could
discourage others from initiating a potential merger, takeover
or other change of control transaction that other stockholders
may view as beneficial.
Number of
directors
Subject to the rights of holders of any series of preferred
stock to elect directors, our board of directors will establish
the number of directors. Until the fifth anniversary of the
completion of this offering, any change in the number of
directors will require the affirmative vote of at least 75% of
the directors then in office.
Staggered
board; removal of directors
Our certificate of incorporation and our by-laws divide our
directors into three classes with staggered three-year terms.
Our directors may be removed from office only for cause and only
by the affirmative vote of holders of our capital stock
representing at least 75% of the voting power of all outstanding
stock entitled to vote.
165
Any vacancy on our board of directors, including a vacancy
resulting from an enlargement of our board of directors, may be
filled only by the affirmative vote of a majority of our
directors present at a meeting duly held at which a quorum is
present.
The classification of our board of directors and the limitations
on the removal of directors and filling of vacancies could make
it more difficult for a third party to acquire, or discourage a
third party from seeking to acquire, control of our company.
Appointment
and removal of chairman of the board
Until the fifth anniversary of the completion of this offering,
the appointment and removal of the chairman of our board of
directors will require the affirmative vote of at least 75% of
our directors then in office. Mr. El-Hibri currently serves
as the chairman of our board of directors.
Stockholder
action by written consent; special meetings
Our certificate of incorporation and our by-laws provide that
any action required or permitted to be taken by our stockholders
must be effected at a duly called annual or special meeting of
such holders and may not be effected by any consent in writing
by such holders. Our certificate of incorporation and our
by-laws also provide that, except as otherwise required by law,
special meetings of our stockholders can only be called by our
board of directors, our chairman of the board or our president.
Advance notice
requirements
Following the second anniversary of the completion of this
offering, our by-laws establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of
stockholders, including proposed nominations of persons for
election to the board of directors. Following the second
anniversary of the completion of this offering, stockholders at
an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting
by or at the direction of the board of directors or by a
stockholder of record on the record date for the meeting, who is
entitled to vote at the meeting and who has delivered timely
written notice in proper form to our secretary of the
stockholders intention to bring such business before the
meeting. These provisions could have the effect of delaying
until the next stockholder meeting stockholder actions that are
favored by the holders of a majority of our outstanding voting
securities.
Delaware
business combination statute
We are subject to Section 203 of the General Corporation
Law of Delaware. Subject to certain exceptions, Section 203
prevents a publicly held Delaware corporation from engaging in a
business combination with any interested
stockholder for three years following the date that the
person became an interested stockholder, unless the interested
stockholder attained such status with the approval of our board
of directors or unless the business combination is approved in a
prescribed manner. A business combination includes,
among other things, a merger or consolidation involving us and
the interested stockholder and the sale of more than
10% of our assets. In general, an interested
stockholder is any entity or person beneficially owning
15% or more of our outstanding voting stock and any entity or
person affiliated with or controlling or controlled by such
entity or person. The restrictions contained in Section 203
are not applicable to any of our existing stockholders.
166
Super-majority
voting
The General Corporation Law of Delaware provides generally that
the affirmative vote of a majority of the shares entitled to
vote on any matter is required to amend a corporations
certificate of incorporation or by-laws, unless a
corporations certificate of incorporation or by-laws, as
the case may be, requires a greater percentage. Until the second
anniversary of the completion of this offering, the affirmative
vote of holders of our capital stock representing a majority of
the voting power of all outstanding stock entitled to vote is
required to amend or repeal the provisions of our certificate of
incorporation described in this section entitled
Anti-takeover effects of Delaware law and our certificate
of incorporation and by-laws. Following the second
anniversary of the completion of this offering, the affirmative
vote of holders of our capital stock representing at least 75%
of the voting power of all outstanding stock entitled to vote is
required to amend or repeal these provisions of our certificate
of incorporation. Until the second anniversary of the completion
of this offering, the affirmative vote of either at least 75% of
the directors then in office or holders of our capital stock
representing a majority of the voting power of all outstanding
stock entitled to vote is required to amend or repeal our
by-laws. Following the second anniversary of the completion of
this offering, the affirmative vote of either a majority of the
directors present at a meeting of our board of directors or
holders of our capital stock representing at least 75% of the
voting power of all outstanding stock entitled to vote is
required to amend or repeal our by-laws.
Stockholder
rights plan
In connection with this offering, we will enter into a rights
agreement pursuant to which we will issue to our stockholders
one preferred stock purchase right for each outstanding share of
our common stock. Each right, when exercisable, will entitle the
registered holder to purchase from us a unit consisting of one
one-thousandth of a share of series A junior participating
preferred stock at a purchase price to be determined by our
board of directors at the same time the initial public offering
price of our common stock is determined. We will enter into the
rights agreement with American Stock Transfer & Trust
Company, as rights agent.
The following description is a summary of the material terms of
our stockholder rights plan. It does not restate these terms in
their entirety. We urge you to read our stockholder rights plan
because it, and not this description, defines its terms and
provisions. We have filed a copy of the rights agreement that
establishes our stockholder rights plan as an exhibit to our
registration statement of which this prospectus forms a part.
Rights.
Each share of common stock will have
attached to it one right. Initially, the rights are not
exercisable and are attached to all certificates representing
outstanding shares of our common stock, and we will not
distribute separate rights certificates. The rights will only be
exercisable under limited circumstances specified in the rights
agreement when there has been a distribution of the rights and
the rights are no longer redeemable by us.
The rights will expire at the close of business on the tenth
anniversary of the date the rights plan was adopted, unless we
redeem or exchange them earlier as described below.
Prior to the rights distribution date.
Prior to the
rights distribution date:
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|
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the rights are evidenced by our common stock certificates and
will be transferred with and only with such common stock
certificates; and
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the surrender for transfer of any certificates of our common
stock will also constitute the transfer of the rights associated
with our common stock represented by such certificate.
|
167
Rights distribution date.
The rights will separate
from our common stock, and a rights distribution date will
occur, upon the earlier of the following events:
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10 business days following the later of (1) a public
announcement that a person or group, other than an exempted
person, has acquired, or obtained the right to acquire
beneficial ownership of 15% or more of the outstanding shares of
our common stock or (2) the first date on which one of our
executive officers has actual knowledge of such an
event; and
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|
|
10 business days following the start of a tender offer or
exchange offer that would result in a person or group, other
than an exempted person, beneficially owning 15% or more of the
outstanding shares of our common stock.
|
The distribution date may be deferred by our board of directors
and some inadvertent actions will not trigger the occurrence of
the rights distribution date. In addition, a rights distribution
date will not occur as a result of the ownership of our stock by
the following exempted persons:
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|
|
Fuad El-Hibri and his wife, Nancy
El-Hibri,
and any entity controlled by Fuad
El-Hibri
or
Nancy
El-Hibri;
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|
Microscience Investments Limited, unless and until such time as
Microscience Investments, together with its affiliates and
associates, directly or indirectly, becomes the beneficial owner
of any additional shares of common stock, except under certain
specified circumstances, and disregarding any shares
Microscience Investments is or becomes the beneficial owner of
solely as a result of the fact that it is a party to any of the
voting agreements described under Principal and selling
stockholders Stockholder arrangements; and
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each other holder of our common stock immediately prior to this
offering to the extent such persons beneficial ownership
exceeds 15% solely as a result of the fact that the person is a
party to any of the voting agreements described under
Principal and selling stockholders Stockholder
arrangements.
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As soon as practicable after the rights distribution date,
separate rights certificates will be mailed to the holders of
record of our common stock as of the close of business on the
rights distribution date. From and after the rights distribution
date, the separate rights certificates alone will represent the
rights. All shares of our common stock issued prior to the
rights distribution date, including shares of common stock
issued in this offering, will be issued with rights. Shares of
our common stock issued after the rights distribution date in
connection with specified employee benefit plans or upon
conversion of specified securities will be issued with rights.
Except as otherwise determined by our board of directors, no
other shares of our common stock issued after the rights
distribution date will be issued with rights.
Flip-in event.
If a person or group, other than an
exempted person, becomes the beneficial owner of 15% or more of
the outstanding shares of our common stock, except as described
below, each holder of a right will thereafter have the right to
receive, upon exercise, a number of shares of our common stock,
or, in some circumstances, cash, property or other securities of
ours, which equals the exercise price of the right divided by
one-half of the current market price of our common stock on the
date the acquisition occurs. However, following the acquisition:
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rights will not be exercisable until the rights are no longer
redeemable by us as set forth below; and
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all rights that are, or were, under the circumstances specified
in the rights agreement, beneficially owned by any acquiring
person will be null and void.
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The event set forth in this paragraph is referred to as a
flip-in event. A flip-in event would not occur if there is an
offer for all of our outstanding shares of common stock that at
least 75% of our board of directors determines is fair to our
stockholders and in their best interests.
168
Flip-over event.
If at any time after a person or
group, other than an exempted person, has become the beneficial
owner of 15% or more of the outstanding shares of our common
stock:
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we are acquired in a merger or other business combination
transaction in which we are not the surviving corporation;
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we are the surviving entity in a merger of other business
combination transaction but our common stock is changed or
exchanged for stock or securities of any other person or for
cash or any other property; or
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more than 50% of our assets or earning power is sold or
transferred,
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then each holder of a right, except rights which previously have
been voided as set forth above, shall thereafter have the right
to receive, upon exercise, that number of shares of common stock
of the acquiring company which equals the exercise price of the
right divided by one-half of the current market price of that
companys common stock at the date of the occurrence of the
event. The event described in this paragraph is referred to as a
flip-over event. A flip-over event does not arise if the merger
or other transaction follows an offer for all of our outstanding
shares of common stock that at least 75% of our board of
directors determines is fair to our stockholders and in their
best interests.
Exchange of rights.
At any time after a flip-in
event, when no person owns a majority of our common stock, our
board of directors may exchange the rights, other than rights
owned by the acquiring person that have become void, in whole or
in part, at an exchange ratio of one share of our common stock,
or one one-thousandth of a share of series A preferred
stock, or of a share of a class or series of preferred stock
having equivalent rights, preferences and privileges, per right.
Adjustments.
The purchase price of the rights, and
the number of securities purchasable, are subject to adjustment
from time to time to prevent dilution. The number of rights
associated with each share of common stock is also subject to
adjustment in the event of stock splits, subdivisions,
consolidations or combinations of our common stock that occur
prior to the rights distribution date.
Series A junior participating preferred
stock.
Series A preferred stock purchasable upon
exercise of the rights will not be redeemable. Each share of
series A preferred stock will be entitled to receive when,
as and if declared by our board of directors, a minimum
preferential quarterly dividend payment of $10 per share
or, if greater, an aggregate dividend of 1,000 times the
dividend declared per share of our common stock. In the event of
liquidation, the holders of the series A preferred stock
will be entitled to a minimum preferential liquidation payment
of $1,000 per share, plus accrued and unpaid dividends, and
will be entitled to an aggregate payment of 1,000 times the
payment made per share of our common stock. Each share of
series A preferred stock will have 1,000 votes, voting
together with our common stock. In the event of any merger,
consolidation or other transaction in which our common stock is
changed or exchanged, each share of series A preferred
stock will be entitled to receive 1,000 times the amount
received per share of our common stock. These rights are
protected by customary antidilution provisions.
Because of the nature of the series A preferred
stocks dividend, liquidation and voting rights, the value
of one one-thousandth of a share of series A preferred
stock purchasable upon exercise of each right should approximate
the value of one share of common stock.
Redemption of rights.
At any time until ten business
days following the date of a public announcement that a person
or group, other than an exempted person, has acquired or
obtained the right to acquire beneficial ownership of 15% or
more of the outstanding shares of our common stock, or such
later date upon which one of our executive officers first has
actual knowledge of such event or such later date as
169
our board of directors may determine, we may redeem the rights
in whole, but not in part, at a price of $0.001 per right,
payable in cash or stock. Immediately upon the redemption of the
rights or such earlier time as established by our board of
directors, the rights will terminate and the only right of the
holders of rights will be to receive the redemption price.
Status of rights holder and tax affects.
Until a
right is exercised, the holder of the right, as such, will have
no rights as a stockholder of ours, including no right to vote
or to receive dividends. Although the distribution of the rights
should not be taxable to stockholders or to us, stockholders
may, depending upon the circumstances, recognize taxable income
in the event that the rights become exercisable for our common
stock, or other consideration, or for common stock of the
acquiring company as described above.
Boards authority to amend.
Our board of
directors may amend any provision of the rights agreement, other
than the redemption price, prior to the date on which the rights
are no longer redeemable. Once the rights are no longer
redeemable, our boards authority to amend the rights
agreement is limited to correcting ambiguities or defective or
inconsistent provisions in a manner that does not adversely
affect the interest of holders of rights.
Effects of the rights.
The rights are intended to
protect our stockholders in the event of an unfair or coercive
offer to acquire our company and to provide our board of
directors with adequate time to evaluate unsolicited offers. The
rights may have anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to
acquire us without conditioning the offer on a substantial
number of rights being acquired. The rights, however, should not
affect any prospective offeror willing to make an offer at a
fair price and otherwise in the best interests of us and our
stockholders, as determined by our board of directors. The
rights should not interfere with any merger or other business
combination approved by our board of directors.
Registration
rights
Upon the completion of this offering, holders of
22,303,280 shares of our common stock as of
October 20, 2006 will have the right to require us to
register these shares of common stock under the Securities Act
under specified circumstances, including any additional shares
issued or distributed by way of a dividend, stock split or other
distribution in respect of these shares.
In connection with our acquisition of Microscience, we granted
to Microscience Investments registration rights with respect to
the shares of our common stock that we issued to Microscience
Investments in the acquisition. We also have granted
registration rights with respect to shares of our common stock
to the holders of our previously existing class A common
stock, in addition to Microscience Investments.
Registration rights held by Microscience Investments may be
transferred to the following parties if they become holders of
the shares covered by the registration rights: APAX Funds
Nominees Limited, The Merlin BioSciences Funds, The Merlin
Fund L.P., Advent Private Equity Funds, JPMorgan Partners
LLC, Merlin Equity Limited, or any subsidiary, affiliate, parent
or general partner of any of these parties.
Demand
registration rights
Subject to specified limitations and to the
lock-up
agreements with the underwriters for this offering, holders of
these registrations rights may, beginning 90 days after
this offering, require that we register all or part of our
common stock subject to the registration rights for sale under
the Securities Act. These holders may demand registration of our
common stock so long as the offering price to the public of the
shares requested to be registered is at least $25,000,000. We
are required to effect only one demand
170
registration, subject to specified exceptions for each of
Microscience and the holders of our previously existing
class A common stock.
Incidental
registration rights
If, after the completion of this offering, we propose to
register any of our common stock under the Securities Act,
subject to specified exceptions, either for our own account or
for the account of other security holders, holders of
registration rights are entitled to notice of the registration
and to include shares of common stock subject to the
registration rights in the registered offering.
Limitations
and expenses
With specified exceptions, the right to include shares in a
registration is subject to the right of underwriters for the
offering to limit the number of shares included in the offering.
We are required to pay one-half of all fees, costs and expenses
of any demand registration, other than underwriting discounts
and commissions.
Transfer agent
and registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company.
New York Stock
Exchange
Our common stock has been authorized for listing on the New York
Stock Exchange under the symbol EBS.
171
Shares eligible
for future sale
Prior to this offering, there has been no market for our common
stock, and a liquid trading market for our common stock may not
develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued
upon exercise of outstanding options or in the public market
after this offering, or the anticipation of those sales, could
adversely affect market prices prevailing from time to time and
could impair our ability to raise capital through sales of our
equity securities. Our common stock has been authorized for
listing on the New York Stock Exchange under the symbol
EBS.
Upon the completion of this offering, we will have outstanding
27,420,404 shares of common stock, after giving effect to
the issuance of 5,000,000 shares of common stock in this
offering.
Of the shares to be outstanding after the completion of this
offering, the 5,000,000 shares of common stock sold in this
offering will be freely tradable without restriction under the
Securities Act unless purchased by our affiliates,
as that term is defined in Rule 144 under the Securities
Act. The remaining shares of our common stock are
restricted securities under Rule 144.
Substantially all of these restricted securities will be subject
to the
180-day
lock-up
period described below.
After the
180-day
lock-up
period, these restricted securities may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rule 144 or 701 under the
Securities Act.
Rule 144
In general and subject to the
lock-up
agreements described below, under Rule 144, beginning
90 days after the date of this prospectus, a person who has
beneficially owned shares of our common stock for at least one
year, including the holding period of any prior owner other than
one of our affiliates, would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
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1% of the number of shares of our common stock then outstanding,
which will equal approximately 274,204 shares immediately
after this offering; and
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the average weekly trading volume in our common stock on the New
York Stock Exchange during the four calendar weeks preceding the
date of filing of a Notice of Proposed Sale of Securities
Pursuant to Rule 144 with respect to the sale.
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Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us. Beginning 90 days
after the date of this prospectus, 21,283 shares of our
common stock outstanding as of October 20, 2006 will be
eligible for sale under Rule 144. Upon expiration of the
180-day
lock-up
period described below, an additional 22,335,252 shares of our
common stock outstanding as of October 20, 2006 will be
eligible for sale under Rule 144, including shares eligible
for resale under Rule 144(k) as described below. We cannot
estimate the number of shares of common stock that our existing
stockholders will elect to sell under Rule 144.
Rule 144(k)
Subject to the
lock-up
agreements described below, shares of our common stock eligible
for sale under Rule 144(k) may be sold immediately upon the
completion of this offering. In general, under Rule 144(k),
172
a person may sell shares of common stock acquired from us
immediately upon the completion of this offering, without regard
to manner of sale, the availability of public information about
us or volume, if:
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the person is not our affiliate and has not been our affiliate
at any time during the three months preceding the sale; and
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the person has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any
prior owner other than an affiliate.
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Immediately upon the completion of this offering, none of the
shares of our common stock outstanding as of October 20,
2006 will be eligible for sale under Rule 144(k). Upon
expiration of the 180-day lock-up period described below,
10,932 shares of common stock outstanding as of
October 20, 2006 will be eligible for sale under
Rule 144(k).
Rule 701
In general, under Rule 701 of the Securities Act, any of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement is eligible to resell those shares
90 days after the date of this prospectus in reliance on
Rule 144, but without compliance with the various
restrictions, including the public information, holding period
and volume limitation restrictions, contained in Rule 144.
Beginning 90 days after the date of this prospectus,
117,124 shares of our common stock outstanding as of
October 20, 2006 will be eligible for sale in accordance
with Rule 701.
Lock-up
agreements
The holders of substantially all of our currently outstanding
capital stock have agreed that, without the prior written
consent of J.P. Morgan Securities Inc., they will not, during
the period ending 180 days after the date of this
prospectus, subject to exceptions specified in the
lock-up
agreements, offer, pledge, announce the intention to sell, sell,
contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for
our common stock or enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences
of ownership of our common stock. Further, these holders have
agreed that, during this period, they will not make any demand
for, or exercise any right with respect to, the registration of
our common stock or any security convertible into or exercisable
or exchangeable for our common stock. The
180-day
lock-up
period may be extended under specified circumstances. The
lock-up
restrictions, specified exceptions and the circumstances under
which the
180-day
lock-up
period may be extended are described in more detail under
Underwriting.
Registration
rights
Subject to the
lock-up
agreements described above, upon the completion of this
offering, holders of 22,303,280 shares of our common stock
outstanding as of October 20, 2006 will have the right to
require us to register these shares of common stock under the
Securities Act under specified circumstances. After registration
pursuant to these rights, these shares will become freely
tradable without restriction under the Securities Act. See
Description of capital stockRegistration
rights for additional information regarding these
registration rights.
173
Stock
options
As of October 20, 2006, we had outstanding options to
purchase 3,109,932 shares of class B common stock, of
which options to purchase 2,303,105 shares of class B
common stock were vested as of October 20, 2006. As of
October 20, 2006, options to purchase 2,607,793 shares
of common stock will be vested and eligible for sale within
180 days after the date of this prospectus, subject to any
lock-up agreements applicable to these shares. Immediately prior
to the completion of this offering, each of these options
automatically will become an option to purchase an equal number
of shares of our common stock. Promptly following this offering,
we intend to file a registration statement on
Form S-8
under the Securities Act to register all of the shares subject
to outstanding options and options and other awards issuable
pursuant to our employee stock option plan and 2006 stock
incentive plan. See ManagementStock option and other
compensation plans for additional information regarding
these plans. Accordingly, shares of our common stock registered
under the registration statements will be available for sale in
the open market, subject to Rule 144 volume limitations
applicable to affiliates, and subject to any vesting
restrictions and
lock-up
agreements applicable to these shares.
174
Underwriting
We are offering the shares of common stock described in this
prospectus through a number of underwriters. J.P. Morgan
Securities Inc., Cowen and Company, LLC and HSBC Securities
(USA) Inc. are acting as representatives of the underwriters. We
and the selling stockholders have entered into an underwriting
agreement with the underwriters. Subject to the terms and
conditions of the underwriting agreement, we have agreed to sell
to the underwriters, and each underwriter has severally agreed
to purchase, at the initial public offering price less the
underwriting discounts and commissions set forth on the cover
page of this prospectus, the number of shares of common stock
listed next to its name in the following table:
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Number of
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Name
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shares
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J.P. Morgan Securities Inc.
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Cowen and Company, LLC
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HSBC Securities (USA) Inc.
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Total
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5,000,000
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The underwriters are committed to purchase all the shares of
common stock offered by us if they purchase any shares. The
underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting
underwriters may also be increased or the offering may be
terminated.
The underwriters propose to offer the shares of common stock
directly to the public at the initial public offering price set
forth on the cover page of this prospectus and to certain
dealers at that price less a concession not in excess of
$ per share. Any such dealers may
resell shares to certain other brokers or dealers at a discount
of up to $ per share from the
initial public offering price. After the initial public offering
of the shares, the offering price and other selling terms may be
changed by the underwriters. The representatives have advised us
that the underwriters do not intend to confirm discretionary
sales in excess of 5% of the shares of common stock offered in
this offering.
The underwriters have an option to purchase up to 480,000
additional shares of common stock from the selling stockholders
and up to 270,000 additional shares of common stock from us to
cover sales of shares by the underwriters that exceed the number
of shares specified in the table above. The underwriters have
30 days from the date of this prospectus to exercise this
over-allotment option. If any shares are purchased with this
over-allotment option, the underwriters will purchase shares
first from the selling stockholders and then from us, in each
case, in approximately the same proportion as shown in the table
above. If any additional shares of common stock are purchased,
the underwriters will offer the additional shares on the same
terms as those on which the shares are being offered.
The underwriting fee is equal to the initial public offering
price per share of common stock less the amount paid by the
underwriters to us and the selling stockholders per share of
common stock. The underwriting fee is
$ per share. The following table
shows the per share and total underwriting discounts and
commissions to be paid to the underwriters assuming both no
exercise and full exercise of the underwriters option to
purchase additional shares.
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Without over-
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With full
over-
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Underwriting
discounts and commissions
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allotment
exercise
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allotment
exercise
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Per share
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$
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$
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Total
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$
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$
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We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal
and accounting expenses, but excluding the underwriting
discounts and commissions, will be approximately $3,450,000.
Substantially all of these expenses are payable by us.
A prospectus in electronic format may be made available on the
websites maintained by one or more underwriters, or selling
group members, if any, participating in the offering. The
underwriters may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the representatives to underwriters and selling
group members that may make Internet distributions on the same
basis as other allocations.
We have agreed, with limited exceptions, that we will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act
relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares
of our common stock, or publicly disclose the intention to make
any offer, sale, pledge, disposition or filing, without the
prior written consent of J.P. Morgan Securities Inc. for a
period of 180 days after the date of this prospectus.
Notwithstanding the foregoing, if (1) during the last
17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs; or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions described above will continue to apply
until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
Notwithstanding the restrictions described above, we are
permitted to issue up to an aggregate of 1,370,000 shares
of our common stock or securities convertible into or
exercisable or exchangeable for common stock in connection with
transactions with unaffiliated third parties that involve
commercial relationships, including joint ventures, marketing or
distribution arrangements, collaboration agreements or
intellectual property license agreements, or in connection with
specified acquisition transactions. The recipients of the common
stock or securities issued in connection with such transactions
will be bound by the terms of the stockholder lock-up described
below.
Our directors and executive officers and substantially all of
our stockholders have entered into lock-up agreements with the
underwriters prior to the commencement of this offering pursuant
to which each of these persons or entities, with limited
exceptions, for a period of 180 days after the date of this
prospectus, may not, without the prior written consent of J.P.
Morgan Securities Inc., (1) offer, pledge, announce the
intention to sell, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of
our common stock or any securities convertible into or
exercisable or exchangeable for our common stock or
(2) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences of
ownership of our common stock, whether any such transaction
described in clause (1) or (2) above is to be settled
by delivery of common stock or such other securities, in cash or
otherwise. Notwithstanding the foregoing, if (1) during the
last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs; or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions described above will continue to apply
until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
The restrictions imposed by these lock-up agreements will not
apply to the transfer or disposition of shares of our common
stock or any securities convertible into or exercisable or
exchangeable for our common stock (1) as a bona fide gift,
(2) to any trust for the direct or indirect benefit of the
stockholder or the immediate family of the stockholder in a
transaction not involving a disposition for value, (3) to
any corporation, partnership, limited liability company or other
entity all of the beneficial ownership interests of which are
held by the stockholder or the immediate family of the
stockholder in a transaction
176
not involving a disposition for value, (4) by will, other
testamentary document or intestate succession to the legal
representative, heir, beneficiary or a member of the immediate
family of the stockholder, (5) as a distribution to partners,
members or stockholders of the stockholder in a transaction not
involving a disposition for value or (6) to any affiliate of the
stockholder or any investment fund or other entity controlled or
managed by the stockholder in a transaction not involving a
disposition for value; provided that the transferee, distributee
or donee agrees in writing to be bound by the terms of the
lock-up agreement to the same extent as if a party thereto; and,
provided further that, in the case of (3), (5) and (6) above, no
filing pursuant to Section 16(a) of the Exchange Act,
reporting a reduction in the beneficial ownership of common
stock shall be required or shall be voluntarily made in
connection with such transfer, other than a filing on a
Form 5 made after the expiration of the
180-day
restricted period or any extension thereof pursuant to the
lock-up agreement. In addition, the restrictions imposed by the
lock-up agreement do not apply to the sale of common stock by
the stockholder pursuant to the underwriting agreement.
Furthermore, notwithstanding the restrictions imposed by the
lock-up agreement, the stockholder may, without the prior
written consent of J.P. Morgan Securities Inc.,
(1) exercise an option to purchase shares of common stock
granted under any stock incentive plan or stock purchase plan,
(2) establish a trading plan pursuant to
Rule 10b5-1
under the Exchange Act for the transfer of common stock,
provided that such plan does not provide for any transfers of
common stock during the
180-day
restricted period or any extension thereof pursuant to the
lock-up agreement and (3) transfer shares of common stock
acquired in this offering or on the open market following this
offering.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act.
Our common stock has been approved for listing on the New York
Stock Exchange under the symbol EBS.
In connection with this offering, the underwriters may engage in
stabilizing transactions, which involves making bids for,
purchasing and selling shares of common stock in the open market
for the purpose of preventing or retarding a decline in the
market price of the common stock while this offering is in
progress. These stabilizing transactions may include making
short sales of the common stock, which involves the sale by the
underwriters of a greater number of shares of common stock than
they are required to purchase in this offering, and purchasing
shares of common stock on the open market to cover positions
created by short sales. Short sales may be covered
shorts, which are short positions in an amount not greater than
the underwriters over-allotment option referred to above,
or may be naked shorts, which are short positions in
excess of that amount. The underwriters may close out any
covered short position either by exercising their over-allotment
option, in whole or in part, or by purchasing shares in the open
market. In making this determination, the underwriters will
consider, among other things, the price of shares available for
purchase in the open market compared to the price at which the
underwriters may purchase shares through the over-allotment
option. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
that could adversely affect investors who purchase in this
offering. To the extent that the underwriters create a naked
short position, they will purchase shares in the open market to
cover the position.
The underwriters have advised us that, pursuant to
Regulation M of the Securities Act, they may also engage in
other activities that stabilize, maintain or otherwise affect
the price of the common stock, including the imposition of
penalty bids. This means that if the representatives of the
underwriters purchase common stock in the open market in
stabilizing transactions or to cover short sales, the
representatives can require the underwriters that sold those
shares as part of this offering to repay the underwriting
discount received by them.
177
These activities may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding
a decline in the market price of the common stock, and, as a
result, the price of the common stock may be higher than the
price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue
them at any time. The underwriters may carry out these
transactions on the New York Stock Exchange, in the
over-the-counter
market or otherwise.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations between us and the representatives of
the underwriters. In determining the initial public offering
price, we and the representatives of the underwriters expect to
consider a number of factors, including:
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the information set forth in this prospectus and otherwise
available to the representatives;
|
|
|
our prospects and the history and prospects for the industry in
which we compete;
|
|
|
an assessment of our management;
|
|
|
our prospects for future earnings;
|
|
|
the general condition of the securities markets at the time of
this offering;
|
|
|
the recent market prices of, and demand for, publicly traded
common stock of generally comparable companies; and
|
|
|
other factors deemed relevant by the underwriters and us.
|
Neither we nor the underwriters can assure investors that an
active trading market will develop for our common stock, or that
the shares of common stock will trade in the public market at or
above the initial public offering price.
J.P. Morgan Partners, LLC, an affiliate of J.P. Morgan
Securities Inc., through its ownership of various entities, owns
approximately 10.9% of the voting securities of Microscience
Investments Limited, which owns 16.2% of our common stock prior
to this offering. Because J.P. Morgan Securities Inc. may
be deemed an affiliate under the National Association of
Securities Dealers, Inc.s Conduct Rules, or the NASD
Rules, as a result of J.P. Morgan Partners, LLCs
ownership of more than 10% of the voting securities of
Microscience Investments Limited, J.P. Morgan Securities
Inc. may be deemed to have a conflict of interest
with us under Rule 2720 of the NASD Rules. When an NASD
member with a conflict of interest participates as an
underwriter in a public offering, the NASD Rules require that
the initial public offering price can be no higher than that
recommended by a qualified independent underwriter,
as defined by the NASD Rules. In accordance with Rule 2720
of the NASD Rules, Cowen and Company, LLC will assume the
responsibility of acting as qualified independent underwriter.
In this role, Cowen and Company, LLC will perform a due
diligence investigation and review and participate in the
preparation of the registration statement, of which this
prospectus is a part.
Certain of the underwriters and their affiliates have provided
in the past to us and our affiliates and may provide from time
to time in the future certain commercial banking, financial
advisory, investment banking and other services for us and such
affiliates in the ordinary course of their business, for which
they have received and may continue to receive customary fees
and commissions. HSBC Realty Credit Corporation, an affiliate of
HSBC Securities (USA) Inc., is the lender under a mortgage loan
for $8.5 million that we entered into in April 2006 in
connection with the purchase of a building in Frederick,
Maryland, a term loan for $10.0 million that we entered
into in August 2006 to finance a portion of the costs of our
facility expansion in Lansing, Michigan and a revolving line of
credit for up to $5.0 million that we entered into in
August 2006. In addition, from time to time, certain of the
underwriters and their affiliates may effect transactions for
their own account or the account of
178
customers, and hold on behalf of themselves or their customers,
long or short positions in our debt or equity securities or
loans, and may do so in the future.
Notices to
foreign investors
This prospectus may only be communicated or caused to be
communicated in the United Kingdom to persons:
|
|
(a)
|
authorised to carry on a regulated activity, or Authorised
Persons, under the Financial Services and Markets Act of 2000,
or FSMA;
|
|
|
(b)
|
having professional experience in matters relating to
investments and qualifying as investment professionals under
article 19 of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005, or the Order;
|
|
|
(c)
|
qualifying as high net worth persons under article 49 of
the Order; or
|
|
|
(d)
|
to whom investments or investment activity of the kind described
in this prospectus may lawfully be made available.
|
This prospectus will only be available to the categories of
persons in the United Kingdom described above and no one falling
outside such categories is entitled to rely on, and they must
not act on, any information in this prospectus. The
communication of this prospectus to any person in the United
Kingdom falling outside the categories described above is
unauthorised and may contravene FSMA. Any individual who is in
any doubt about the investment to which this prospectus relates
should consult an Authorised Person specialising in advising on
investments of this kind. By receiving this document you are
deemed to represent and warrant to us and the underwriters that
you fall within the categories of persons described above.
Persons who do not fall within one of the categories of persons
described above should not take any action on the basis of this
prospectus and should not act or rely on it. Any individual who
is in doubt about the investment to which this prospectus
relates should consult an authorised person specialising in
advising on investments of this kind.
No approved prospectus relating to the matters referred to in
this prospectus has been made available to the public in the
United Kingdom and, accordingly, the common stock may not be,
and will not be, offered in the United Kingdom except to
qualified investors under section 86 of FSMA or except in
circumstances which would not result in an offer to the public
in the United Kingdom within the meaning of FSMA. No approved
prospectus will be registered and published in any other member
state of the European Economic Area and common stock will only
be offered or sold in any such member state in circumstances
which do not require the publication of a prospectus pursuant to
the provisions of the Prospectus Directive.
No prospectus will be approved by any member state of the
European Economic Area which has implemented the Prospectus
Directive, or Relevant Member State, and no prospectus will be
registered or published in any Relevant Member State.
Applications will be accepted and common stock will be issued to
investors in the Relevant Member States only in circumstances
which do not require the publication of a prospectus pursuant to
the Prospectus Directive including:
|
|
(i)
|
at any time to legal entities which are authorised or regulated
to operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
|
|
|
(ii)
|
at any time to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year, (2) a total balance sheet of more than
43 million and (3) an annual turnover of more
than 50 million, as shown in its last annual or
consolidated accounts; or
|
|
|
(iii)
|
at any time in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive.
|
179
No prospectus pursuant to the German Securities Prospectus Act
will be filed with the German Federal Financial Supervisory
Authority. Consequently the common stock must not be distributed
within Germany by way of a public offer, public advertisement or
in any similar manner. Applications will only be accepted and
common stock will be issued to investors in Germany only in
circumstances which do not require the publication of a
prospectus pursuant to the German Securities Prospectus Act:
|
|
(i)
|
at any time to legal entities which are authorised or regulated
to operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities pursuant to Section 2 no. 6 lit. a of the
German Securities Prospectus Act;
|
|
|
(ii)
|
at any time to a corporate entity which has two or more of
(1) an average of at least 250 employees during the last
financial year, (2) a total balance sheet of more than
43 million and (3) an annual turnover of more
than 50 million, as shown in its last annual or
consolidated accounts; or
|
|
|
(iii)
|
at any time in any other circumstances which do not require the
publication by us of a prospectus pursuant to Section 3 of
the German Securities Prospectus Act.
|
This prospectus and any other document relating to the common
stock, as well as information and statements contained therein,
may not be supplied to the public in Germany or used in
connection with any offer for subscription of the common stock
to the public in Germany or any other means of public marketing.
This prospectus and any other related information is strictly
private and confidential. It must not be provided to any person
or entity other than the original recipient, and may not be
reproduced or used for any other purpose.
The common stock has not been registered with the Commissione
Nazionale per le Società e la Borsa, or CONSOB, pursuant to
Italian securities legislation and, accordingly, the common
stock cannot be offered or sold, and shall not be offered or
sold in the Republic of Italy in a solicitation to the public at
large, and that sales of the common stock in the Republic of
Italy shall only be negotiated on an individual basis with
Professional Investors, as defined under
Article 31, paragraph 2, of CONSOB Regulation
no. 11522 of 1 July 1998, as amended, and effected in
compliance with the requirements of Articles 94 and seq. of
Legislative Decree no. 58 of 24 February 1998, as
amended, and CONSOB Regulation no. 11971 of 14 May
1999, as amended, and shall in any event be effected in
accordance with all Italian securities, tax and exchange control
and other applicable laws and regulations.
This prospectus does not constitute an issue prospectus pursuant
to Art 652a of the Swiss Code of Obligations. The common stock
will not be listed on the SWX Swiss Exchange and, therefore, the
prospectus may not comply with the disclosure standards of the
listing rules of the SWX Swiss Exchange. Accordingly, the common
stock may not be offered to the public in or from Switzerland,
but only to a selected and limited circle of investors which do
not subscribe to the common stock with a view to distribution.
The investors will be individually approached by the
underwriters from time to time.
This prospectus is personal to each offeree and does not
constitute an offer to any other person. The prospectus may only
be used by those persons to whom it has been handed out in
connection with the offer described therein and may neither
directly nor indirectly be distributed or made available to
other persons without express consent of the issuer. It may not
be used in connection with any other offer and shall in
particular not be copied
and/or
distributed to the public in Switzerland.
180
Legal
matters
The validity of the common stock offered hereby is being passed
upon by Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C. Thelen Reid & Priest LLP, Washington,
D.C., is acting as counsel to the selling stockholders in
connection with this offering. Dechert LLP, Philadelphia,
Pennsylvania is acting as counsel for the underwriters in
connection with this offering.
Experts
Ernst & Young LLP, independent registered public
accounting firm, has audited our consolidated financial
statements at December 31, 2004 and 2005, and for each of
the three years in the period ended December 31, 2005, as
set forth in their report. We have included our consolidated
financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young
LLPs report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, London, England, independent
auditors, has audited the financial statements of Emergent
Product Development UK Limited for each of the two years in the
period ended December 31, 2004, as set forth in their
report. We have included these financial statements in the
prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLPs report, given on
their authority as experts in accounting and auditing.
Where you can
find more information
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock we are offering to sell. This prospectus, which
constitutes part of the registration statement, does not include
all of the information contained in the registration statement
and the exhibits, schedules and amendments to the registration
statement. For further information with respect to us and our
common stock, we refer you to the registration statement and to
the exhibits and schedules to the registration statement.
Statements contained in this prospectus about the contents of
any contract or any other document are not necessarily complete,
and, in each instance, we refer you to the copy of the contract
or other documents filed as an exhibit to the registration
statement. Each of theses statements is qualified in all
respects by this reference.
You may read and copy the registration statement of which this
prospectus is a part at the Securities and Exchange
Commissions public reference room, which is located at 100
F Street, N.E., Room 1580, Washington, DC 20549. You can
request copies of the registration statement by writing to the
Securities and Exchange Commission and paying a fee for the
copying cost. Please call the Securities and Exchange Commission
at
1-800-SEC-0330
for more information about the operation of the Securities and
Exchange Commissions public reference room. In addition,
the Securities and Exchange Commission maintains an Internet
website, which is located at http://www.sec.gov, that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities
and Exchange Commission. You may access the registration
statement of which this prospectus is a part at the Securities
and Exchange Commissions Internet website. Upon completion
of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934,
and we will file reports, proxy statements and other information
with the Securities and Exchange Commission.
This prospectus includes statistical data that were obtained
from industry publications. These industry publications
generally indicate that the authors of these publications have
obtained information from sources believed to be reliable but do
not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be
reliable, we have not independently verified their data.
181
Index to
financial statements
|
|
|
|
|
Page
|
|
Emergent BioSolutions Inc. and subsidiaries
|
|
|
|
|
|
|
|
F-2
|
Consolidated financial statements:
|
|
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
|
|
Emergent Product Development UK Limited
|
|
|
|
|
|
|
|
F-32
|
Financial statements:
|
|
|
|
|
F-33
|
|
|
F-34
|
|
|
F-35
|
|
|
|
Emergent BioSolutions Inc. and subsidiaries
|
|
|
|
|
|
|
|
F-51
|
|
|
|
|
|
F-52
|
F-1
Emergent
BioSolutions Inc. and subsidiaries
Report of
independent registered public accounting firm
The Board of Directors and Stockholders
Emergent BioSolutions Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Emergent BioSolutions Inc. and Subsidiaries as of
December 31, 2004 and 2005, and the related consolidated
statements of operations, changes in stockholders equity
and cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Emergent BioSolutions Inc. and
Subsidiaries at December 31, 2004 and 2005, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005 in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
May 23, 2006,
except as to Note 17, as to which
the date is
October 27, 2006
McLean, VA
F-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
September 30,
|
|
(in
thousands, except
|
|
December 31,
|
|
|
2006
|
|
share and per
share data)
|
|
2004
|
|
2005
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,821
|
|
$
|
36,294
|
|
|
$
|
19,906
|
|
Accounts receivable
|
|
|
18,637
|
|
|
2,530
|
|
|
|
3,273
|
|
Inventories
|
|
|
13,253
|
|
|
16,441
|
|
|
|
28,068
|
|
Income taxes receivable
|
|
|
|
|
|
763
|
|
|
|
3,542
|
|
Deferred tax assets
|
|
|
978
|
|
|
1,989
|
|
|
|
252
|
|
Restricted cash
|
|
|
1,250
|
|
|
|
|
|
|
190
|
|
Prepaid expenses and other current
assets
|
|
|
756
|
|
|
1,099
|
|
|
|
1,961
|
|
|
|
|
|
|
|
Total current assets
|
|
|
41,695
|
|
|
59,116
|
|
|
|
57,192
|
|
Property, plant and equipment, net
|
|
|
27,269
|
|
|
30,645
|
|
|
|
59,632
|
|
Deferred tax assets, net of current
|
|
|
24
|
|
|
9,981
|
|
|
|
10,785
|
|
Other assets
|
|
|
68
|
|
|
590
|
|
|
|
3,222
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
69,056
|
|
$
|
100,332
|
|
|
$
|
130,831
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, related party
|
|
$
|
15
|
|
$
|
22
|
|
|
$
|
|
|
Accounts payable, operations
|
|
|
5,505
|
|
|
10,403
|
|
|
|
16,571
|
|
Accrued compensation
|
|
|
3,710
|
|
|
6,177
|
|
|
|
4,898
|
|
Indebtedness under lines of credit
|
|
|
|
|
|
|
|
|
|
2,168
|
|
Long-term indebtedness, current
portion
|
|
|
572
|
|
|
902
|
|
|
|
1,687
|
|
Notes payable to employees, current
portion
|
|
|
474
|
|
|
506
|
|
|
|
63
|
|
Income taxes payable
|
|
|
3,761
|
|
|
2,134
|
|
|
|
|
|
Deferred revenue, current portion
|
|
|
18,256
|
|
|
7,340
|
|
|
|
8,978
|
|
Other current liabilities
|
|
|
1,893
|
|
|
2,609
|
|
|
|
4,101
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,186
|
|
|
30,093
|
|
|
|
38,466
|
|
Long-term indebtedness, net of
current portion
|
|
|
11,347
|
|
|
10,471
|
|
|
|
32,555
|
|
Notes payable to employees, net of
current portion
|
|
|
474
|
|
|
31
|
|
|
|
|
|
Deferred revenue, net of current
portion
|
|
|
|
|
|
|
|
|
|
3,001
|
|
Other liabilities
|
|
|
100
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
46,107
|
|
|
40,595
|
|
|
|
74,072
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 par
value; 3,000,000 shares authorized, 0 shares issued
and outstanding at December 31, 2004 and 2005 and
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, Class A,
$0.001 par value; 100,000,000 shares authorized,
18,666,479, 22,303,280 and 22,303,280 shares issued and
outstanding at December 31, 2004 and 2005 and
September 30, 2006, respectively
|
|
|
19
|
|
|
22
|
|
|
|
22
|
|
Common Stock, Class B,
$0.01 par value; 2,000,000 shares authorized, 0,
21,283 and 86,340 shares issued and outstanding at
December 31, 2004 and 2005 and September 30, 2006,
respectively
|
|
|
|
|
|
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
7,610
|
|
|
34,595
|
|
|
|
35,079
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
(276
|
)
|
|
|
(182
|
)
|
Retained earnings
|
|
|
15,320
|
|
|
25,396
|
|
|
|
21,839
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
22,949
|
|
|
59,737
|
|
|
|
56,759
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
69,056
|
|
$
|
100,332
|
|
|
$
|
130,831
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
September 30,
|
|
(in
thousands, except
|
|
Year
ended December 31,
|
|
|
(unaudited)
|
|
share and per
share data)
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
55,536
|
|
|
$
|
81,014
|
|
|
$
|
127,271
|
|
|
$
|
85,807
|
|
|
$
|
61,263
|
|
Contracts and grants
|
|
|
233
|
|
|
|
2,480
|
|
|
|
3,417
|
|
|
|
1,093
|
|
|
|
4,580
|
|
|
|
|
|
|
|
Total revenues
|
|
|
55,769
|
|
|
|
83,494
|
|
|
|
130,688
|
|
|
|
86,900
|
|
|
|
65,843
|
|
Operating expense
(income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
22,342
|
|
|
|
30,102
|
|
|
|
31,603
|
|
|
|
23,147
|
|
|
|
11,645
|
|
Research and development
|
|
|
6,327
|
|
|
|
10,117
|
|
|
|
18,381
|
|
|
|
9,632
|
|
|
|
26,640
|
|
Selling, general and administrative
|
|
|
19,547
|
|
|
|
30,323
|
|
|
|
42,793
|
|
|
|
28,924
|
|
|
|
32,952
|
|
Purchased in-process research and
development
|
|
|
1,824
|
|
|
|
|
|
|
|
26,575
|
|
|
|
26,575
|
|
|
|
477
|
|
Settlement of State of Michigan
obligation
|
|
|
|
|
|
|
(3,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
5,729
|
|
|
|
16,771
|
|
|
|
21,336
|
|
|
|
8,622
|
|
|
|
(5,871
|
)
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
100
|
|
|
|
65
|
|
|
|
485
|
|
|
|
338
|
|
|
|
405
|
|
Interest expense
|
|
|
(293
|
)
|
|
|
(241
|
)
|
|
|
(767
|
)
|
|
|
(575
|
)
|
|
|
(778
|
)
|
Other income (expense), net
|
|
|
168
|
|
|
|
6
|
|
|
|
55
|
|
|
|
(24
|
)
|
|
|
291
|
|
|
|
|
|
|
|
Total other income
(expense)
|
|
|
(25
|
)
|
|
|
(170
|
)
|
|
|
(227
|
)
|
|
|
(261
|
)
|
|
|
(82
|
)
|
Income (loss) before provision
for (benefit from) income taxes
|
|
|
5,704
|
|
|
|
16,601
|
|
|
|
21,109
|
|
|
|
8,361
|
|
|
|
(5,953
|
)
|
Provision for (benefit from)
income taxes
|
|
|
1,250
|
|
|
|
5,129
|
|
|
|
5,325
|
|
|
|
2,109
|
|
|
|
(2,617
|
)
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,454
|
|
|
$
|
11,472
|
|
|
$
|
15,784
|
|
|
$
|
6,252
|
|
|
$
|
(3,336
|
)
|
|
|
|
|
|
|
Earnings (loss) per
share basic
|
|
$
|
0.24
|
|
|
$
|
0.61
|
|
|
$
|
0.77
|
|
|
$
|
0.31
|
|
|
$
|
(0.15
|
)
|
Earnings (loss) per
share diluted
|
|
$
|
0.22
|
|
|
$
|
0.56
|
|
|
$
|
0.69
|
|
|
$
|
0.28
|
|
|
$
|
(0.15
|
)
|
Weighted average number of
shares basic
|
|
|
18,904,992
|
|
|
|
18,919,850
|
|
|
|
20,533,471
|
|
|
|
19,930,498
|
|
|
|
22,370,191
|
|
Weighted average number of
shares diluted
|
|
|
20,316,752
|
|
|
|
20,439,252
|
|
|
|
22,751,733
|
|
|
|
22,048,412
|
|
|
|
22,370,191
|
|
Cash dividends per
share basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial
statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
no-par
|
|
|
no-par
|
|
|
Class A
|
|
Class B
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
Total
|
|
(in thousands,
except
|
|
common
stock
|
|
|
common stock
|
|
|
$0.001 par
value common stock
|
|
$0.01 par
value common stock
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
Retained
|
|
|
stockholders
|
|
share and per
share data)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
loss
|
|
|
earnings
|
|
|
equity
|
|
|
|
|
Balance at December 31, 2002
|
|
|
18,017,994
|
|
|
$
|
2,940
|
|
|
|
731,886
|
|
|
$
|
69
|
|
|
|
|
|
$
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,146
|
|
|
$
|
4,155
|
|
Redemption of common stock
|
|
|
|
|
|
|
|
|
|
|
(71,927
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
(200
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
439,264
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,454
|
|
|
|
4,454
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
18,017,994
|
|
|
|
2,940
|
|
|
|
1,099,223
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,407
|
|
|
|
8,448
|
|
|
|
|
|
|
|
Redemption of common stock
|
|
|
|
|
|
|
|
|
|
|
(573,322
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,559
|
)
|
|
|
(1,612
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
122,584
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Conversion of class A no-par
common
stock to class A $0.001 par value common stock
|
|
|
(18,017,994
|
)
|
|
|
(2,940
|
)
|
|
|
|
|
|
|
|
|
|
|
18,017,994
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
2,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of class B no-par
common
stock to class A $0.01 par value common stock
|
|
|
|
|
|
|
|
|
|
|
(648,485
|
)
|
|
|
(60
|
)
|
|
|
648,485
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,310
|
|
|
|
|
|
|
|
|
|
|
|
4,310
|
|
Tax benefit related to the
disqualifying disposition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,472
|
|
|
|
11,472
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,666,479
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
7,610
|
|
|
|
|
|
|
|
15,320
|
|
|
|
22,949
|
|
|
|
|
|
|
|
Issuance of common stock to acquire
Microscience Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,636,801
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
26,998
|
|
|
|
|
|
|
|
|
|
|
|
27,001
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,451
|
|
|
|
1
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Redemption of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,168
|
)
|
|
|
(1
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
(308
|
)
|
|
|
(337
|
)
|
Forfeiture of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
Payment of dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,400
|
)
|
|
|
(5,400
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,784
|
|
|
|
15,784
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276
|
)
|
|
|
|
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,508
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,303,280
|
|
|
22
|
|
|
21,283
|
|
|
|
|
|
|
|
34,595
|
|
|
|
(276
|
)
|
|
|
25,396
|
|
|
|
59,737
|
|
|
|
|
|
|
|
Redemption of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
(221
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,057
|
|
|
|
1
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336
|
)
|
|
|
(3,336
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,242
|
)
|
|
|
|
|
|
|
Balance at September 30, 2006
(unaudited)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
22,303,280
|
|
$
|
22
|
|
|
86,340
|
|
|
$
|
1
|
|
|
$
|
35,079
|
|
|
$
|
(182
|
)
|
|
$
|
21,839
|
|
|
$
|
56,759
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial
statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
|
|
|
|
|
|
|
ended
September 30,
|
|
|
|
Year ended
December 31,
|
|
|
(unaudited)
|
|
(in
thousands)
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,454
|
|
|
$
|
11,472
|
|
|
$
|
15,784
|
|
|
$
|
6,252
|
|
|
$
|
(3,336
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities
(net of effects of acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
(credit)
|
|
|
|
|
|
|
4,310
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
442
|
|
Non-cash gain on settlement
|
|
|
|
|
|
|
(3,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,214
|
|
|
|
1,867
|
|
|
|
3,549
|
|
|
|
2,495
|
|
|
|
3,265
|
|
Deferred income taxes
|
|
|
(467
|
)
|
|
|
(418
|
)
|
|
|
(10,968
|
)
|
|
|
(10,313
|
)
|
|
|
933
|
|
Other obligations
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of property and
equipment
|
|
|
13
|
|
|
|
43
|
|
|
|
32
|
|
|
|
31
|
|
|
|
82
|
|
Purchased in-process research and
development
|
|
|
1,824
|
|
|
|
|
|
|
|
26,575
|
|
|
|
26,575
|
|
|
|
477
|
|
Cash payment on State of Michigan
obligation
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(528
|
)
|
|
|
(15,664
|
)
|
|
|
16,107
|
|
|
|
16,299
|
|
|
|
(744
|
)
|
Inventories
|
|
|
(4,656
|
)
|
|
|
(1,609
|
)
|
|
|
(3,189
|
)
|
|
|
(3,009
|
)
|
|
|
(11,627
|
)
|
Income taxes
|
|
|
(1,713
|
)
|
|
|
5,794
|
|
|
|
(2,390
|
)
|
|
|
(2,509
|
)
|
|
|
(4,913
|
)
|
Prepaid expenses and other assets
|
|
|
(244
|
)
|
|
|
50
|
|
|
|
(865
|
)
|
|
|
(939
|
)
|
|
|
(3,653
|
)
|
Accounts payable
|
|
|
983
|
|
|
|
2,472
|
|
|
|
5,463
|
|
|
|
(1,275
|
)
|
|
|
6,146
|
|
Accrued compensation
|
|
|
(583
|
)
|
|
|
585
|
|
|
|
2,466
|
|
|
|
(1,163
|
)
|
|
|
(1,279
|
)
|
Other current liabilities
|
|
|
(1,617
|
)
|
|
|
44
|
|
|
|
619
|
|
|
|
103
|
|
|
|
1,442
|
|
Deferred revenue
|
|
|
11,852
|
|
|
|
3,869
|
|
|
|
(10,916
|
)
|
|
|
(10,916
|
)
|
|
|
4,639
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
11,072
|
|
|
|
9,196
|
|
|
|
42,250
|
|
|
|
21,631
|
|
|
|
(8,126
|
)
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(4,123
|
)
|
|
|
(17,072
|
)
|
|
|
(6,532
|
)
|
|
|
(2,300
|
)
|
|
|
(32,333
|
)
|
Acquisitions, net of cash received
|
|
|
(3,794
|
)
|
|
|
|
|
|
|
(559
|
)
|
|
|
|
|
|
|
(218
|
)
|
Restricted cash deposits
|
|
|
|
|
|
|
(1,250
|
)
|
|
|
1,250
|
|
|
|
(17
|
)
|
|
|
(190
|
)
|
Proceeds from investment maturities
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(7,917
|
)
|
|
|
(18,175
|
)
|
|
|
(5,841
|
)
|
|
|
(2,317
|
)
|
|
|
(32,741
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt and
lines of credit
|
|
|
172
|
|
|
|
10,992
|
|
|
|
31
|
|
|
|
|
|
|
|
35,853
|
|
Proceeds from notes payable to
employees
|
|
|
|
|
|
|
947
|
|
|
|
123
|
|
|
|
123
|
|
|
|
|
|
Repayments on product supply and
royalty obligations
|
|
|
(900
|
)
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class B common
stock
|
|
|
39
|
|
|
|
12
|
|
|
|
33
|
|
|
|
|
|
|
|
43
|
|
Redemption of Class B common
stock
|
|
|
(200
|
)
|
|
|
(665
|
)
|
|
|
(337
|
)
|
|
|
(339
|
)
|
|
|
(221
|
)
|
Principal payments on long-term
debt and lines of credit
|
|
|
(38
|
)
|
|
|
(184
|
)
|
|
|
(1,110
|
)
|
|
|
(958
|
)
|
|
|
(11,290
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of dividend
|
|
|
|
|
|
|
|
|
|
|
(5,400
|
)
|
|
|
(5,400
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(927
|
)
|
|
|
8,681
|
|
|
|
(6,660
|
)
|
|
|
(6,574
|
)
|
|
|
24,385
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
(276
|
)
|
|
|
(50
|
)
|
|
|
94
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
2,228
|
|
|
|
(298
|
)
|
|
|
29,473
|
|
|
|
12,690
|
|
|
|
(16,388
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
4,891
|
|
|
|
7,119
|
|
|
|
6,821
|
|
|
|
6,821
|
|
|
|
36,294
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
7,119
|
|
|
$
|
6,821
|
|
|
$
|
36,294
|
|
|
$
|
19,511
|
|
|
$
|
19,906
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
interest
|
|
$
|
99
|
|
|
$
|
170
|
|
|
$
|
696
|
|
|
$
|
501
|
|
|
$
|
665
|
|
|
|
|
|
|
|
Cash paid during the year for
income taxes
|
|
$
|
4,280
|
|
|
$
|
|
|
|
$
|
17,985
|
|
|
$
|
3,835
|
|
|
$
|
1,470
|
|
|
|
|
|
|
|
Supplemental information on non
cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to acquire
Microscience Limited
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,001
|
|
|
$
|
27,001
|
|
|
$
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial
statements
F-6
Emergent
BioSolutions Inc. and subsidiaries
Notes to consolidated financial statements
(dollars in thousands, except per
share data)
|
|
1.
|
Nature of the
business and organization
|
Emergent Biosolutions Inc. (the Company or Emergent) is a
biopharmaceutical company focused on the development,
manufacture and commercialization of immunobiotics. The Company
operates in two business segments: biodefense and commercial.
The Company commenced operations as BioPort Corporation
(BioPort) in September 1998 through an acquisition from the
Michigan Biologic Products Institute of rights to the marketed
product, BioThrax, vaccine manufacturing facilities at a
multi-building campus on approximately 12.5 acres in
Lansing, Michigan and vaccine development and production
know-how. Following this acquisition, the Company completed
renovations at the Lansing facilities that had been initiated by
the State of Michigan. In December 2001, the U.S. Food and
Drug Administration (FDA) approved a supplement to the
Companys manufacturing facility license for the
manufacture of BioThrax at the renovated facilities. In June
2004, the Company completed a corporate reorganization
(Reorganization) in which:
|
|
|
Emergent issued 18,666,479 shares of Class A Common
Stock in exchange for 18,017,994 shares of BioPort
class A common stock and 648,485 shares of BioPort
class B common stock;
|
|
|
|
all other issued and outstanding shares of BioPort class B
common stock were repurchased and retired; and
|
|
|
all outstanding stock options to purchase BioPort class B
common stock were assumed by Emergent and option holders were
granted replacement stock options to purchase an equal number of
shares of Class B Common Stock of Emergent.
|
As a result of the Reorganization, BioPort became a wholly owned
subsidiary of Emergent. The Company has renamed BioPort as
Emergent BioDefense Operations Lansing Inc. (Emergent BioDefense
Operations). The Company acquired its portfolio of commercial
vaccine candidates through an acquisition of Microscience
Limited (Microscience) in a share exchange in June 2005 and an
acquisition of substantially all of the assets of Antex
Biologics Inc. (Antex) for cash in May 2003. The Company has
renamed Microscience as Emergent Product Development UK Limited.
|
|
2.
|
Summary of
significant accounting policies
|
Basis of
presentation and consolidation
The accompanying consolidated financial statements include the
accounts of Emergent and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Unaudited interim
financial information
The accompanying interim consolidated balance sheet as of
September 30, 2006, the statements of operations and cash
flows for the nine months ended September 30, 2005 and 2006
and the consolidated statement of changes in stockholders
equity for the nine months ended September 30, 2006 are
unaudited. These unaudited interim consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States. In the
opinion of the Companys management, the unaudited interim
consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and
include all adjustments necessary for the fair presentation of
the Companys statement of financial position, results of
operations and its cash flows for the nine months ended
September 30, 2005 and 2006. The results for the nine
months ended September 30, 2006 are not necessarily
indicative of the results to be expected for the year ending
F-7
December 31, 2006. All references to September 30,
2006 or to the nine months ended September 30, 2005 and
2006 in the notes to the consolidated financial statements are
unaudited.
Use of
estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and cash
equivalents
Cash equivalents are highly liquid investments with a maturity
of 90 days or less at the date of purchase and consist of
time deposits and investments in money market funds with
commercial banks and financial institutions and high-quality
corporate bonds. Also, the Company maintains cash balances with
financial institutions in excess of insured limits. The Company
does not anticipate any losses with such cash balances. At
December 31, 2004 and 2005 and September 30, 2006, the
Company maintained all of its cash and cash equivalents in three
financial institutions.
Fair value of
financial instruments
The carrying amounts of the Companys short-term financial
instruments, which include cash and cash equivalents, accounts
receivable and accounts payable, approximate their fair values
due to their short maturities. The carrying value and fair value
of long-term indebtedness were $11,821 and $11,409,
respectively, at December 31, 2004 and $10,502 and $10,089,
respectively, at December 31, 2005. The carrying value and
fair value of long-term indebtedness were $35,606 and $34,998,
respectively, at September 30, 2006.
Restricted
cash
Restricted cash at December 31, 2004 and September 30,
2006 consists, in each case, of a certificate of deposit held by
a bank as collateral for a letter of credit acting as a security
deposit on a loan. The certificate of deposit outstanding as of
December 31, 2004 was redeemed by the Company in October
2005.
Significant
customers and accounts receivable
The Companys primary customers are the
U.S. Department of Defense (DoD) and U.S. Department
of Health and Human Services (HHS). For the years ended
December 31, 2003, 2004 and 2005 and the nine months ended
September 30, 2005 and 2006, sales of BioThrax to the DoD
and HHS comprised 100%, 99% and 96% and 96% and 92% of total
revenues, respectively. As of December 31, 2004 and 2005
and September 30, 2006, the Companys receivable
balances were comprised of 96% and 38% and 98%, respectively,
from these customers. Unbilled accounts receivable, included in
accounts receivable, totaling $3,772 and $1,418 and $107 as of
December 31, 2004 and 2005 and September 30, 2006,
respectively, relate to various service contracts for which
product has been delivered or work has been performed, though
invoicing has not yet occurred. Accounts receivable are stated
at invoice amounts and consist primarily of amounts due from the
DoD and HHS as well as amounts due under reimbursement contracts
with other government entities and non-government and
philanthropic organizations. If necessary, the Company records a
provision for doubtful receivables to allow for any amounts
which may be unrecoverable. This provision is based upon an
analysis of the Companys prior collection experience,
customer creditworthiness and current economic trends. As of
December 31, 2004 and 2005 and September 30, 2006, an
allowance for doubtful accounts was not recorded, as the prior
collection history from these customers indicates collection is
likely.
F-8
Concentrations of
credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company places its cash
and cash equivalents with high quality financial institutions.
Management believes that the financial risks associated with its
cash and cash equivalents are minimal. Because accounts
receivable consist of amounts due from the U.S. federal
government for product sales and from government agencies under
government grants, management deems there to be minimal credit
risk.
Inventories
Inventories are stated at the lower of cost or market, with cost
being determined using a standard cost method, which
approximates average cost. Average cost consists primarily of
material, labor and manufacturing overhead expenses and includes
the services and products of third party suppliers. The Company
analyzes its inventory levels quarterly and writes down, in the
applicable period, inventory that has become obsolete, inventory
that has a cost basis in excess of its expected net realizable
value and inventory in excess of expected customer demand. The
Company also writes off in the applicable period the costs
related to expired inventory.
Property, plant
and equipment
Property, plant and equipment are stated at cost. Depreciation
is computed using the straight-line method over the following
estimated useful lives:
|
|
|
|
|
|
Buildings
|
|
|
39 years
|
|
Furniture and equipment
|
|
|
3-7 years
|
|
Internal-use software
|
|
|
Lesser of 3 years or product life
|
|
Leasehold improvements
|
|
|
Lesser of the asset life or life of lease
|
|
|
|
Upon retirement or sale, the cost of assets disposed of and the
related accumulated depreciation are removed from the accounts
and any resulting gain or loss is credited or charged to
operations. Repairs and maintenance costs are expensed as
incurred.
The Company capitalizes costs associated with purchased software
from the time the preliminary project stage is completed until
the software is ready for use. Under the provisions of the
Statement of Position
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use
, the Company capitalizes costs
associated with software developed or obtained for internal use
when the preliminary project stage is completed. Capitalized
costs include only: (1) external direct costs of materials
and services consumed in developing or obtaining internal use
software and (2) payroll and payroll-related costs for
employees who are directly associated with and who devote time
to the internal use software project during the development
stage. Capitalization of such costs ceases before training and
other post implementation software activities occur. Computer
software maintenance costs related to software development are
expensed as incurred.
Income
taxes
Income taxes are accounted for using the liability method.
Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered
or settled.
The Company records valuation allowances to reduce deferred tax
assets to the amounts that it anticipates will be realized. The
Company considers future taxable income and ongoing tax planning
F-9
strategies in assessing the need for valuation allowances. In
general, if the Company determines that it is able to realize
more than the recorded amounts of net deferred tax assets in the
future, net income will increase in the period in which the
determination is made. Likewise, if the Company determines that
it is not able to realize all or part of the net deferred tax
asset in the future, net income will decrease in the period in
which the determination is made. The Company applies any
reversals of valuation allowance related to an acquired deferred
tax asset against other intangibles before impacting net income.
Under sections 382 and 383 of the Internal Revenue Code, if
an ownership change occurs with respect to a loss
corporation, as defined, there are annual limitations on
the amount of net operating losses and deductions that are
available. Due to the acquisition of Microscience in 2005, the
Company believes the use of the operating losses will be
significantly limited.
The Companys ability to realize deferred tax assets
depends upon future taxable income as well as the limitations
discussed above. For financial reporting purposes, a deferred
tax asset must be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax
assets will not be realized prior to expiration.
Revenue
recognition
The Company recognizes revenues from product sales in accordance
with Staff Accounting Bulletin No. 104,
Revenue
Recognition
(SAB No. 104). SAB No. 104
requires recognition of revenues from product sales that require
no continuing performance by the Company if four basic criteria
have been met:
|
|
|
there is persuasive evidence of an arrangement;
|
|
|
delivery has occurred and title has passed to the Companys
customer;
|
|
|
the fee is fixed and determinable and no further obligation
exists; and
|
|
|
collectibility is reasonably assured.
|
All revenues from product sales are recorded net of applicable
allowances for sales returns, rebates, special promotional
programs, and discounts. For arrangements where the risk of loss
has not passed to the customer, the Company defers the
recognition of revenue until such time that risk of loss has
passed. Also, the cost of revenue associated with amounts
recorded as deferred revenue is recorded in inventory until such
time as risk of loss has passed.
Under the Companys contract with the DoD, title to the
product passes to the DoD upon submission of the first invoice.
The earnings process is complete upon FDA release of the product
for sale and distribution. Following FDA release of the product,
the product is segregated for later shipment, and all deferred
revenue related to the released product is recognized in
accordance with the bill and hold requirements under
SAB 104.
In December 2005, the Securities and Exchange Commission
released an interpretation with respect to the accounting for
sales of vaccines and bioterror countermeasures to the federal
government for placement into the strategic national stockpile.
This interpretation provides for revenue recognition for
specifically identified products purchased for the strategic
national stockpile in the event that all requirements for
revenue recognition, as specified in Statement of Financial
Accounting Concepts No. 5,
Recognition and Measurement
in Financial Statements of Business Enterprises
, are not
met. This interpretation is applicable to the Companys
contracts with HHS, but because the Company recognizes revenue
upon delivery of product, the Company has not applied this
guidance.
The Company recognizes revenue from upfront and milestone
payments in accordance with Emerging Issues Task Force (EITF)
Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF
No. 00-21),
which addresses whether, for revenue recognition purposes, there
is one or several elements in an arrangement. The Company
recognizes revenue from milestone payments upon
F-10
achievement of pre-defined scientific events that require
substantive effort if achievement of the milestone was not
readily assured at the inception of the agreement.
Payments received by the Company for the reimbursement of
expenses for research and development activities are recorded in
accordance with EITF Issue No. 99-19,
Reporting Revenue Gross
as Principal Versus Net as an Agent
(EITF
No. 99-19).
Pursuant to EITF
No. 99-19,
for transactions in which the Company acts as principal, with
discretion to choose suppliers, bears credit risk and performs a
substantive part of the services, revenue is recorded at the
gross amount of the reimbursement. Costs associated with these
reimbursements are reflected as a component of research and
development expenses.
Impairment of
long-lived assets
In accordance with Statement of Financial Accounting Standards
No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets
(SFAS No. 144), the Company
assesses the recoverability of its long-lived assets by
determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If
impairment is indicated, the Company measures the amount of such
impairment by comparing the fair value to the carrying value.
The Company has recorded no impairment losses for the years
ended December 31, 2003, 2004 and 2005 and the nine months
ended September 30, 2006.
Research and
development
Research and development costs are expensed as incurred.
Research and development costs primarily consist of salaries,
materials and related expenses for personnel and facility
expenses. Other research and development expenses include fees
paid to consultants and outside service providers and the costs
of materials used in clinical trials and research and
development.
Purchased
in-process research and development
The Company accounts for purchased in-process research and
development in accordance with the Statement of Financial
Accounting Standards No. 2,
Accounting for Research and
Development Costs
(SFAS No. 2) along with
Financial Accounting Standards Board (FASB) Interpretation
No. 4,
Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase
Method an interpretation of FASB Statement
No. 2
(FIN 4). Under these standards, the Company
is required to determine whether the technology relating to a
particular research and development project acquired through an
acquisition has an alternative future use. If the determination
is that the technology has no alternative future use, the
acquisition amount not directly attributed to fixed assets is
expensed. Otherwise, the Company capitalizes and amortizes the
costs incurred over their estimated useful lives of the
technology acquired.
Comprehensive
income (loss)
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income
(SFAS No. 130),
requires the presentation of the comprehensive income (loss) and
its components as part of the financial statements.
Comprehensive income is comprised of net income (loss) and other
changes in equity that are excluded from net income (loss). The
Company includes gains and losses on intercompany transactions
with foreign subsidiaries that are considered to be long-term
investments and translation gains and losses incurred when
converting its subsidiaries financial statements from
their functional currency to the U.S. dollar in accumulated
other comprehensive income (loss).
Foreign
currencies
The local currency is the functional currency for the
Companys foreign subsidiaries and, as such, assets and
liabilities are translated into U.S. dollars at year-end
exchange rates. Income and expense items are
F-11
translated at average exchange rates during the year.
Translation adjustments resulting from this process are charged
or credited to other comprehensive income (loss).
Certain risks and
uncertainties
The Company has derived substantially all of its revenue from
sales of BioThrax under contracts with the DoD and HHS. The
Companys ongoing U.S. government contracts do not
necessarily increase the likelihood that it will secure future
comparable contracts with the U.S. government. The Company
expects that a significant portion of the business that it will
seek in the near future, in particular for BioThrax, will be
under government contracts that present a number of risks that
are not typically present in the commercial contracting process.
U.S. government contracts for BioThrax require annual
funding decisions by the government and are subject to
unilateral termination or modification by the government. The
Company may fail to achieve significant sales of BioThrax to
customers in addition to the U.S. government, which would
harm its growth opportunities. The Company may not be able to
sustain or increase profitability. The Company is spending
significant amounts for the expansion of its manufacturing
facilities. The Company may not be able to manufacture BioThrax
consistently in accordance with FDA specifications. Other than
BioThrax, all of the Companys product candidates are
undergoing clinical trials or are in early stages of
development, and failure is common and can occur at any stage of
development. None of the Companys product candidates other
than BioThrax has received regulatory approval.
Earnings per
share
Basic net income (loss) attributable to common stockholders per
share of common stock excludes dilution for potential common
stock issuances and is computed by dividing net income (loss)
attributable to common stockholders by the weighted average
number of shares outstanding for the period. Diluted net income
(loss) attributable to common stockholders per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock.
F-12
The following table presents the calculation of basic and
diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
ended
|
|
|
|
Year ended
December 31,
|
|
September 30,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,454
|
|
$
|
11,472
|
|
$
|
15,784
|
|
$
|
6,252
|
|
$
|
(3,336
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of
shares basic
|
|
|
18,904,992
|
|
|
18,919,850
|
|
|
20,533,471
|
|
|
19,930,498
|
|
|
22,370,191
|
|
|
|
|
|
|
|
Dilutive securities
stock options
|
|
|
1,411,761
|
|
|
1,519,402
|
|
|
2,218,262
|
|
|
2,117,914
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of
shares diluted
|
|
|
20,316,752
|
|
|
20,439,252
|
|
|
22,751,733
|
|
|
22,048,412
|
|
|
22,370,191
|
|
|
|
|
|
|
|
Earnings (loss) per
share basic
|
|
$
|
0.24
|
|
$
|
0.61
|
|
$
|
0.77
|
|
$
|
0.31
|
|
$
|
(0.15
|
)
|
Earnings (loss) per
share diluted
|
|
$
|
0.22
|
|
$
|
0.56
|
|
$
|
0.69
|
|
$
|
0.28
|
|
$
|
(0.15
|
)
|
|
|
The Company has taken into consideration the disclosure required
by the Participating Securities and the Two-Class Method under
FASB Statement No. 128 (EITF No. 03-6).
Accounting for
stock-based compensation
As of September 30, 2006, the Company has one stock-based
employee compensation plan, the Emergent BioSolutions Employee
Stock Option Plan (the Emergent Plan), described more fully in
Note 10 Stockholders Equity. Through
December 31, 2005, the Company accounted for grants under
the Emergent Plan using the intrinsic value method in accordance
with the provisions of Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees
(APB No. 25) and has provided the pro forma disclosures
of net income (loss) and net income (loss) per share in
accordance with SFAS No. 123,
Accounting for
Stock-Based Compensation
(SFAS No. 123) using the
fair value method. Under APB No. 25, compensation expense
is based on the difference, if any, on the date of the grant
between the fair value of the Companys stock and the
exercise price of the option and is recognized ratably over the
vesting period of the option. The Company accounted for equity
instruments issued to non-employees in accordance with
SFAS No. 123 and EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services
(EITF
No. 96-18).
Effective January 1, 2006, the Company adopted the fair
value provisions of SFAS No. 123 (revised 2004),
Share Based Payment
(SFAS No. 123(R)), using
the modified prospective method. Under the fair value
recognition provisions of SFAS No. 123(R), the Company
recognizes stock-based compensation net of an estimated
forfeiture rate.
Under the modified prospective method, compensation cost
recognized in 2006 includes: (1) compensation cost for all
share-based payments granted prior to but not yet vested as of
December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, and
F-13
(2) compensation cost for all share-based payments granted
subsequent to December 31, 2005, based on the grant date
fair value estimated in accordance with the provisions of
SFAS No. 123(R). As a result of adopting
SFAS No. 123(R) on January 1, 2006, the
Companys loss before income taxes and net loss for the
nine months ended September 30, 2006 is approximately $442
higher than if it had continued to account for share-based
compensation under APB No. 25. Both basic and diluted
losses per share for the nine months ended September 30,
2006 are $0.01 lower than if the Company had continued to
account for share-based compensation under APB No. 25.
Results for prior periods have not been restated. Based on
options granted to employees as of September 30, 2006,
total compensation expense not yet recognized related to
unvested options is approximately $970, after tax. The Company
expects to recognize that expense over a weighted average period
of 2.8 years.
The Company has utilized the Black-Scholes valuation model for
estimating the fair value of all stock options granted. The fair
value of each option is estimated on the date of grant. Set
forth below are the weighted-average assumptions used in valuing
the stock options granted and a discussion of the Companys
methodology for developing each of the assumptions used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
Nine months ended
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
100
|
%
|
|
|
52
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Risk-free interest rate
|
|
|
3.15
|
%
|
|
|
2.93
|
%
|
|
|
3.68
|
%
|
|
|
4.18
|
%
|
|
|
4.69
|
%
|
Expected average life of options
(years)
|
|
|
2.7
|
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
2.7
|
|
|
|
2.9
|
|
Forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
|
|
|
|
Expected dividend yield
The Company does not
pay regular dividends on its common stock and does not
anticipate paying any dividends in the foreseeable future.
|
|
|
Expected volatility
Volatility is a measure
of the amount by which a financial variable, such as share
price, has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. The Company
uses the historical volatility of similar companies over the
preceding three-year period to estimate expected volatility.
Since 2003, the annual volatility of these similar companies has
ranged from 18.4% to 29.4%, with an average of 23.4%.
|
|
|
Risk-free interest rate
This is the average
U.S. Treasury rate with a term that most closely resembles
the expected life of the option for the quarter in which the
option was granted.
|
|
|
Expected average life of options
This is the
period of time that the options granted are expected to remain
outstanding. This estimate is based primarily on the employee
position profile of option holders and the trading lock out
periods that result from the employees access to stock price
sensitive information.
|
|
|
Forfeiture rate
This is the estimated
percentage of options granted that are expected to be forfeited
or cancelled on an annual basis before becoming fully vested.
The Company estimates the forfeiture rate based on past turnover
data with further consideration given to the level of the
employees to whom the options were granted.
|
Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the
statement of cash flows. SFAS No. 123(R) requires the
cash flows resulting from the tax benefits of deductions in
excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows.
There were no excess tax benefits classified as a financing cash
inflow in the period ended September 30, 2006.
F-14
The following table illustrates the effect on net income (loss)
and net income (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation for the three years ended
December 31, 2003, 2004 and 2005 and for the nine months
ended September 30, 2005 and 2006. The reported and pro
forma net income (loss) and net income (loss) per share for the
nine month period ended September 30, 2006 are the same
because stock-based compensation expense is recorded under the
provisions of SFAS No. 123(R) for that period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
Nine months ended
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Net income, as reported
|
|
$
|
4,454
|
|
|
$
|
11,472
|
|
|
$
|
15,784
|
|
|
$
|
6,252
|
|
|
$
|
(3,336
|
)
|
Add: Stock-based compensation in
reported net income, net of taxes
|
|
|
|
|
|
|
2,801
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
Deduct: Total stock-based
compensation expense determined under the fair value based
method for all awards, net of taxes
|
|
|
(133
|
)
|
|
|
(3,185
|
)
|
|
|
(258
|
)
|
|
|
(161
|
)
|
|
|
(248
|
)
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
4,321
|
|
|
$
|
11,088
|
|
|
$
|
15,526
|
|
|
$
|
6,091
|
|
|
$
|
(3,336
|
)
|
|
|
|
|
|
|
Net income (loss) attributable to
common stockholders per common share basic
|
|
$
|
0.24
|
|
|
$
|
0.61
|
|
|
$
|
0.77
|
|
|
$
|
0.31
|
|
|
$
|
(0.15
|
)
|
Net income (loss) attributable to
common stockholders per common share diluted
|
|
$
|
0.22
|
|
|
$
|
0.56
|
|
|
$
|
0.69
|
|
|
$
|
0.28
|
|
|
$
|
(0.15
|
)
|
Pro forma net income (loss)
attributable to common stockholders per common share
basic
|
|
$
|
0.23
|
|
|
$
|
0.59
|
|
|
$
|
0.76
|
|
|
$
|
0.31
|
|
|
$
|
(0.15
|
)
|
Pro forma net income (loss)
attributable to common stockholders per common share
diluted
|
|
$
|
0.21
|
|
|
$
|
0.54
|
|
|
$
|
0.68
|
|
|
$
|
0.28
|
|
|
$
|
(0.15
|
)
|
|
|
Recent accounting
pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS
No. 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. Prior to
adoption, the Company will evaluate the impact of adopting SFAS
No. 157 on the financial statements.
In June 2006, the FASB issued FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, Accounting for
Income Taxes
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 requires that the Company recognize in its financial
statements, the impact of a tax position, if that position is
more likely than not of being sustained on audit, based on the
technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective for
F-15
fiscal years beginning after December 15, 2006, with the
cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The Company is
currently evaluating the impact of adopting FIN 48 on the
financial statements.
In March 2006, the FASB issued Statement No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140
(SFAS No. 156). SFAS No. 156 requires an
entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial
asset by entering into a servicing contract based on certain
conditions. The provisions of SFAS No. 156 are
effective for fiscal years beginning after September 15,
2006. The adoption of SFAS No. 156 will not have a
material impact on the Companys consolidated financial
statements.
In February 2006, the FASB issued Statement No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140
(SFAS No. 155).
SFAS No. 155 permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject
to the requirements of Statement No. 133, establishes a
requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are
not embedded derivatives and amends Statement No. 140 to
eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to
a beneficial interest other than another derivative financial
instrument. The provisions of SFAS No. 155 are
effective for fiscal years beginning after September 15,
2006. The adoption of SFAS No. 155 will not have a
material impact on the Companys consolidated financial
statements.
Reclassifications
Certain prior period amounts have been reclassified to conform
to the current period presentation.
ViVacs
GmbH
On July 14, 2006, Emergent International, Inc., a wholly
owned subsidiary of the Company incorporated in Delaware (EII),
completed the acquisition of ViVacs GmbH, a German limited
liability company (ViVacs), pursuant to the terms and conditions
of the Share Exchange Agreement dated July 14, 2006 by and
between EII and ViVacs. EII paid $150 in cash on the closing
date of the agreement and agreed to pay $50 on each of the first
and second anniversaries of the closing date. The acquisition
agreement also provides for a potential variable earn-out
purchase price of up to $220, based on future payments from
third party licensees of the technology. As of
September 30, 2006, the Company has not received any such
payments from third party licensees. Because ViVacs was a
development stage company that had not commenced its planned
principal operations, the transaction was accounted for as an
acquisition of assets rather than as a business combination and,
therefore, goodwill was not recorded.
Total purchase consideration consisted of:
|
|
|
|
|
|
|
|
|
|
|
Cash (including the present value
of future guaranteed cash payments of $100)
|
|
$
|
250
|
|
Direct acquisition costs
|
|
|
180
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
430
|
|
|
|
The assets acquired were accounted for in accordance with the
provisions of SFAS No. 141,
Business Combinations
(SFAS No. 141). All of the tangible and intangible
assets acquired and liabilities assumed of ViVacs were recorded
at their estimated fair market values on the acquisition date.
F-16
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
153
|
|
Property and equipment
|
|
|
97
|
|
Current liabilities
|
|
|
(297
|
)
|
|
|
|
|
|
Net liabilities acquired
|
|
|
47
|
|
In-process research and development
|
|
|
477
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
430
|
|
|
|
In connection with the transaction, the Company recorded a
charge of $477 for acquired research projects associated with
product candidates in development for which, at the acquisition
date, technological feasibility had not been established and,
for accounting purposes, no alternative future use existed.
Microscience
Limited
On June 23, 2005, Emergent Europe, Inc., a wholly owned
subsidiary of the Company incorporated in Delaware (EEI),
completed the acquisition of Microscience pursuant to the terms
and conditions of the Share Exchange Agreement dated
June 23, 2005 by and between EEI and Microscience Holdings
plc, a public limited liability company incorporated in England.
At the closing date, the Company, through EEI, issued
Microscience shareholders 3,636,801 shares of the
Companys Class A Common Stock in exchange for all of
the outstanding stock of Microscience. Shares of Class A
Common Stock of the Company were valued for financial statement
purposes at $7.42 per share based on a determination of the
estimated fair value by the Companys board of directors.
Because Microscience was a development stage company that had
not commenced its planned principal operations, the transaction
was accounted for as an acquisition of assets rather than as a
business combination and, therefore, goodwill was not recorded.
Total purchase consideration consisted of:
|
|
|
|
|
|
Fair value of common stock
|
|
$
|
27,001
|
|
Direct acquisition costs
|
|
|
1,194
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
28,195
|
|
|
|
The assets acquired were accounted for in accordance with the
provisions of SFAS No. 141. All of the tangible and
intangible assets acquired and liabilities assumed of
Microscience were recorded at their estimated fair market values
on the acquisition date.
The purchase price was allocated as follows:
|
|
|
|
|
|
Current assets
|
|
$
|
1,441
|
|
Property and equipment
|
|
|
863
|
|
Current liabilities
|
|
|
(684
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
1,620
|
|
In-process research and development
|
|
|
26,575
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
28,195
|
|
|
|
F-17
In connection with the transaction, the Company recorded a
charge of $26,575 for acquired research projects associated with
products in development for which, at the acquisition date,
technological feasibility had not been established and no
alternative future use existed.
Antex Biologics
Inc.
On May 31, 2003, BioPort completed the acquisition of
assets from Antex, a subsidiary of Antex Pharma Inc. (Pharma
and, together with Antex, Sellers), pursuant to the terms and
conditions of the Asset Purchase Agreement dated April 10,
2003 (the Purchase Agreement) by and among BioPort and Sellers.
Pursuant to the Purchase Agreement, BioPort acquired from
Sellers all of the assets and assumed certain liabilities for
cash of $3,400 and transaction costs of $394. The amount of
consideration was determined on the basis of arms length
negotiations between BioPort and Sellers. Because Antex was a
development stage company that had not commenced its planned
principal operations, the transaction was accounted for as an
acquisition of assets rather than as a business combination and,
therefore, goodwill was not recorded.
Total purchase consideration consisted of:
|
|
|
|
|
Purchase price
|
|
$
|
3,400
|
Direct acquisition costs
|
|
|
394
|
|
|
|
|
Total purchase consideration
|
|
$
|
3,794
|
|
|
The assets acquired were accounted for in accordance with the
provisions of SFAS No. 141. All of the tangible and
intangible assets acquired and liabilities assumed of Antex were
recorded at their estimated fair market value on the acquisition
date.
The purchase price was allocated as follows:
|
|
|
|
|
Current assets
|
|
$
|
279
|
Property and equipment
|
|
|
1,691
|
In-process research and
development consideration
|
|
|
1,824
|
|
|
|
|
Total purchase consideration
|
|
$
|
3,794
|
|
|
In connection with the transaction, the Company recorded a
charge of $1,824 for acquired research projects associated with
products in development for which, at the acquisition date,
technological feasibility had not been established and no
alternative future use existed.
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
Billed
|
|
$
|
14,865
|
|
$
|
1,112
|
|
$
|
3,166
|
Unbilled
|
|
|
3,772
|
|
|
1,418
|
|
|
107
|
|
|
|
|
|
|
Total
|
|
$
|
18,637
|
|
$
|
2,530
|
|
$
|
3,273
|
|
|
F-18
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
Raw materials and supplies
|
|
$
|
1,947
|
|
$
|
2,229
|
|
$
|
2,165
|
Work-in-process
|
|
|
6,674
|
|
|
9,547
|
|
|
24,195
|
Finished goods
|
|
|
4,632
|
|
|
4,665
|
|
|
1,708
|
|
|
|
|
|
|
Inventories
|
|
$
|
13,253
|
|
$
|
16,441
|
|
$
|
28,068
|
|
|
|
|
6.
|
Property, plant
and equipment
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Land and improvements
|
|
$
|
2,963
|
|
|
$
|
2,995
|
|
|
$
|
5,124
|
|
Buildings and leasehold
improvements
|
|
|
13,496
|
|
|
|
14,143
|
|
|
|
22,569
|
|
Furniture and equipment
|
|
|
10,563
|
|
|
|
12,520
|
|
|
|
14,597
|
|
Internal-use software
|
|
|
3,818
|
|
|
|
3,937
|
|
|
|
3,937
|
|
Construction in-progress
|
|
|
2,086
|
|
|
|
6,197
|
|
|
|
25,506
|
|
|
|
|
|
|
|
|
|
|
32,925
|
|
|
|
39,792
|
|
|
|
71,733
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(5,657
|
)
|
|
|
(9,147
|
)
|
|
|
(12,101
|
)
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
27,269
|
|
|
$
|
30,645
|
|
|
$
|
59,632
|
|
|
|
Depreciation and amortization expense was $1,214, $1,867 and
$3,549 for the years ended December 31, 2003, 2004 and
2005, respectively, and $2,495 and $3,265 for the nine months
ended September 30, 2005 and 2006, respectively. For the
years ended December 31, 2003, 2004 and 2005, depreciation
and amortization expense included approximately $0, $209 and
$1,257, respectively, related to internally developed software.
For the nine months ended September 30, 2005 and 2006,
depreciation and amortization expense included approximately
$943 and $943, respectively, related to internally developed
software.
In connection with the acquisition of Microscience in 2005 as
further described in Note 3 Acquisitions, the
Company acquired a facility lease deposit totaling $468. The
deposit remains in effect as of December 31, 2005 and
September 30, 2006.
F-19
|
|
8.
|
Other current
liabilities
|
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
Contract costs
|
|
$
|
3
|
|
$
|
445
|
|
$
|
1,948
|
Professional fees
|
|
|
1,462
|
|
|
1,390
|
|
|
1,056
|
Interest payable
|
|
|
71
|
|
|
146
|
|
|
259
|
Property taxes and other
|
|
|
357
|
|
|
628
|
|
|
838
|
|
|
|
|
|
|
|
|
$
|
1,893
|
|
$
|
2,609
|
|
$
|
4,101
|
|
|
|
|
9.
|
Long-term debt
and related party notes payable
|
The components of long term-debt and related party notes payable
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Term loan dated August 2006,
9.151%, due August 2011
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,000
|
|
Convertible Line of Credit dated
August 2006
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Term Loan dated October 2004;
6.625%, due October 2011
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Forgivable Loan dated October
2004; 3.0%, due March 2013
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
2,500
|
|
ERP Term Loan dated
August 2004; prime less 0.375%, due September 2007
|
|
|
2,280
|
|
|
|
1,760
|
|
|
|
1,280
|
|
Term Loan dated April 2006;
LIBOR plus 3%, due April 2011
|
|
|
|
|
|
|
|
|
|
|
8,428
|
|
Employee notes payable for stock
redemption; 6%, due 2006
|
|
|
947
|
|
|
|
537
|
|
|
|
63
|
|
Other
|
|
|
140
|
|
|
|
113
|
|
|
|
34
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
12,867
|
|
|
|
11,909
|
|
|
|
34,305
|
|
|
|
|
|
|
|
Less current portion of notes
payable
|
|
|
(1,046
|
)
|
|
|
(1,408
|
)
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
11,821
|
|
|
$
|
10,502
|
|
|
$
|
32,555
|
|
|
|
In August 2006, the Company entered into a term loan for $10,000
and a revolving credit loan for up to $5,000. Under the term
loan, the Company is required to make monthly principal payments
beginning in April 2007. A residual principal payment of
approximately $4,000 is due upon maturity in August 2011. At the
Companys request, the term loan is subject to an extension
term in the sole discretion of the lender for five additional
years until August 2016 for an extension fee of 1.00% of the
principal balance of the loan. If the term of the loan were
extended, the Company would be required to continue to make
monthly principal payments through maturity in August 2016 in
lieu of the residual principal payment otherwise due in August
2011. Interest is payable monthly and accrues at an annual rate
equal to LIBOR plus 3.75% (9.48% as of September 30, 2006).
Under the revolving credit loan, the Company is not required to
repay outstanding principal until October 2007. In October 2007,
the outstanding principal under the revolving credit loan will
convert to a term loan with required monthly principal payments
through maturity in August 2011. Interest is payable monthly and
accrues at an annual rate equal to LIBOR plus 3.75% (9.48% as of
September 30, 2006).
F-20
The Company also is required to pay a fee on a quarterly basis
equal to 0.50% of the average daily difference between $5,000
and the amount outstanding under the revolving credit loan.
The term loan and revolving credit loan are secured by
substantially all of Emergent BioDefense Operations
assets, other than accounts receivable under BioThrax supply
contracts with the DoD and HHS. The Company is required to
maintain on an annual basis a minimum tangible net worth of not
less than the sum of 85% of tangible net worth for the most
recently completed fiscal year plus 25% of current net operating
profit after taxes. In addition, the Company is required to
maintain on a quarterly basis a ratio of earnings before
interest, taxes, depreciation and amortization for the most
recent four quarters to the sum of current obligations under
capital leases and principal obligations and interest expenses
for borrowed money, in each case due and payable for the
following four quarters, of not less than 1.25 to 1.00.
In April 2006, the Company completed the acquisition of a
150,000 square foot facility in Frederick, Maryland for
$9,750. This facility was previously under a lease which
contained an option to purchase the facility. The Company paid
$1,250 in cash and financed the remaining balance with a bank
loan in the amount of $8,500. This loan requires monthly
principal and interest payments from May 2006 through April 2011
of $72 with a balloon payment for the remaining unpaid principal
and interest due in April 2011. The interest rate is a floating
rate based on the three month LIBOR plus 3% (8.37% as of
September 30, 2006). The loan is collateralized by the
150,000 square foot facility. The loan requires the Company
to comply with certain non-financial covenants.
In October 2004, the Company entered into a Secured Conditional
Loan with the Maryland Economic Development Assistance Fund for
$2.5 million. The proceeds of the loan were used to
reimburse the Company for eligible costs it incurred to purchase
a building in Frederick, Maryland. The loan is secured by a
$1,250 letter of credit and a security interest in the building.
The Company is required to pay an annual fee of 1% to maintain
the letter of credit. The borrowing bears interest at
3% per annum, and the term of the loan ends March 31,
2013. The principal and related accrued interest may be forgiven
if specified employment levels are achieved and maintained
through December 2012, at least $42,900 in project costs are
expended prior to December 2009 and the Company occupies the
building through December 2012. The loan requires the Company to
employ at least 280 full-time employees at the Companys
facilities in Frederick, Maryland as of December 31, 2009 and
maintain at least 280 full-time employees through December 31,
2012. If as of December 31, 2009, 2010, 2011 or 2012 the Company
employs fewer than 280 and more than 225 full-time employees at
the Companys facilities in Frederick, Maryland, then the
Company will be required to repay $9 of principal plus accrued
interest for each position not filled below the target level of
280 employees. If as of December 31, 2009, 2010, 2011 or 2012
the Company employs fewer than 225 full-time employees at the
Companys facilities in Frederick, Maryland, then the
Company will be required to repay the entire outstanding
principal amount of the loan plus accrued interest. This loan is
guaranteed by all of the subsidiaries of the Company.
In connection with the purchase of the building in Frederick,
Maryland discussed above, the Company entered into a loan
agreement for $7,000 with a bank to finance the remaining
portion of the purchase price. The borrowing accrues interest at
6.625% per annum through October 2006. The Company is
required to make interest only payments through that date.
Beginning in November 2006, the Company will begin to make
monthly payments of $62, based upon a 15 year amortization
schedule. In November 2009, the monthly payments will be
adjusted based upon a 12 year amortization schedule. All
unpaid principal and interest is due in full in October 2011.
The Company is required to maintain certain financial and
non-financial covenants including a minimum tangible net
worth of not less than $5,000 and a debt coverage ratio of not
less than 1.1 to 1. This loan is guaranteed by all of the
subsidiaries of the Company.
F-21
During 2004, the Company implemented an Enterprise Resource
Planning (ERP) system. The Company financed $2,280 of the costs
through the issuance of a term loan. The loan bears interest at
prime less 0.375% (8.63% as of September 30, 2006) and
is due in September 2007. Monthly payments escalate from $40 to
$106 over the term. The ERP system provides security for the
loan.
In 2004, the Company issued notes as consideration for the
repurchase of outstanding class B common stock of BioPort.
These notes were issued to various current and past employees
who were issued equity as a result of earlier stock option
exercises. Amounts are payable in annual installments, through
2006, and bear interest at 6%.
Scheduled principal repayments and maturities on long-term debt
as of December 31, 2005 are as follows:
|
|
|
|
|
2006
|
|
$
|
1,408
|
2007
|
|
|
1,302
|
2008
|
|
|
317
|
2009
|
|
|
2,838
|
2010 and thereafter
|
|
|
6,045
|
|
|
|
|
|
|
$
|
11,910
|
|
|
Line of
credit
On April 1, 2005, the Company, through Emergent BioDefense
Operations, formerly BioPort, obtained a line of credit that
provides for borrowings of up to $10,000. The line of credit is
scheduled to expire on November 15, 2006. The line of
credit is secured by accounts receivable under our DOD and HHS
contracts and bears interest at the prime rate less 0.375%
(8.63% as of September 30, 2006). Emergent BioDefense
Operations is subjected to certain covenants, including
maintenance of specified equity levels on a quarterly basis.
Emergent BioDefense Operations is currently in compliance with
those covenants. There was $2,168 outstanding under this line of
credit as of September 30, 2006. No borrowings were
outstanding under this line of credit as of December 31,
2005.
Preferred
stock
The Company is authorized to issue up to 3,000,000 shares
of preferred stock, $0.001 par value per share (Preferred
Stock). Any preferred stock issued may have dividend rates,
voting rights, conversion privileges, redemption
characteristics, and sinking fund requirements as approved by
the Companys board of directors. As of September 30,
2006, no preferred stock has been issued.
Common
stock
The Company currently has two classes of common stock authorized
and outstanding: class A common stock, $0.001 par
value per share (Class A Common Stock), and class B
common stock, $0.01 par value per share (Class B
Common Stock). The Company is authorized to issue up to
100,000,000 shares of the Class A Common Stock and
2,000,000 shares of the Class B Common Stock. Holders
of Class A Common Stock are entitled to one vote for each
share of Class A Common Stock held on all matters as may be
provided by law. Holders of Class B Common Stock are not
entitled to vote the shares of Class B Common Stock, except
as otherwise required by law.
Holders of Class A Common Stock and Class B Common
Stock are entitled to receive ratably dividends payable as and
when declared by the Companys board of directors. On
June 15, 2005, the Companys
F-22
board of directors declared a special cash dividend to the
holders of outstanding shares of Class A Common Stock and
Class B Common Stock in an aggregate amount of $5,400. The
Companys board of directors declared this special dividend
in order to distribute the net proceeds of a payment received as
a result of the settlement of litigation initiated in 2002 by
the Company against Elan Pharmaceuticals, Inc., Athena
Neurosciences, Inc. and Solstice Neurosciences, Inc. in an
effort to clarify intellectual property rights, including the
recovery of royalties and other costs and fees, to which the
Company believed it was entitled under a series of agreements
regarding the development of botulinum toxin products. The
Company paid the special cash dividend on July 13, 2005 to
stockholders of record as of June 15, 2005. No regular
dividends have been declared or paid.
Each share of Class B Common Stock will automatically
convert into one share of Class A Common Stock immediately
prior to the closing of the first underwritten sale of the
Companys securities pursuant to an effective registration
statement under the Securities Act of 1933, as amended.
Following conversion, the Class B Common Stock will be
eliminated and no further shares may be issued.
Prior to the formation of the Company, BioPort issued
class A no-par voting common stock (BioPort Class A
Common Stock) and class B no-par non-voting common stock
(BioPort Class B Common Stock) to fund operations. BioPort,
at its sole discretion, elected to redeem 71,927 shares of
BioPort Class B Common Stock for $200 during the year ended
December 31, 2003.
In June 2004, in the Reorganization, the Company issued
18,666,479 shares of Class A Common Stock in exchange for
18,017,994 shares of BioPort Class A Common Stock and
648,485 shares of BioPort Class B Common Stock held by
BioPharm, L.L.C. The Company repurchased and retired the
remaining issued and outstanding shares of BioPort Class B
Common Stock from former employees. Approximately
544,000 BioPort shares were repurchased at $2.74 per
share and approximately 28,000 BioPort shares were
repurchased at $4.12 per share. Shares were repurchased for
$665 in cash and the issuance of $947 in notes payable. See
Note 9 Long-term debt and related party notes
payable, for additional information related to the former
employee notes payable.
During the year ended December 31, 2005, the Company
repurchased 112,168 shares of Class B Common Stock
with an original weighted average cost of $0.26 per share, for
$337.
Stock
options
As of September 30, 2006, the Company has one stock-based
employee compensation plan, the Emergent Plan, under which the
Company has granted options to purchase shares of Class B
Common Stock.
Prior to the Reorganization, BioPort had a separate stock option
plan (BioPort plan) under which options were granted to purchase
BioPort Class B Common Stock. The exercise price and
vesting schedule for options were determined by BioPorts
board of directors, or a committee thereof, which was
established to administer the BioPort plan options.
As of June 30, 2004, options to purchase
1,948,892 shares of BioPort Class B Common Stock were
outstanding under the BioPort plan. Pursuant to the
Reorganization, all outstanding BioPort plan options were
assumed by Emergent and option holders were granted replacement
stock options to purchase an equal number of shares of
Class B Common Stock of Emergent. The exercise period for
the replacement options was extended to June 30, 2007. The
BioPort options were scheduled to expire on June 30, 2004.
In connection with the Reorganization, the Company recorded
stock-based compensation expense as a result of the issuance of
the stock options to purchase Class B Common Stock. Based
upon the guidance in APB No. 25, because the stock options
granted for Class B Common Stock provided for an extended
term over that of the cancelled BioPort plan options, a new
measurement date was created and the Company recorded as
stock-based compensation expense the excess of the intrinsic
value of the
F-23
modified options over the intrinsic value of the BioPort plan
options when originally issued. This resulted in stock-based
compensation expense of $2,801, net of taxes, for the year ended
December 31, 2004.
Outside of the reorganization, options to purchase an additional
322,235 shares of Class B common stock of Emergent
under the Emergent Plan were granted during the year ended
December 31, 2004.
The terms and conditions of stock options (including price,
vesting schedule, term and number of shares) under the Emergent
Plan are determined by the Companys compensation
committee, which administers the Emergent Plan.
Each option granted under the Emergent Plan becomes exercisable
as specified in the relevant option agreement, and no option can
be exercised after ten years from the date of grant.
The Emergent Plan has both incentive and non-qualified stock
option features. Under the plan, the Company may grant options
totaling up to 3,596,375 shares of Class B Common
Stock. The exercise price of each incentive option must be not
less than 100% of the fair market value of the shares on the
date of grant, except in the case of the incentive stock options
being granted to a 10% stockholder, in which case the exercise
price must be not less than 110% of the fair market value of the
shares on the date of grant.
The following is a summary of stock option plan activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioPort
Plan
|
|
Emergent
Plan
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
|
average
|
|
Aggregate
|
|
|
Number
|
|
|
exercise
|
|
Number
|
|
|
exercise
|
|
intrinsic
|
|
|
of
shares
|
|
|
price
|
|
of
shares
|
|
|
price
|
|
value
|
|
|
Outstanding at December 31,
2002
|
|
|
2,311,007
|
|
|
$
|
0.09
|
|
|
|
|
|
$
|
|
|
|
|
Granted
|
|
|
297,779
|
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(439,264
|
)
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(222,212
|
)
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
1,947,310
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2003
|
|
|
1,319,714
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
136,348
|
|
|
|
1.08
|
|
|
810,866
|
|
|
|
2.74
|
|
|
|
Exercised
|
|
|
(122,584
|
)
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Converted from BioPort to Emergent
Plan
|
|
|
(1,948,892
|
)
|
|
|
0.43
|
|
|
1,948,892
|
|
|
|
0.43
|
|
|
|
Forfeited
|
|
|
(12,182
|
)
|
|
|
0.47
|
|
|
(166,250
|
)
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
|
|
|
|
|
|
|
2,593,508
|
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2004
|
|
|
|
|
|
|
|
|
|
2,475,108
|
|
|
|
1.03
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
805,579
|
|
|
|
3.83
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
(133,451
|
)
|
|
|
0.32
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
(123,807
|
)
|
|
|
2.63
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
|
|
|
|
|
|
|
3,141,829
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
F-24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioPort
Plan
|
|
Emergent
Plan
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
average
|
|
Aggregate
|
|
|
Number
|
|
exercise
|
|
Number
|
|
|
exercise
|
|
intrinsic
|
|
|
of
shares
|
|
price
|
|
of
shares
|
|
|
price
|
|
value
|
|
|
Exercisable at December 31,
2005
|
|
|
|
|
|
|
|
|
2,452,483
|
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
Granted (unaudited)
|
|
|
|
|
|
|
|
|
258,933
|
|
|
|
11.36
|
|
|
|
Exercised (unaudited)
|
|
|
|
|
|
|
|
|
(65,057
|
)
|
|
|
0.65
|
|
|
|
Forfeited (unaudited)
|
|
|
|
|
|
|
|
|
(194,702
|
)
|
|
|
2.62
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006 (unaudited)
|
|
|
|
|
|
|
|
|
3,141,003
|
|
|
$
|
2.54
|
|
$
|
39,148,022
|
|
|
|
|
|
|
Exercisable at September 30,
2006 (unaudited)
|
|
|
|
|
|
|
|
|
2,334,176
|
|
|
$
|
1.33
|
|
$
|
31,916,054
|
|
The weighted average remaining contractual term of options
outstanding and exercisable as of December 31, 2005 and
September 30, 2006 was 2.46 years and 1.82 years,
and 2.12 years and 1.26 years, respectively.
The weighted average grant date fair value of options granted
during the years ended December 31, 2003, 2004 and 2005 was
$0.68, $0.95 and $1.37, respectively, and $4.28 for the nine
months ended September 30, 2006. The total intrinsic value
of options exercised during the years ended December 31,
2003, 2004 and 2005 and during the nine months ended
September 30, 2006 was $1,165, $325 and $563 and $518,
respectively.
At December 31, 2005, stock options outstanding and vested
by exercise price were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
Options
exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
remaining
|
|
average
|
|
|
|
average
|
Range
of
|
|
Number
|
|
contractual
|
|
exercise
|
|
Number
|
|
exercise
|
exercise
prices
|
|
outstanding
|
|
life
(years)
|
|
price
|
|
exercisable
|
|
price
|
|
|
$0.09
|
|
|
986,413
|
|
|
1.50
|
|
$
|
0.09
|
|
|
986,413
|
|
$
|
0.09
|
0.10
|
|
|
467,528
|
|
|
1.50
|
|
|
0.10
|
|
|
467,528
|
|
|
0.10
|
1.54
|
|
|
46,298
|
|
|
1.50
|
|
|
1.54
|
|
|
46,298
|
|
|
1.54
|
2.74
|
|
|
1,152,489
|
|
|
2.69
|
|
|
2.74
|
|
|
802,637
|
|
|
2.74
|
3.50
|
|
|
388,406
|
|
|
4.96
|
|
|
3.50
|
|
|
138,099
|
|
|
3.50
|
8.52
|
|
|
100,695
|
|
|
4.65
|
|
|
8.52
|
|
|
11,508
|
|
|
8.52
|
|
|
|
|
|
|
|
|
|
3,141,829
|
|
|
2.46
|
|
$
|
1.78
|
|
|
2,452,483
|
|
$
|
1.22
|
|
|
Options granted from October 1, 2005 through
September 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
|
Number of
|
|
average
|
|
average
|
|
average
|
|
|
options
|
|
exercise
|
|
fair value of
|
|
intrinsic
|
Month
of grant
|
|
granted
|
|
price
|
|
common stock
|
|
value(1)
|
|
|
November 2005
|
|
|
28,770
|
|
|
8.52
|
|
|
8.52
|
|
|
|
June 2006
|
|
|
165,430
|
|
|
10.28
|
|
|
10.28
|
|
|
|
September 2006
|
|
|
93,503
|
|
|
13.26
|
|
|
13.26
|
|
|
|
|
|
|
|
(1)
|
|
Intrinsic value reflects the amount by which the value of the
shares as of the grant date exceeds the exercise price of the
options.
|
F-25
Significant components of the provision for income taxes
attributable to operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
|
|
|
|
Year ended
December 31,
|
|
|
ended
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,717
|
|
|
$
|
5,547
|
|
|
$
|
16,093
|
|
|
$
|
12,222
|
|
|
$
|
(3,650
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
200
|
|
|
|
100
|
|
|
|
|
|
|
|
Total current
|
|
|
1,717
|
|
|
|
5,547
|
|
|
|
16,293
|
|
|
|
12,422
|
|
|
|
(3,550
|
)
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(416
|
)
|
|
|
(372
|
)
|
|
|
(9,769
|
)
|
|
|
(9,177
|
)
|
|
|
833
|
|
State
|
|
|
(51
|
)
|
|
|
(46
|
)
|
|
|
(1,199
|
)
|
|
|
(1,136
|
)
|
|
|
100
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(467
|
)
|
|
|
(418
|
)
|
|
|
(10,968
|
)
|
|
|
(10,313
|
)
|
|
|
933
|
|
|
|
|
|
|
|
Total provision (benefit) for
income taxes
|
|
$
|
1,250
|
|
|
$
|
5,129
|
|
|
$
|
5,325
|
|
|
$
|
2,109
|
|
|
$
|
(2,617
|
)
|
|
The Companys net deferred tax asset consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
666
|
|
|
$
|
2,242
|
|
|
$
|
4,180
|
|
Purchased in-process research and
development
|
|
|
645
|
|
|
|
721
|
|
|
|
703
|
|
Stock compensation
|
|
|
1,457
|
|
|
|
1,696
|
|
|
|
1,393
|
|
Foreign deferrals
|
|
|
|
|
|
|
27,797
|
|
|
|
30,343
|
|
Other
|
|
|
883
|
|
|
|
1,219
|
|
|
|
1,245
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
3,651
|
|
|
|
33,675
|
|
|
|
37,864
|
|
Fixed assets
|
|
|
(1,859
|
)
|
|
|
(1,387
|
)
|
|
|
(941
|
)
|
Other
|
|
|
(124
|
)
|
|
|
(393
|
)
|
|
|
(673
|
)
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
(1,983
|
)
|
|
|
(1,780
|
)
|
|
|
(1,614
|
)
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(666
|
)
|
|
|
(19,925
|
)
|
|
|
(25,213
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,002
|
|
|
$
|
11,970
|
|
|
$
|
11,037
|
|
|
Net operating loss carryforwards consist of $92 million for
state jurisdictions and $70 million for foreign jurisdictions.
The state net operating loss carryforwards will begin to expire
in 2018. The foreign net operating loss carryforwards will have
an indefinite life unless the foreign entities have a change in
the nature or conduct of the business in the three years
following a change in ownership. The use of the Companys
net operating loss carryforwards may be restricted due to
changes in Company ownership. The Company paid $4,280, $0, and
$17,985 in income taxes in 2003, 2004, and 2005, respectively.
For the nine months ended September 30, 2005 and 2006,
the Company paid $3,335 and $1,470 in income taxes, respectively.
F-26
The provision for income taxes differs from the amount of taxes
determined by applying the U.S. federal statutory rate to
loss before provision for income taxes as a result of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
Nine months ended
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Federal tax at statutory rates
|
|
$
|
1,996
|
|
|
$
|
5,863
|
|
|
$
|
7,388
|
|
|
$
|
2,926
|
|
|
|
(1,794
|
)
|
State taxes, net of federal benefit
|
|
|
(230
|
)
|
|
|
(714
|
)
|
|
|
(2,329
|
)
|
|
|
(1,864
|
)
|
|
|
(962
|
)
|
Impact of foreign operations
|
|
|
|
|
|
|
|
|
|
|
(17,982
|
)
|
|
|
(17,368
|
)
|
|
|
(3,599
|
)
|
Change in valuation allowance
|
|
|
187
|
|
|
|
479
|
|
|
|
19,259
|
|
|
|
17,712
|
|
|
|
5,288
|
|
Tax credits
|
|
|
(441
|
)
|
|
|
(492
|
)
|
|
|
(474
|
)
|
|
|
(474
|
)
|
|
|
|
|
Other differences
|
|
|
(255
|
)
|
|
|
11
|
|
|
|
(211
|
)
|
|
|
1,198
|
|
|
|
(1,840
|
)
|
Permanent differences
|
|
|
(7
|
)
|
|
|
(18
|
)
|
|
|
(326
|
)
|
|
|
(21
|
)
|
|
|
290
|
|
|
|
|
|
|
|
Federal tax at statutory rates
|
|
$
|
1,250
|
|
|
$
|
5,129
|
|
|
$
|
5,325
|
|
|
$
|
2,109
|
|
|
$
|
(2,617
|
)
|
|
The estimated effective annual tax rate for the nine months
ended September 30, 2005 and 2006 was 25% and 44%,
respectively. The increase in the estimated rate is due
primarily to an increase in the valuation allowance related to
estimated foreign and state net operating losses.
The Company is the subject of an ongoing federal income tax
audit for the tax year ended December 31, 2004. The
financial statement impact of the audit has been estimated at
approximately $500. This amount has been accrued as of
September 30, 2006.
During 1999, the Company established a defined contribution
savings plan under Section 401(k) of the Internal Revenue
Code. The 401(k) Plan covers substantially all employees. Under
the 401(k) Plan, employees may make elective salary deferrals.
The Company provides for matching of qualified deferrals up to
50% of the first 6% of the employees salary. During the
years ended December 31, 2003, 2004 and 2005, the Company
made matching contributions of approximately $182, $452 and
$520, respectively. During the nine months ended
September 30, 2005 and 2006, the Company made matching
contributions of approximately $384 and $431, respectively.
|
|
13.
|
Commitments and
settlement gains
|
Leases
The Company leases laboratory and office facilities, office
equipment and vehicles under various operating lease agreements.
The Company leases office and laboratory space in Gaithersburg,
Maryland under a noncancelable operating lease that contains a
3% annual escalation and expires on November 30, 2008. For
the years ended December 31, 2003, 2004 and 2005 and the
nine months ended September 30, 2005 and 2006, total
rent expense was $890, $1,334 and $2,526 and $1,834 and $1,428,
respectively.
Future minimum payments under operating lease obligations as of
December 31, 2005 are as follows:
|
|
|
|
|
2006
|
|
$
|
1,689
|
2007
|
|
|
1,249
|
2008
|
|
|
1,188
|
2009
|
|
|
56
|
|
|
|
|
Total minimum lease payments
|
|
$
|
4,182
|
|
In July 2006, the Company entered into a lease agreement for
approximately 23,000 square feet of office space in Rockville,
Maryland. Annual rent begins at $600 per year and escalates at
approximately
F-27
3% per year over the ten year term of the lease. The Company has
a five year renewal option at the end of the initial term.
Vendor
contracts
In accordance with a recently signed research contract, the
Company is committed to spending a minimum of $200 in research
and development activities by September 2007. To date, the
Company has incurred minimal expenditures under this contract.
Litigation
In June 2002, the Company initiated a lawsuit against Élan
Pharmaceuticals and related entities in an effort to clarify
intellectual property rights, including the recovery of
royalties and other costs and fees, to which the Company
believed it was entitled under a set of 1991 agreements and to
clarify intellectual property rights associated with those
agreements. The Company sought damages, injunctive relief and
declaratory relief. On June 27, 2005, the Company obtained
a settlement pursuant to which Élan and related entities
agreed to pay the Company $10,000. Payment of such settlement
was received by the Company in July 2005. The agreement also
clarified the parties intellectual property rights. Upon
receipt of the settlement from Élan Pharmaceuticals and
related entities, the Company distributed a net settlement
amount (total proceeds from the settlement less reserves for
applicable federal and state income taxes, legal expenses
related to the suit and other miscellaneous expenses) of $5,400
to all Company stockholders of record as of June 15, 2005.
In 1998, the Company recorded obligations related to the initial
purchase agreement of Michigan Biologic Products Institute of
$10,119. During 2004, the Company settled its entire remaining
purchase obligations to the State of Michigan for $6,300,
resulting in a gain of $3,819, which is reflected as a component
of operations on the accompanying statement of operations.
From time to time, the Company is involved in product liability
claims and other litigation considered normal in the nature of
its business. The Company does not believe that any such
proceedings would have a material, adverse effect on the results
of its operations.
14. Related
party transactions
Simba LLC, a Maryland based limited liability company 100% owned
by the Companys Chief Executive Officer and his wife,
provides chartered air transportation. Simba offers its services
to the Company on a discount from Simbas normal commercial
rate. For the years ended December 31, 2003, 2004 and 2005
and the nine months ended September 30, 2005 and 2006, the
Company paid approximately $0, $32 and $34 and $34 and $13,
respectively, for transportation on an as needed basis for
business purposes. As of May 2006, this arrangement has been
terminated.
The Company has entered into marketing and sales contracts with
family members of the Chief Executive Officer to market and sell
BioThrax in certain international territories if certain
conditions are met. A consulting arrangement with the Chief
Executive Officers sister requires a payment of 4% of net
sales, not to exceed $2.00 per dose, under the agreement. A
marketing arrangement with an entity affiliated with the Chief
Executive Officer and his family requires a payment of 40% of
gross sales in countries in the Middle East and North Africa,
except Israel. No royalty payments under these agreements have
been triggered for the years ended December 31, 2003, 2004
and 2005 and the nine months ended September 30, 2005 and
2006. The arrangement with the Chief Executive Officers
sister has been terminated.
For the years ended December 31, 2003, 2004 and 2005 and
the nine months ended September 30, 2005 and 2006, the
Company paid approximately $116, $494 and $794, and $630 and
$370, respectively, in consulting and lease and transportation
arrangements with various persons or entities affiliated with
the Chief Executive Officer or two members of the board of
directors. There was no
F-28
accounts payable balance for these services at September 30,
2006. The Company currently has an agreement with a director to
perform corporate strategic issues consultation and directed
project support to the marketing and communications group and an
agreement with East West Resources Corporation, a company owned
by the Chief Executive Officer, to provide transportation and
logistical support.
The Company operates in two business segments: biodefense and
commercial. In the biodefense business, the Company develops and
commercializes products for use against biological agents that
are potential weapons of bioterrorism. Revenues in this segment
relate to the Companys FDA approved product, BioThrax. In
the commercial business, the Company develops products for use
against infectious diseases with significant unmet or
underserved medical needs. Revenues in this segment consist
primarily of development and grant revenues received under
collaboration and grant arrangements. The all other segment
relates to the general operating costs of the business and
includes costs of the centralized services departments, which
are not allocated to the other segments. The assets in this
segment consist of cash and fixed assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable
segments
|
|
|
|
Biodefense
|
|
Commercial
|
|
|
All
other
|
|
|
Total
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
128,219
|
|
$
|
2,469
|
|
|
$
|
|
|
|
$
|
130,688
|
|
Research and development
|
|
|
10,327
|
|
|
6,962
|
|
|
|
1,092
|
|
|
|
18,381
|
|
Interest revenue
|
|
|
|
|
|
|
|
|
|
485
|
|
|
|
485
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
(767
|
)
|
|
|
(767
|
)
|
Depreciation and amortization
|
|
|
2,911
|
|
|
411
|
|
|
|
226
|
|
|
|
3,548
|
|
Net income (loss)
|
|
|
58,632
|
|
|
(40,325
|
)
|
|
|
(2,523
|
)
|
|
|
15,784
|
|
Assets
|
|
|
40,502
|
|
|
5,489
|
|
|
|
54,341
|
|
|
|
100,332
|
|
Expenditures for long-lived assets
|
|
$
|
3,286
|
|
$
|
3,052
|
|
|
$
|
194
|
|
|
$
|
6,532
|
|
Year Ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
82,585
|
|
$
|
909
|
|
|
$
|
|
|
|
$
|
83,494
|
|
Research and development
|
|
|
6,279
|
|
|
1,136
|
|
|
|
2,702
|
|
|
|
10,117
|
|
Interest revenue
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
65
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
(241
|
)
|
|
|
(241
|
)
|
Depreciation and amortization
|
|
|
1,685
|
|
|
169
|
|
|
|
10
|
|
|
|
1,867
|
|
Net income (loss)
|
|
|
21,776
|
|
|
(5,428
|
)
|
|
|
(4,876
|
)
|
|
|
11,472
|
|
Assets
|
|
|
51,626
|
|
|
3,491
|
|
|
|
13,939
|
|
|
|
69,056
|
|
Expenditures for long-lived assets
|
|
$
|
8,320
|
|
$
|
668
|
|
|
$
|
8,084
|
|
|
$
|
17,072
|
|
|
F-29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable
segments
|
|
|
|
Biodefense
|
|
Commercial
|
|
|
All
other
|
|
|
Total
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
55,536
|
|
$
|
233
|
|
|
$
|
|
|
|
$
|
55,769
|
|
Research and development
|
|
|
4,352
|
|
|
477
|
|
|
|
1,498
|
|
|
|
6,327
|
|
Interest revenue
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
100
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
(293
|
)
|
Depreciation and amortization
|
|
|
1,153
|
|
|
61
|
|
|
|
|
|
|
|
1,214
|
|
Net income (loss)
|
|
|
6,106
|
|
|
(1,459
|
)
|
|
|
(193
|
)
|
|
|
(4,454
|
)
|
Asset
|
|
|
28,266
|
|
|
2,462
|
|
|
|
7,119
|
|
|
|
37,847
|
|
Expenditures for long-lived assets
|
|
$
|
4,020
|
|
$
|
103
|
|
|
$
|
|
|
|
$
|
4,123
|
|
|
|
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in
Note 2 Summary of significant accounting
policies. There are no inter-segment transactions.
|
|
16.
|
Quarterly
financial data (unaudited)
|
Quarterly financial information for the years ended
December 31, 2005 and 2004 is presented in the following
tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
March 31
|
|
June 30
|
|
|
September 30
|
|
December 31
|
|
|
Fiscal year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,261
|
|
$
|
44,058
|
|
|
$
|
27,581
|
|
$
|
43,788
|
Income (loss) from operations
|
|
|
425
|
|
|
3,699
|
|
|
|
4,498
|
|
|
12,714
|
Net income (loss)
|
|
|
225
|
|
|
2,616
|
|
|
|
3,410
|
|
|
9,533
|
Net income (loss) per share, basic
|
|
|
0.01
|
|
|
0.14
|
|
|
|
0.15
|
|
|
0.43
|
Net income (loss) per share,
diluted
|
|
|
0.01
|
|
|
0.12
|
|
|
|
0.13
|
|
|
0.38
|
Fiscal year 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,360
|
|
$
|
13,044
|
|
|
$
|
22,241
|
|
$
|
27,848
|
Income (loss) from operations
|
|
|
3,758
|
|
|
(7,632
|
)
|
|
|
8,063
|
|
|
12,582
|
Net income (loss)
|
|
|
2,582
|
|
|
(5,271
|
)
|
|
|
5,580
|
|
|
8,560
|
Net income (loss) per share, basic
|
|
|
0.14
|
|
|
(0.27
|
)
|
|
|
0.30
|
|
|
0.46
|
Net income (loss) per share,
diluted
|
|
|
0.13
|
|
|
(0.27
|
)
|
|
|
0.27
|
|
|
0.41
|
|
|
On September 20, 2006, the Companys board of
directors recommended to the stockholders of the Company an
amendment of the Companys amended and restated certificate
of incorporation, which the stockholders approved on October 27,
2006, that, among other things, reclassifies the Class A
Common Stock as common stock, $0.001 par value per share (Common
Stock), increases the number of authorized shares of Common
Stock to 100,000,000 shares and adjusts the par value of
the Preferred Stock from $0.01 par value per share to $0.001 par
value per share. The amendment became effective on October 27,
2006. On September 20, 2006, the Companys board of
directors also authorized the pricing committee of the board of
directors to effect a stock split of both the Common Stock, in
the form of a dividend of shares of Common Stock, and the
Class B Common Stock, in the form of a
F-30
dividend of shares of Class B Common Stock. The pricing
committee subsequently declared a 2.8771-for-one stock split of
the Common Stock and the Class B Common Stock effective as
of October 27, 2006. The par values, the number of
authorized shares and all share and per share amounts in the
consolidated financial statements have been retroactively
adjusted to give effect to the filing of the certificate of
amendment of the Companys amended and restated certificate
of incorporation and the stock split. The consolidated financial
statements do not reflect the reclassification of the
Class A Common Stock as Common Stock, other than the
related adjustment to par value and the increase in the number
of authorized shares.
F-31
Emergent Product
Development UK Limited
Report of Independent Auditors
The Board of Directors and Stockholders
Emergent Product Development UK Limited
We have audited the accompanying profit and loss account and
statement of cash flows of Emergent Product Development UK
Limited for each of the two years in the period ended
December 31, 2004. These financial statements are the
responsibility of the companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit
of the companys internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of the
operations and the cash flows of Emergent Product Development UK
Limited for each of the two years in the period ended
December 31, 2004 in conformity with accounting principles
generally accepted in the United Kingdom which differ in certain
respects from those generally accepted in the United States (see
Note 17 of Notes to the financial statements).
/s/ Ernst & Young LLP
London, England
October 24, 2006
F-32
Emergent Product
Development UK Limited
Profit and loss account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended December 31,
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
Notes
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Turnover and gross
profit
|
|
|
3
|
|
|
|
93
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development costs
|
|
|
|
|
|
|
10,337
|
|
|
|
9,601
|
|
Other costs
|
|
|
|
|
|
|
800
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
|
|
|
|
11,137
|
|
|
|
10,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
(11,044
|
)
|
|
|
(10,507
|
)
|
Interest receivable
|
|
|
5
|
|
|
|
144
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on ordinary activities
before taxation
|
|
|
3
|
|
|
|
(10,900
|
)
|
|
|
(10,376
|
)
|
Taxation on loss on ordinary
activities
|
|
|
7
|
|
|
|
1,173
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the financial
year
|
|
|
9
|
|
|
|
(9,727
|
)
|
|
|
(9,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All results are in respect of continuing operations. There were
no recognised gains and losses other than for the loss for the
year of £9,120,000 (2003: £9,727,000).
A summary of the significant adjustments to loss for the
financial year that would be required had United States
generally accepted accounting principles been applied instead of
those generally accepted in the United Kingdom, is set out in
Note 17 of Notes to the Financial Statements.
The accompanying notes are an integral part of this profit
and loss account.
F-33
Emergent Product
Development UK Limited
Statement of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended December 31,
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
Notes
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Net cash outflow from
operating activities
|
|
|
10
|
|
|
|
(11,111
|
)
|
|
|
(8,329
|
)
|
Returns on investments and
servicing of finance
|
|
|
11
|
|
|
|
144
|
|
|
|
131
|
|
Taxation
|
|
|
11
|
|
|
|
949
|
|
|
|
1,124
|
|
Capital expenditure and financial
investment
|
|
|
11
|
|
|
|
(244
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow before
management of liquid resources and financing
|
|
|
|
|
|
|
(10,262
|
)
|
|
|
(7,234
|
)
|
Management of liquid resources
|
|
|
11
|
|
|
|
(3,200
|
)
|
|
|
1,700
|
|
Financing
|
|
|
11
|
|
|
|
6,000
|
|
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in
cash
|
|
|
12
|
|
|
|
(7,462
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant differences between the statement of cash flows
presented above and that required under United States generally
accepted accounting principles are described in Note 17 of
Notes to the Financial Statements.
The accompanying notes are an integral part of this statement
of cash flows.
F-34
Emergent Product
Development UK Limited
Notes to the financial statements
The companys principal activity is the research and
development of novel vaccines to combat infectious diseases. The
companys scientific platforms offer the potential both to
identify genes implicated in causing infectious diseases and to
target and develop novel vaccines and anti-microbial compounds
for those diseases.
Accounting
convention
The financial statements are prepared under the historical cost
convention and in accordance with United Kingdom accounting
standards.
Group
reorganisation
On June 4, 2004, Microscience Investments Limited (formerly
Microscience Holdings plc) acquired 100% of the entire share
capital (and all of the voting rights) of Emergent Product
Development UK Limited (formerly Microscience Limited) in an
exchange of shares, which resulted in the former shareholders of
Emergent Product Development UK Limited holding the same
proportion of the issued share capital of Microscience
Investments Limited as they had held in Emergent Product
Development UK Limited.
Basis of
preparing the financial statements going
concern
The financial statements have been prepared on a going concern
basis, which assumes that the company will continue in
operational existence for the foreseeable future. During the
year ended December 31, 2004, the company incurred a loss
of £9,120,000 (2003: loss £9,727,000).
The validity of the going concern assumption depends on
continued financial support from the ultimate parent company,
Microscience Investments Limited, up to June 23, 2005, and
from Emergent BioSolutions Inc. from June 24, 2005.
To fund its continued trading since December 31, 2004, the
company obtained working capital funding from Microscience
Investments Limited until June 23, 2005. On June 24,
2005, the entire working capital funding balance of
£3,281,000 with Microscience Investments Limited was repaid
via the issue of 5,553,603 ordinary shares of 5p each. On the
same date, the entire share capital of the company was acquired
by Emergent Europe Inc., a wholly owned subsidiary of Emergent
BioSolutions Inc. Since that date, the company has obtained
working capital funding from Emergent BioSolutions Inc.,
together with confirmation that adequate funding will be made
available to enable the company to discharge its liabilities as
they fall due. With this support in place, the directors believe
that it is appropriate for the financial statements to be
prepared on a going concern basis.
Related parties
transactions
The company was a wholly owned subsidiary of Microscience
Investments Limited until June 23, 2005, the consolidated
financial statements of which are publicly available for the two
years ended December 31, 2004. Accordingly, the company has
taken advantage of the exemption in FRS 8 from disclosing
transactions with members or investees of the Microscience group.
Revenue
recognition
Revenues are earned from collaborative research agreements and
licence fee agreements. Licence fees are recognised up-front
where the fee is non-refundable and there are no ongoing
obligations. Milestone payments under collaborative research
agreements are recognised as revenue when earned, as evidenced
by achievement of the specified milestones and the absence of
ongoing performance obligations. Any
F-35
amounts received in advance of performance are recorded as
deferred revenue. None of the revenues recognised to date are
refundable if the relevant research effort is not successful.
Tangible fixed
assets
All fixed assets are initially recorded at cost.
Depreciation
Depreciation is provided on all tangible fixed assets, at rates
calculated to write off the cost or valuation, less estimated
residual value based on prices prevailing at the date of
acquisition or revaluation, of each asset evenly over its
expected useful life, as follows:
|
|
|
|
Computers and office fixtures and
fittings
|
|
Over 3-5 years
|
Research and development fixtures
and fittings
|
|
Over 5 years
|
Leasehold improvements
|
|
Over the remaining term of the
lease or the
useful economic life, whichever is the shorter
|
|
|
The carrying values of tangible fixed assets are reviewed for
impairment in periods if events or changes in circumstances
indicate the carrying value may not be recoverable.
Research and
development
Research and development expenditure is charged to the profit
and loss account as incurred.
Leases
Assets held under finance leases, which are leases where
substantially all the risks and rewards of ownership of the
asset have passed to the company, and hire purchase contracts
are capitalised in the balance sheet and are depreciated over
their useful lives. The capital elements of future obligations
under the leases and hire purchase contracts are included as
liabilities in the balance sheet.
The interest elements of the rental obligations are charged in
the profit and loss account over the periods of the contracts
and represent a constant proportion of the balance of capital
repayments outstanding.
Rentals payable under operating leases are charged in the profit
and loss account on a straight-line basis over the lease term.
Pensions
The company makes contributions to personal pension plans for
its employees. The contributions are charged to the profit and
loss account as they become payable.
Deferred
taxation
Deferred tax is recognised in respect of all timing differences
that have originated but not reversed at the balance sheet date
where transactions or events have occurred at that date that
will result in an obligation to pay more, or a right to pay less
or to receive more, tax, with the following exception:
|
|
|
deferred tax assets are recognised only to the extent that the
directors consider that it is more likely than not that there
will be suitable taxable profits from which the future reversal
of the underlying timing differences can be deducted.
|
Deferred tax is measured on an undiscounted basis at the tax
rates that are expected to apply in the periods in which timing
differences reverse, based on tax rates and laws enacted or
substantively enacted at the balance sheet date.
Full provision for deferred tax is made in accordance with FRS
19.
F-36
Research and
development tax credits
The Finance Act 2000 allows research companies of a certain size
to claim a tax credit for qualifying research expenditures. The
company has claimed these credits. The relevant tax credit for
the year is shown in the profit and loss account as a reduction
of any taxation due.
Employee share
options
The company has granted share options to employees and, in
accordance with Urgent Issues Task Force Abstract Number 17
(UITF17), records a non-cash charge to the profit and loss
account for the difference between the exercise price of the
option and the fair value of the underlying shares on the date
of grant. The profit and loss charge is recognised over the
period during which the incentive benefits of the option relate.
During 2004, the company was acquired by Microscience
Investments Limited and options previously granted to employees
were rolled over into equivalent options over shares in the
holding company. The effect of this reorganisation on options
granted by the company is shown in Note 8.
Foreign
currency
Transactions in foreign currencies are recorded at the rate
ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated
at the rate of exchange ruling at the balance sheet date. All
differences are taken to the profit and loss account.
Collaboration
arrangements
The company has entered into certain collaboration arrangements
whereby the parties agree to work jointly on research and
development of potential therapeutic products. Under such
arrangements, the parties agree which element of research and
development each will perform. These arrangements do not include
the creation of any separate entity to conduct the activities
nor any separate and distinct assets or liabilities. The parties
agree that the combined cost of all relevant activities will be
borne by the parties in a particular proportion and that net
revenues derived from sales of any resulting product will be
shared similarly. The sharing of costs will result in balancing
payments between the parties and such payments receivable will
be respectively added to or deducted from research and
development costs in the profit and loss account. Any amounts
receivable or payable at a period end are included in the
balance sheet under debtors or creditors.
Turnover, which is stated net of value added tax, represents
revenues recognised from collaborative research agreements, and
is generated wholly in Europe. Turnover is attributable to one
business segment.
F-37
|
|
3.
|
Loss on ordinary
activities before taxation
|
The loss on ordinary activities before taxation is stated after
charging:
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
Auditors
remuneration audit services
|
|
|
8
|
|
|
11
|
non-audit
services
|
|
|
5
|
|
|
111
|
Depreciation of owned fixed assets
|
|
|
323
|
|
|
333
|
Depreciation of assets held under
finance leases
|
|
|
7
|
|
|
|
Loss on disposal of fixed assets
|
|
|
3
|
|
|
|
Operating lease
rentals land and buildings
|
|
|
256
|
|
|
250
|
plant
and machinery
|
|
|
7
|
|
|
7
|
|
|
For the year ended December 31, 2004, fees paid to the
auditors, Ernst & Young LLP, include fees for work as
reporting accountants in connection with an aborted UK initial
public offering.
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
Recognised in arriving at
operating loss:
|
|
|
|
|
|
|
Costs associated with aborted
initial public offering
|
|
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
Bank interest receivable
|
|
|
144
|
|
|
131
|
|
|
The average monthly number of employees (including executive
directors) employed by the company during the year was:
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
No.
|
|
No.
|
|
|
Research and development
|
|
|
65
|
|
|
64
|
Management and administration
|
|
|
7
|
|
|
6
|
|
|
|
|
|
|
|
|
|
72
|
|
|
70
|
|
|
Staff costs, including executive directors, were:
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
Wages and salaries
|
|
|
2,741
|
|
|
3,203
|
Social security costs
|
|
|
300
|
|
|
359
|
Pension costs
|
|
|
192
|
|
|
212
|
|
|
|
|
|
|
|
|
|
3,233
|
|
|
3,774
|
|
|
F-38
Directors emoluments were:
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
Wages, salaries and other benefits
|
|
|
633
|
|
|
786
|
Pension costs
|
|
|
39
|
|
|
53
|
Compensation for loss of office
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
672
|
|
|
953
|
|
|
The emoluments of the highest paid director were:
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
Wages, salaries and other benefits
|
|
|
176
|
|
|
191
|
Pension costs
|
|
|
14
|
|
|
15
|
|
|
|
|
|
|
|
|
|
190
|
|
|
206
|
|
|
(a) Tax
on loss on ordinary activities
The tax credit represents:
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
|
£000
|
|
£000
|
|
|
|
|
Research and development tax credit
|
|
|
1,124
|
|
|
1,303
|
|
Adjustments in respect of previous
periods
|
|
|
49
|
|
|
(47
|
)
|
|
|
|
|
|
|
Total current tax (note 7(b))
|
|
|
1,173
|
|
|
1,256
|
|
|
|
F-39
(b) Factors
affecting the tax charge
The tax assessed on the loss on ordinary activities for the year
is lower than the standard rate of corporation tax in the United
Kingdom of 30% (2003: 30%). The differences are reconciled below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Loss on ordinary activities before
tax
|
|
|
(10,900
|
)
|
|
|
(10,376
|
)
|
|
|
|
|
|
|
Loss on ordinary activities
multiplied by the standard rate of tax
|
|
|
(3,270
|
)
|
|
|
(3,113
|
)
|
Effect of:
|
|
|
|
|
|
|
|
|
Disallowed expenses and
non-taxable income
|
|
|
1,333
|
|
|
|
1,785
|
|
Capital allowances in arrears of
depreciation
|
|
|
48
|
|
|
|
48
|
|
Tax losses
|
|
|
1,850
|
|
|
|
1,310
|
|
Research and development tax credit
|
|
|
(1,124
|
)
|
|
|
(1,303
|
)
|
Adjustments in respect of previous
periods
|
|
|
(49
|
)
|
|
|
47
|
|
Other timing differences
|
|
|
39
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
Total current tax (note 7(a))
|
|
|
(1,173
|
)
|
|
|
(1,256
|
)
|
|
|
(c) Factors
that may affect future tax charges
There are tax losses of approximately £27,200,000
(2003
:
£22,400,000) available to carry forward
against future trading profits, subject to the agreement of the
Inland Revenue. No deferred tax assets have been recognised in
respect of these amounts since the company does not anticipate
generating taxable profits in the immediate future. The company
claimed research and development tax credits for the year ended
December 31, 2004 of £1,303,000 (year ended
December 31, 2003: £1,124,000).
As at January 1, 2003, and December 31, 2003 and 2004,
the authorised and issued share capital of the company was as
follows:
Authorised
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
January 1,
|
|
|
2003, and
|
|
2003 and
|
|
|
December 31,
|
|
December 31,
|
|
|
2003
|
|
2003
|
|
|
No.
|
|
£
|
|
|
A Ordinary shares of
0.001p each
|
|
|
16,670,000
|
|
|
167
|
B Ordinary shares of
0.001p each
|
|
|
48,123,900
|
|
|
481
|
A Preferred Ordinary
shares of 0.001p each
|
|
|
29,640,573
|
|
|
296
|
B Preferred Ordinary
shares of 0.001p each
|
|
|
86,148,649
|
|
|
861
|
Deferred shares of 99.998p each
|
|
|
11,434,241
|
|
|
11,434,012
|
|
|
|
|
|
|
|
|
|
192,017,363
|
|
|
11,435,817
|
|
|
F-40
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2004
|
|
2004
|
|
|
No.
|
|
£
|
|
|
A Ordinary shares of
5p each
|
|
|
8,640,000
|
|
|
432,000
|
B Ordinary shares of
5p each
|
|
|
27,034,698
|
|
|
1,351,735
|
A Preferred Ordinary
shares of 5p each
|
|
|
14,820,287
|
|
|
741,014
|
B Preferred Ordinary
shares of 5p each
|
|
|
43,074,325
|
|
|
2,153,716
|
|
|
|
|
|
|
|
|
|
93,569,310
|
|
|
4,678,465
|
|
|
Allotted, called
up and fully paid
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
January 1,
|
|
|
2003
|
|
2003
|
|
|
No.
|
|
£
|
|
|
A Ordinary shares of
0.001p each
|
|
|
4,188,400
|
|
|
42
|
B Ordinary shares of
0.001p each
|
|
|
47,013,800
|
|
|
470
|
A Preferred Ordinary
shares of 0.001p each
|
|
|
23,376,320
|
|
|
234
|
B Preferred Ordinary
shares of 0.001p each
|
|
|
46,469,673
|
|
|
465
|
Deferred shares of 99.998p each
|
|
|
11,434,241
|
|
|
11,434,012
|
|
|
|
|
|
|
|
|
|
132,482,434
|
|
|
11,435,223
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2003
|
|
2003
|
|
|
No.
|
|
£
|
|
|
A Ordinary shares of
0.001p each
|
|
|
4,188,400
|
|
|
42
|
B Ordinary shares of
0.001p each
|
|
|
47,013,800
|
|
|
470
|
A Preferred Ordinary
shares of 0.001p each
|
|
|
23,396,392
|
|
|
234
|
B Preferred Ordinary
shares of 0.001p each
|
|
|
65,039,776
|
|
|
650
|
Deferred shares of 99.998p each
|
|
|
11,434,241
|
|
|
11,434,012
|
|
|
|
|
|
|
|
|
|
151,072,609
|
|
|
11,435,408
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2004
|
|
2004
|
|
|
No.
|
|
£
|
|
|
A Ordinary shares of
5p each
|
|
|
2,260,900
|
|
|
113,045
|
B Ordinary shares of
5p each
|
|
|
25,756,900
|
|
|
1,287,845
|
A Preferred Ordinary
shares of 5p each
|
|
|
11,698,197
|
|
|
584,910
|
B Preferred Ordinary
shares of 5p each
|
|
|
40,798,037
|
|
|
2,039,902
|
|
|
|
|
|
|
|
|
|
80,514,034
|
|
|
4,025,702
|
|
|
Movements in
share capital
On September 30, 2003, pursuant to a Subscription and
Shareholders Agreement dated February 18, 2002, the
third tranche of 18,570,103 B Preferred Ordinary
shares with an aggregate nominal value of
F-41
£185 were allotted to investors for gross proceeds of
£6,000,000. During the year ended December 31, 2003,
20,072 A Preferred Ordinary shares were issued in
relation to the exercise of share options at par.
On March 11, 2004, the company issued 16,556,290
B Preferred Ordinary shares of 0.001p each for
aggregate cash consideration of £5.5 million.
On May 13, 2004, the company agreed to a reorganisation of
its share capital prior to its acquisition by Microscience
Investments Limited by way of a share for share exchange. The
principal features of the reorganisation were:
(a) The issue of shares in the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
Gross
|
|
|
2004
|
|
proceeds
|
|
|
No.
|
|
£
|
|
|
A Preferred Ordinary
shares of 0.001p each
|
|
|
2
|
|
|
1
|
B Preferred Ordinary
shares of 0.001p each
|
|
|
8
|
|
|
2
|
|
|
|
|
|
|
|
|
|
10
|
|
|
3
|
|
|
(b) The exercise of options held by certain shareholders
over shares in the company as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
Gross
|
|
|
2004
|
|
proceeds
|
|
|
No.
|
|
£
|
|
|
A Ordinary shares of
0.001p each
|
|
|
333,400
|
|
|
3
|
B Ordinary shares of
0.001p each
|
|
|
4,500,000
|
|
|
45
|
|
|
|
|
|
|
|
|
|
4,833,400
|
|
|
48
|
|
|
(c) The redemption of all of the deferred shares in issue
for £1 out of the proceeds of the share issue noted above.
(d) A bonus issue of 2,499 shares of the same class
for every share then owned by the holders of each of the
A Ordinary, A Preferred Ordinary,
B Ordinary and B Preferred Ordinary
shares.
(e) The consolidation of every 5,000 shares of each
class subject to the bonus issue in (d) above into one new
share of each respective class with a nominal value of 5p.
Rights of the
shares
Ordinary and
Preferred Ordinary shares
The A and B Ordinary and the
A and B Preferred Ordinary shares rank
pari passu
as regards both dividends and voting rights
but constitute separate classes of equity shares. In a sale or
liquidation the B Preferred Ordinary shareholders
take precedence over the A Preferred Ordinary
shareholders, who in turn take precedence over the A
and B Ordinary shareholders.
Deferred
shares
The rights of the deferred shares are as follows:
Priority on a
winding up
On a return of assets on a liquidation or otherwise, the
deferred shareholders are entitled to receive payment of the
subscription price paid for the shares after the holders of the
A and B Preferred
F-42
Ordinary and A and B Ordinary shares
have received £1,000,000 in respect of each such Preferred
Ordinary share and Ordinary share.
Voting
rights
Deferred shareholders have no voting rights.
Redemption
The company may redeem the deferred shares for an aggregate
price of £1 at any time.
Dividends
The deferred shareholders have no dividend rights.
Classification
The deferred shares
are classed as non-equity.
Share
options
Options over A Ordinary shares have been granted to
directors, employees and consultants under unapproved and
approved share option schemes. Details of movements in share
options for the two years ended December 31, 2003 and 2004
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
Preferred
|
|
|
|
A
Ordinary
|
|
|
Ordinary
|
|
|
|
shares
|
|
|
shares
|
|
|
|
No.
|
|
|
No.
|
|
|
|
|
At January 1, 2003 (over
shares of 0.001p each)
|
|
|
9,611,476
|
|
|
|
|
|
Granted
|
|
|
2,300,000
|
|
|
|
|
|
Exercised
|
|
|
(20,072
|
)
|
|
|
|
|
Lapsed
|
|
|
(216,300
|
)
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003 (over
shares of 0.001p each)
|
|
|
11,675,104
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
|
|
Reclassified
|
|
|
(377,504
|
)
|
|
|
377,504
|
|
Exercised
|
|
|
(333,400
|
)
|
|
|
|
|
Lapsed
|
|
|
(1,403,600
|
)
|
|
|
|
|
Terms varied as a result of
capital reorganisation
|
|
|
(50,000
|
)
|
|
|
(188,752
|
)
|
Options cancelled in exchange for
options in Microscience Investments Limited
|
|
|
(10,460,600
|
)
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 (over
shares of 5p each)
|
|
|
50,000
|
|
|
|
188,752
|
|
|
|
To the extent not previously exercised the options outstanding
at December 31, 2004 expired on May 31, 2005.
As part of the capital reorganisation undertaken by the group,
certain options in issue at the date of reorganisation were
rolled over into options on exactly equivalent terms over the
equivalent class of share in the companys holding company,
Microscience Investments Limited.
Where options were retained in Emergent Product Development UK
Limited, the terms of the options were varied to provide an
equivalent interest and economic benefit in the shares of the
company under
F-43
the new capital structure. On exercise of these options
provision has been made for the resulting issued shares to be
exchanged for equivalent shares in Microscience Investments
Limited.
Shareholders
share options
At January 1, 2003 and 2004, the Merlin Fund held 3,000,000
options over B Ordinary shares exercisable at par
and Apax Funds Nominees Limited held a further 1,500,000 options
over B Ordinary shares exercisable at par. These
options were exercised immediately prior to the capital
reorganisation on May 7, 2004.
In addition to the above, at January 1, 2003 and 2004,
Imperial College held options over 500,000 B
Ordinary shares at an exercise price of 30p per share and Apax
Funds Nominees Limited held options over 2,055,596 B
Ordinary shares at an exercise price of 50p per share.
Under the terms of the capital reorganisation on May 13,
2004, the terms of the options were varied to provide an
equivalent interest and economic benefit in the shares of the
company under the new capital structure. On exercise of these
options, provision was made for the resulting issued shares to
be exchanged for equivalent shares in Microscience Investments
Limited. As a result of the above, at December 31, 2004
Imperial College retained an option over 250,000 5p
B Ordinary shares with an exercise price of 60p per
share and Apax Funds Nominees Limited retained an option over
1,027,798 5p B Ordinary shares with an exercise
price of £1 per share.
|
|
9.
|
Reconciliation of
movements on reserves and shareholders funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Called up
|
|
|
Share
|
|
|
Capital
|
|
Profit
|
|
|
share-
|
|
|
|
share
|
|
|
premium
|
|
|
redemption
|
|
and loss
|
|
|
holders
|
|
|
|
capital
|
|
|
account
|
|
|
reserve
|
|
account
|
|
|
funds
|
|
|
|
£000
|
|
|
£000
|
|
|
£000
|
|
£000
|
|
|
£000
|
|
|
|
|
At January 1, 2003
|
|
|
11,435
|
|
|
|
17,055
|
|
|
|
|
|
|
(20,611
|
)
|
|
|
7,879
|
|
Issue of share capital
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
Loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,727
|
)
|
|
|
(9,727
|
)
|
|
|
|
|
|
|
At December 31, 2003
|
|
|
11,435
|
|
|
|
23,055
|
|
|
|
|
|
|
(30,338
|
)
|
|
|
4,152
|
|
Issue of share capital
|
|
|
|
|
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
Loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,120
|
)
|
|
|
(9,120
|
)
|
Deferred shares redeemed out of
proceeds of fresh issue
|
|
|
(11,434
|
)
|
|
|
|
|
|
|
11,434
|
|
|
|
|
|
|
|
|
Effect of capital reorganisation
|
|
|
4,025
|
|
|
|
(4,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004
|
|
|
4,026
|
|
|
|
24,530
|
|
|
|
11,434
|
|
|
(39,458
|
)
|
|
|
532
|
|
|
|
F-44
|
|
10.
|
Reconciliation of
operating loss to operating cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Operating loss
|
|
|
(11,044
|
)
|
|
|
(10,507
|
)
|
Depreciation
|
|
|
330
|
|
|
|
333
|
|
Loss on disposal of tangible fixed
assets
|
|
|
3
|
|
|
|
|
|
Write-off of investment and loan
to joint venture
|
|
|
65
|
|
|
|
|
|
(Increase)/decrease in debtors
|
|
|
(114
|
)
|
|
|
183
|
|
(Decrease)/increase in creditors
|
|
|
(351
|
)
|
|
|
1,742
|
|
Decrease in provisions
|
|
|
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
Net cash outflow from operating
activities
|
|
|
(11,111
|
)
|
|
|
(8,329
|
)
|
|
|
|
|
11.
|
Analysis of cash
flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Returns on investments and
servicing of finance:
|
|
|
|
|
|
|
|
|
Interest received
|
|
|
144
|
|
|
|
131
|
|
|
|
|
|
|
|
Taxation:
|
|
|
|
|
|
|
|
|
Research and development tax
credit received
|
|
|
949
|
|
|
|
1,124
|
|
|
|
|
|
|
|
Capital expenditure and
financial investment:
|
|
|
|
|
|
|
|
|
Purchase of tangible fixed assets
|
|
|
(184
|
)
|
|
|
(160
|
)
|
Proceeds from the sale of tangible
fixed assets
|
|
|
5
|
|
|
|
|
|
Investment and loan to joint
venture
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow
|
|
|
(244
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
Management of liquid
resources:
|
|
|
|
|
|
|
|
|
(Increase)/decrease in short-term
deposits
|
|
|
(3,200
|
)
|
|
|
1,700
|
|
|
|
|
|
|
|
Net cash (outflow)/inflow
|
|
|
(3,200
|
)
|
|
|
1,700
|
|
|
|
|
|
|
|
Financing:
|
|
|
|
|
|
|
|
|
Issue of Preferred ordinary share
capital
|
|
|
6,000
|
|
|
|
5,500
|
|
|
|
|
|
|
|
Net cash inflow
|
|
|
6,000
|
|
|
|
5,500
|
|
|
|
Liquid resources comprise short-term cash deposits.
F-45
|
|
12.
|
Analysis and
reconciliation of net funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
January 1,
|
|
Cash
|
|
|
At
December 31,
|
|
|
2003
|
|
flow
|
|
|
2003
|
|
|
£000
|
|
£000
|
|
|
£000
|
|
|
Bank current account
|
|
|
7,878
|
|
|
(7,462
|
)
|
|
|
416
|
Short-term deposits*
|
|
|
|
|
|
3,200
|
|
|
|
3,200
|
|
|
|
|
|
|
Cash at bank and in hand/net funds
|
|
|
7,878
|
|
|
(4,262
|
)
|
|
|
3,616
|
|
|
|
|
|
*
|
|
Short-term deposits are included
within cash at bank and in hand in the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
January 1,
|
|
Cash
|
|
|
At
December 31,
|
|
|
2004
|
|
flow
|
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
£000
|
|
|
Bank current account
|
|
|
416
|
|
|
(34
|
)
|
|
|
382
|
Short-term deposits*
|
|
|
3,200
|
|
|
(1,700
|
)
|
|
|
1,500
|
|
|
|
|
|
|
Cash at bank and in hand/net funds
|
|
|
3,616
|
|
|
(1,734
|
)
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Decrease in cash in the year
|
|
|
(7,462
|
)
|
|
|
(34
|
)
|
Increase/(decrease) in liquid
resources
|
|
|
3,200
|
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
Change in net funds resulting from
cash flows
|
|
|
(4,262
|
)
|
|
|
(1,734
|
)
|
|
|
|
|
|
|
Movement in net funds in year
|
|
|
(4,262
|
)
|
|
|
(1,734
|
)
|
Net funds at January 1,
|
|
|
7,878
|
|
|
|
3,616
|
|
|
|
|
|
|
|
Net funds at December 31,
|
|
|
3,616
|
|
|
|
1,882
|
|
|
|
At December 31, 2004 the company had annual commitments
under operating leases expiring as set out below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and
buildings
|
|
Other
|
|
|
2003
|
|
2004
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
£000
|
|
£000
|
|
|
Between two and five years
|
|
|
256
|
|
|
250
|
|
|
7
|
|
|
3
|
|
|
The company makes contributions to personal pension plans for
its employees. During the year, contributions payable amounted
to £212,000 (2003: £192,000).
|
|
15.
|
Related party
transactions
|
Imperial College of Science, Technology and Medicine, a
shareholder, recharged expenses of £253,000 (2003:
£206,000) incurred on behalf of the company, principally
related to research and development costs.
F-46
The following fees were paid to major shareholders during the
year for the provision of directors services:
|
|
|
|
|
|
|
|
|
|
Paid during
year
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
Merlin Biosciences Limited
|
|
|
16
|
|
|
16
|
Apax Europe IV GP Co Limited
|
|
|
15
|
|
|
16
|
Advent Venture Partners
|
|
|
15
|
|
|
20
|
JP Morgan Partners
|
|
|
15
|
|
|
16
|
|
|
|
|
|
|
|
|
|
61
|
|
|
68
|
|
|
The following shareholders charged expenses for their services
as directors and for consultancy work as follows:
|
|
|
|
|
|
|
|
|
|
Paid during
year
|
|
|
2003
|
|
2004
|
|
|
£000
|
|
£000
|
|
|
M. Redmond
|
|
|
22
|
|
|
23
|
S. Harris
|
|
|
16
|
|
|
10
|
A. Lindberg
|
|
|
15
|
|
|
51
|
|
|
|
|
|
|
|
|
|
53
|
|
|
84
|
|
|
|
|
16.
|
Post balance
sheet events
|
On June 24, 2005, the company was acquired by Emergent
Europe Inc., a wholly owned subsidiary of Emergent BioSolutions
Inc.
On July 22, 2005, the company changed its name from
Microscience Limited to Emergent Europe Limited.
On November 11, 2005, the company changed its
accounting reference date from December 31 to June 23,
in order to prepare financial statements for the period up to
acquisition by Emergent Europe Inc.
On May 4, 2006, the company entered into a collaboration
agreement with Sanofi Pasteur relating to the development and
commercialisation of the companys meningitis B vaccine
candidate and received a 3 million upfront licence
fee. This agreement also provides for a series of milestone
payments upon the achievement of specified development and
commercialisation objectives, payments for development work
under the collaboration and royalties on net sales of this
product.
On May 25, 2006, the company changed its name from Emergent
Europe Limited to Emergent Product Development UK Limited.
On September 26, 2006 the company changed its accounting
reference date from June 23 to December 31 in order to
align its statutory financial statements period to that of its
ultimate parent company, Emergent BioSolutions Inc.
F-47
|
|
17.
|
Reconciliation to
US GAAP
|
Summary of
significant differences between UK GAAP followed by the company
and US GAAP
The companys financial statements have been prepared in
accordance with accounting principles generally accepted in the
United Kingdom (UK GAAP), which differ in certain significant
respects from accounting principles generally accepted in the
United States (US GAAP). The following is a summary of
adjustments to net loss and cash flows required when reconciling
such amounts recorded in the financial statements to the
corresponding amounts in accordance with US GAAP.
(a) Employee
share options modification
The company modified certain options over A Ordinary
shares to employees during the year ended December 31,
2004, such that the awards now pertain to A
Preferred Ordinary shares.
Under UK GAAP, there is no accounting for the cost of these
grants after the initial grant date.
Under US GAAP, Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
, as interpreted
by Financial Accounting Standards Board Interpretation
No. 44,
Accounting for Certain Transactions Involving
Stock Compensation
, the modification is treated as a
cancellation of the original award with replacement by a new
award over A Preferred Ordinary shares. The
intrinsic value of the replacement awards on the date of grant
has been recorded as compensation expense for the year ended
December 31, 2004.
(b) Accounting
for national insurance on share options
Under UK GAAP, the company has accounted for a potential
liability to employees National Insurance on certain
employee share options. The provision has been made
systematically by reference to the market value of shares at the
balance sheet dates over the period from the date of grant to
the end of the relevant vesting period and from that date to the
date of actual exercise the provision is being adjusted by
reference to changes in market value. The provisions as at
December 31, 2003 and 2004 were £80,000 and nil,
respectively. The net credits to the profit and loss account for
the years ended December 31, 2003 and 2004 amounted to
£nil and £80,000, respectively.
Under US GAAP, Emerging Issues Task Force Issue No.
00-16,
Recognition and Measurement of Employer Payroll Taxes on
Employer Stock Based Compensation
, no liability to national
insurance is recognised until such time as the share option is
exercised since this is when the liability crystallises. This
adjustment removes the timing difference relating to the expense
in the income statement.
(c) Vacation
pay
Under UK GAAP, the company does not record accruals at the
balance sheet date for employees vacation earned but not
taken. Under US GAAP, such accruals are required.
The charge/(credit) for the years ended December 31, 2004
and 2003 would be £1,000 and £(1,000),
respectively
.
(d) Taxation
Under UK GAAP, deferred tax is provided in full on timing
differences which results in an obligation at the balance sheet
date to pay more tax, or a right to pay less tax, at a future
date, at rates expected to apply when they crystallise based on
current tax rates and law. Net deferred tax assets are
recognised to the extent that it is regarded as more likely than
not that they will be recovered.
Under US GAAP, deferred tax is recognised in full in respect of
temporary differences between the reported carrying amount of an
asset or liability and its corresponding tax basis. Deferred tax
assets are also recognised in full subject to a valuation
allowance to reduce the amount of such assets to that which is
more likely than not to be realised.
F-48
As at December 31, 2004 and 2003, the company had
approximately £27,200,000 and £22,400,000 of
cumulative tax losses respectively. These losses represent a
deferred tax asset for accounting purposes. In accordance with
both UK GAAP and US GAAP, no asset has been recognised in
respect of these tax losses due to the uncertainty as to whether
these losses can be offset against future profits.
Reconciliation of
net loss from UK GAAP to US GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
Notes
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Net loss as reported under UK GAAP
|
|
|
|
|
|
|
(9,727
|
)
|
|
|
(9,120
|
)
|
Adjustments for: *
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share options
modifications
|
|
|
(a
|
)
|
|
|
|
|
|
|
(5
|
)
|
Accounting for National Insurance
on share options
|
|
|
(b
|
)
|
|
|
|
|
|
|
(80
|
)
|
Vacation pay
|
|
|
(c
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
Net loss as reported under
US GAAP
|
|
|
|
|
|
|
(9,728
|
)
|
|
|
(9,204
|
)
|
|
|
|
|
|
*
|
|
The deferred tax effect of
reconciling items has not been reflected as, where a deferred
tax asset arises, a valuation allowance would be recognised
against that asset, and where a deferred tax liability arises,
the valuation allowance would be reduced accordingly.
|
Statement of cash
flows
The statement of cash flows prepared under UK GAAP presents
substantially the same information as that required under US
GAAP by Statement of Financial Accounting
Standards No. 95,
Statement of Cash Flows
.
These standards differ however with regard to classification of
items within the statement and the definition of cash and cash
equivalents.
Under UK GAAP, cash comprises cash in hand, deposits repayable
on demand and bank overdrafts. Deposits are repayable on demand
if they can be withdrawn at any time without notice and without
penalty or if a maturity or period of notice of not more than
24 hours or one working day has been agreed. Under US GAAP,
cash equivalents are short-term highly liquid investments,
generally with original maturities of three months or less, that
are readily convertible to known amounts of cash and present
insignificant risk of changes in value because of changes in
interest rates.
Under UK GAAP, cash flows are presented separately for operating
activities, returns on investments and servicing of finance,
taxation, capital expenditure and financial investment,
management of liquid resources and financing activities. US GAAP
requires only three categories of cash flow activity to be
reported: operating, investing and financing. Cash flows from
taxation and returns on investments and servicing of finance
under UK GAAP would, with the exception of dividends paid, be
shown under operating activities under US GAAP. The payment of
dividends and the payment to acquire own shares (treasury stock)
would be included as a financing activity under US GAAP.
Management of liquid resources under UK GAAP would be included
as cash and cash equivalents. Under US GAAP management of liquid
resources would be included as an investing activity to the
extent that such amounts have an original maturity of more than
three months and are convertible into known amounts of cash.
F-49
Summary statements of cash flows presented under US GAAP using
UK GAAP measurement principles are given below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
£000
|
|
|
£000
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(10,018
|
)
|
|
|
(7,074
|
)
|
Net cash used in investing
activities
|
|
|
(244
|
)
|
|
|
(160
|
)
|
Net cash provided by financing
activities
|
|
|
6,000
|
|
|
|
5,500
|
|
|
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
|
(4,262
|
)
|
|
|
(1,734
|
)
|
Beginning cash and cash equivalents
|
|
|
7,878
|
|
|
|
3,616
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
|
3,616
|
|
|
|
1,882
|
|
|
|
F-50
Emergent
BioSolutions Inc. and subsidiaries
Unaudited pro forma condensed
combined statement of operations
For the year ended
December 31, 2005
The unaudited pro forma condensed combined financial information
is presented to give effect to the acquisition of Microscience
by Emergent and represents the combined companys unaudited
pro forma statements of operations for the year ended
December 31, 2005. The statement of operations for the year
ended December 31, 2005 was derived by combining the
results for the year ended December 31, 2005 of Emergent
with the results of Microscience as if the acquisition had
occurred on January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
Pro forma
|
|
|
|
Emergent
|
|
|
Microscience
|
|
|
adjustments
|
|
|
combined
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
127,271
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
127,271
|
|
Contracts and grants
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
130,688
|
|
|
|
|
|
|
|
|
|
|
|
130,688
|
|
Operating expense
(income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
31,603
|
|
|
|
|
|
|
|
|
|
|
|
31,603
|
|
Research and development
|
|
|
18,381
|
|
|
|
5,963
|
|
|
|
|
|
|
|
24,344
|
|
Selling, general and administrative
|
|
|
42,793
|
|
|
|
557
|
|
|
|
|
|
|
|
43,350
|
|
Purchased in-process research and
development
|
|
|
26,575
|
|
|
|
|
|
|
|
|
|
|
|
26,575
|
|
Litigation settlement
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
Income (loss) from
operations:
|
|
|
21,336
|
|
|
|
(6,520
|
)
|
|
|
|
|
|
|
14,816
|
|
Other income
(expense)
|
|
|
(227
|
)
|
|
|
22
|
|
|
|
|
|
|
|
(205
|
)
|
Income (loss) before provision
for (benefit from) income taxes
|
|
|
21,109
|
|
|
|
(6,498
|
)
|
|
|
|
|
|
|
14,611
|
|
Provision for (benefit from)
income taxes
|
|
|
5,325
|
|
|
|
(781
|
)
|
|
|
|
|
|
|
4,544
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,784
|
|
|
$
|
(5,717
|
)
|
|
$
|
|
|
|
$
|
10,067
|
|
|
|
|
|
|
|
Earnings (loss) per
share basic
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
$
|
0.45
|
|
Earnings (loss) per
share diluted
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
$
|
0.41
|
|
Weighted-average number of
shares basic
|
|
|
20,533,471
|
|
|
|
|
|
|
|
1,769,809
|
|
|
|
22,303,280
|
|
Weighted-average number of
shares diluted
|
|
|
22,751,733
|
|
|
|
|
|
|
|
1,769,809
|
|
|
|
24,521,542
|
|
The accompanying note is an
integral part of this pro forma condensed combined statement of
operations.
F-51
Emergent
BioSolutions Inc. and subsidiaries
Note to unaudited pro forma
condensed
combined statement of
operations
For the year ended
December 31, 2005
On June 23, 2005, Emergent Europe, Inc., a wholly owned
subsidiary of Emergent incorporated in Delaware (EEI), completed
the acquisition of Microscience pursuant to the terms and
conditions of the Share Exchange Agreement dated June 23,
2005 by and among EEI and Microscience Holdings plc, a public
limited liability company incorporated in England. At the
closing date, Emergent, through EEI, issued Microscience
shareholders 3,636,801 shares of Emergents
Class A Common Stock in exchange for all of the outstanding
stock of Microscience.
The pro forma condensed combined statement of operations has
been prepared by management of Emergent without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
normally prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations. However, management believes that
the disclosures are adequate to make the information not
misleading.
The unaudited pro forma condensed combined financial statements
do not reflect one-off items directly attributable to the
acquisition, such as the write-off of purchased in-process
research and development. The unaudited pro forma condensed
combined financial statements should be read in conjunction with
the historical consolidated financial statements and related
notes and other financial information pertaining to Emergent and
Microscience, including Managements discussion and
analysis of financial condition and results of operations
and Risk factors, which appear elsewhere in this
prospectus.
F-52
5,000,000 shares
Common stock
Prospectus
JPMorgan
Cowen and Company
HSBC
,
2006
Until ,
2006 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The
following table indicates the expenses to be incurred in
connection with the offering described in this Registration
Statement, other than underwriting discounts and commissions,
all of which will be paid by the Registrant. All amounts are
estimated except the Securities and Exchange Commission
registration fee and the National Association of Securities
Dealers Inc. filing fee.
|
|
|
|
|
|
Amount
|
|
Securities and Exchange Commission
registration fee
|
|
$
|
9,844
|
National Association of Securities
Dealers Inc. fee
|
|
|
9,700
|
New York Stock Exchange listing fee
|
|
|
150,000
|
Accountants fees and expenses
|
|
|
575,000
|
Legal fees and expenses
|
|
|
2,000,000
|
Blue Sky fees and expenses
|
|
|
5,000
|
Transfer Agents fees and
expenses
|
|
|
3,500
|
Printing and engraving expenses
|
|
|
600,000
|
Miscellaneous
|
|
|
96,956
|
|
|
|
|
Total Expenses
|
|
$
|
3,450,000
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 102
of the General Corporation Law of the State of Delaware permits
a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director,
except where the director breached his duty of loyalty, failed
to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend
or approved a stock repurchase in violation of Delaware
corporate law or obtained an improper personal benefit. The
Registrants restated certificate of incorporation provides
that no director of the Registrant shall be personally liable to
it or its stockholders for monetary damages for any breach of
fiduciary duty as director, notwithstanding any provision of law
imposing such liability, except to the extent that the General
Corporation Law of the State of Delaware prohibits the
elimination or limitation of liability of directors for breaches
of fiduciary duty.
Section 145
of the General Corporation Law of the State of Delaware provides
that a corporation has the power to indemnify a director,
officer, employee, or agent of the corporation and certain other
persons serving at the request of the corporation in related
capacities against expenses (including attorneys fees),
judgments, fines and amounts paid in settlements actually and
reasonably incurred by the person in connection with an action,
suit or proceeding to which he is or is threatened to be made a
party by reason of such position, if such person acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, in any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful, except that, in the case of
actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any claim, issue
or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery or other adjudicating court determines that,
despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses which the Court of
Chancery or such other court shall deem proper.
II-1
The
Registrants restated certificate of incorporation provides
that the Registrant will indemnify each person who was or is a
party or threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action
by or in the right of the Registrant) by reason of the fact that
he or she is or was, or has agreed to become, a director or
officer of the Registrant, or is or was serving, or has agreed
to serve, at the Registrants request as a director,
officer, partner, employee or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture,
trust or other enterprise, including any employee benefit plan,
(all such persons being referred to hereafter as an
Indemnitee), or by reason of any action alleged to
have been taken or omitted in such capacity, against all
expenses (including attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by
or on behalf of Indemnitee in connection with such action, suit
or proceeding and any appeal therefrom, if Indemnitee acted in
good faith and in a manner which Indemnitee reasonably believed
to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The Registrants restated certificate
of incorporation provides that the Registrant will indemnify any
Indemnitee who was or is a party to or threatened to be made a
party to any threatened, pending or completed action or suit by
or in the right of the Registrant to procure a judgment in our
favor by reason of the fact that the Indemnitee is or was, or
has agreed to become, a director or officer of the Registrant,
or is or was serving, or has agreed to serve, at our request, as
a director, officer, partner, employee or trustee of or in a
similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise, (including any employee
benefit plan), or by reason of any action alleged to have been
taken or omitted in such capacity, against all expenses
(including attorneys fees) and, to the extent permitted by
law, amounts paid in settlement actually and reasonably incurred
by or on behalf of Indemnitee in connection with such action,
suit or proceeding and any appeal therefrom, if Indemnitee acted
in good faith and in a manner which Indemnitee reasonably
believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with
respect to any claim, issue or matter as to which Indemnitee
shall have been adjudged to be liable to the Registrant, unless,
and only to the extent, that the Court of Chancery of Delaware
or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of
such liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for
such expense (including attorneys fees) which the Court of
Chancery of Delaware or the court in which such action or suit
was brought shall deem proper. Notwithstanding the foregoing, to
the extent that an Indemnitee has been successful, on the merits
or otherwise, in defense of any action, suit or proceeding,
Indemnitee shall be indemnified by the Registrant against all
expenses (including attorneys fees) actually and
reasonably incurred in connection therewith. Expenses must be
advanced to an Indemnitee under certain circumstances.
The
Registrant has entered into agreements to indemnify the
Registrants directors and executive officers. These
agreements, among other things, provide that the Registrant will
indemnify the director or executive officer to the fullest
extent permitted by law for claims arising in his or her
capacity as a director, officer, manager, employee, agent or
representative of the Registrant. The indemnification agreements
also establish the procedures that will apply in the event a
director or officer makes a claim for indemnification.
The
Registrant maintains a general liability insurance policy which
covers certain liabilities of directors and officers of the
Registrant arising out of claims based on acts or omissions in
their capacities as directors or officers.
In any
underwriting agreement the Registrant enters into in connection
with the sale of common stock being registered hereby, the
underwriters will agree to indemnify, under certain conditions,
the Registrant, the Registrants directors, the Registrants
officers and persons who control the Registrant with the meaning
of the Securities Act of 1933, as amended, against certain
liabilities.
II-2
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
Set forth
below is information regarding shares of class A and
class B common stock issued, and options granted, by the
Registrant for class B common stock within the past three
years. Also included is the consideration, if any, received by
the Registrant for such shares, options and information relating
to the section of the Securities Act, or rule of the Securities
and Exchange Commission, under which exemption from registration
was claimed.
(a) Issuance
of Securities
|
|
|
|
(1)
|
On
June 30, 2004, the Registrant issued an aggregate of
18,666,479 shares of class A common stock to
stockholders of BioPort Corporation in exchange for an equal
number of outstanding shares of common stock of BioPort. All
other issued and outstanding shares of common stock of BioPort
were repurchased and retired. As a result of this exchange,
BioPort became a wholly owned subsidiary of the Registrant. The
Registrant subsequently renamed BioPort as Emergent BioDefense
Operations Lansing Inc.
|
|
|
(2)
|
On
June 23, 2005, the Registrant issued an aggregate of
3,636,801 shares of class A common stock to
Microscience Investments Limited, formerly Microscience Holdings
plc, in connection with the acquisition of all the outstanding
shares of capital stock of Microscience Limited.
|
No
underwriters were involved in the foregoing issuances of
securities. The securities described in this
section (a) of Item 15 were issued to investors
in reliance upon the exemption from the registration
requirements of the Securities Act, as set forth in
Section 4(2) under the Securities Act, relative to
transactions by an issuer not involving any public offering, to
the extent an exemption from such registration was required. All
stockholders to whom shares of class A common stock
described above were issued represented to the Registrant in
connection with such issuances that they were acquiring the
shares for their own account, for investment, and not with a
view to the sale or distribution, and that they had sufficient
knowledge and experience in financial matters so as to be
capable of evaluating the merits and risks of purchasing the
shares. The stockholders received written disclosures that the
securities had not been registered under the Securities Act and
that any resale must be made pursuant to a registration
statement or an available exemption from such registration.
(b) Stock
Option Grants
Since
inception, we have issued options to certain employees and
directors to purchase an aggregate of 3,750,712 shares of
our class B common stock as of October 20, 2006. As of
October 20, 2006, options to purchase 229,275 shares
of class B common stock had been exercised, options to
purchase 411,505 shares of class B common stock had
been forfeited and options to purchase 3,109,932 shares of
class B common stock remained outstanding at a weighted
average exercise price of $2.54 per share.
The issuance
of stock options and the common stock issuable upon the exercise
of such options as described in this section (b) of
Item 15 were issued pursuant to written compensatory plans
or arrangements with our employees, directors and consultants,
in reliance on the exemption provided by Section 3(b) of
the Securities Act and Rule 701 promulgated thereunder. All
recipients either received adequate information about the
Registrant or had access, through employment or other
relationships, to such information.
All of the
foregoing securities are deemed restricted securities for
purposes of the Securities Act. All certificates representing
the issued shares of common stock described in this Item 15
included appropriate legends setting forth that the securities
had not been registered and the applicable restrictions on
transfer.
II-3
The exhibits
to the registration statement are listed in the
Exhibit Index to this registration statement and are
incorporated by reference herein.
|
|
|
|
(a)
|
The
undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
|
|
|
(b)
|
Insofar as
indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
|
|
|
(c)
|
The
undersigned registrant hereby undertakes that:
|
|
|
|
|
(i)
|
For purposes
of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
the registration statement as of the time it was declared
effective.
|
|
|
|
|
(ii)
|
For purposes
of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
|
II-4
SIGNATURES
Pursuant to
the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 5 to the Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Gaithersburg, State of
Maryland on the 30th day of October 2006.
EMERGENT
BIOSOLUTIONS INC.
Fuad El-Hibri
President,
Chief Executive Officer and Chairman of the Board of Directors
Pursuant to
the requirements of the Securities Act, this Amendment
No. 5 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/
Fuad
El-Hibri
Fuad
El-Hibri
|
|
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
|
|
October 30, 2006
|
|
|
|
|
|
/s/
R.
Don Elsey
R.
Don Elsey
|
|
Vice President Finance, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
October 30, 2006
|
|
|
|
|
|
*
Joe
M. Allbaugh
|
|
Director
|
|
October 30, 2006
|
|
|
|
|
|
*
Zsolt
Harsanyi, Ph.D.
|
|
Director
|
|
October 30, 2006
|
|
|
|
|
|
*
Jerome
M. Hauer
|
|
Director
|
|
October 30, 2006
|
|
|
|
|
|
*
Shahzad
Malik, M.D.
|
|
Director
|
|
October 30, 2006
|
|
|
|
|
|
*
Ronald
B. Richard
|
|
Director
|
|
October 30, 2006
|
|
|
|
|
|
*
Louis
Sullivan, M.D.
|
|
Director
|
|
October 30, 2006
|
|
|
|
|
|
|
|
*By:
|
|
/s/
Fuad
El-Hibri
Fuad
El-Hibri
Attorney-in-fact
|
|
|
|
|
II-5
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation, as amended, of the Registrant
|
|
3
|
.2*
|
|
Form of Restated Certificate of
Incorporation of the Registrant to be effective upon completion
of the offering
|
|
3
|
.3*
|
|
Bylaws of the Registrant
|
|
3
|
.4*
|
|
Form of Amended and Restated
By-laws of the Registrant to be effective upon the completion of
the offering
|
|
4
|
.1*
|
|
Specimen certificate evidencing
shares of common stock
|
|
4
|
.2*
|
|
Registration Rights Agreement,
dated June 23, 2005, between the Registrant and
Microscience Investments Limited, formerly Microscience Holdings
plc
|
|
4
|
.3*
|
|
Registration Rights Agreement,
dated September 22, 2006, among the Registrant and the entities
listed on Schedule 1 thereto
|
|
4
|
.4
|
|
Form of Rights Agreement to be
entered into between the Registrant and the Rights Agent prior
to the completion of the offering
|
|
5
|
.1
|
|
Opinion of Wilmer Cutler Pickering
Hale and Dorr LLP
|
|
9
|
.1*
|
|
Voting and Right of First Refusal
Agreement, dated October 21, 2005, between the William J.
Crowe, Jr. Revocable Living Trust and Fuad El-Hibri
|
|
9
|
.2*
|
|
Voting Agreement, dated
June 30, 2004, between BioPharm, L.L.C. and Michigan
Biologic Products, Inc.
|
|
9
|
.3*
|
|
Voting Agreement, dated
June 30, 2004, between BioPharm, L.L.C. and Biologika,
L.L.C.
|
|
9
|
.4*
|
|
Voting Agreement, dated
June 30, 2004, by and among the stockholders named therein
|
|
9
|
.5*
|
|
Voting Agreement, dated August 11,
2006, between BioPharm, L.L.C. and Microscience Investments
Limited
|
|
10
|
.1*
|
|
Employee Stock Option Plan, as
amended and restated
|
|
10
|
.2*
|
|
Form of Director Stock Option
Agreement
|
|
10
|
.3
|
|
2006 Stock Incentive Plan
|
|
10
|
.4
|
|
Form of Incentive Stock Option
Agreement under 2006 Stock Incentive Plan
|
|
10
|
.5
|
|
Form of Nonstatutory Stock Option
Agreement under 2006 Stock Incentive Plan
|
|
10
|
.6*
|
|
Severance Plan and Termination
Protection Program
|
|
10
|
.7*
|
|
Form of Indemnity Agreement
|
|
10
|
.8*
|
|
Contract
No. W9113M-04-D-0002,
dated January 3, 2004, between Emergent BioDefense
Operations Lansing Inc., formerly BioPort Corporation, and
U.S. Army Space and Missile Defense Command, as amended
|
|
10
|
.9*
|
|
Contract
No. 200-2005-11811,
dated May 5, 2005, between Emergent BioDefense Operations
Lansing Inc., formerly BioPort Corporation, and Department of
Health and Human Services, Office of Public Health Emergency
Preparedness and Office of Research and Development
Coordination, as amended
|
|
10
|
.10*
|
|
Filling Services Agreement, dated
March 18, 2002, between Emergent BioDefense Operations
Lansing Inc., formerly BioPort Corporation, and Hollister-Stier
Laboratories LLC, as amended
|
|
10
|
.11*
|
|
BT Vaccine License Agreement,
dated November 23, 2004, between the Registrant and the
Health Protection Agency
|
|
10
|
.12*
|
|
BT Vaccine Development Agreement,
dated November 23, 2004, between the Registrant and the
Health Protection Agency
|
|
10
|
.13*
|
|
rBot Vaccine License Agreement,
dated November 23, 2004, between the Registrant and the
Health Protection Agency
|
|
10
|
.14*
|
|
rBot Vaccine Development
Agreement, dated November 23, 2004, between the Registrant
and the Health Protection Agency
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.15*
|
|
Exclusive Distribution Agreement,
dated November 23, 2004, between the Registrant and the
Health Protection Agency
|
|
10
|
.16*
|
|
Investment Agreement relating to
Microscience Holdings plc, dated March 18, 2005, among the
Wellcome Trust, Microscience Investments Limited, formerly
Microscience Holdings plc, and Emergent Product Development
UK Limited, formerly Microscience Limited, as amended
|
|
10
|
.17*
|
|
Standard Employment Contract,
dated September 22, 2006, between Emergent Product
Development UK Limited, formerly Emergent Europe Limited, and
Steven N. Chatfield
|
|
10
|
.18*
|
|
Letter Agreement, dated
July 11, 2006, between the Registrant and Steven N.
Chatfield
|
|
10
|
.19*
|
|
Consulting Services Agreement,
dated March 1, 2006, between the Registrant and The Hauer
Group
|
|
10
|
.20*
|
|
Amended and Restated Marketing
Agreement, dated January 1, 2000, between Emergent
BioDefense Operations Lansing Inc., formerly BioPort
Corporation, and Intergen N.V., as amended
|
|
10
|
.21*
|
|
Lease, dated December 1,
1998, between ARE-QRS, Corp. and Antex Biologics Inc., as amended
|
|
10
|
.22*
|
|
Lease (540 Eskdale Road, Winnersh
Triangle, Wokingham, Berkshire), dated December 13, 1996,
between Slough Properties Limited and Azur Environmental
Limited, as assigned to Emergent Product Development UK Limited,
formerly Microscience Limited
|
|
10
|
.23*
|
|
Lease (545 Eskdale Road, Winnersh
Triangle, Wokingham, Berkshire), dated December 13, 1996,
between Slough Properties Limited and Azur Environmental
Limited, as assigned to Emergent Product Development UK Limited,
formerly Microscience Limited
|
|
10
|
.24*
|
|
Lease Agreement, dated
June 27, 2006, between Brandywine Research LLC and the
Registrant
|
|
10
|
.25*
|
|
Amended and Restated Loan
Agreement, dated July 29, 2005, between Emergent BioDefense
Operations Lansing Inc., formerly BioPort Corporation, and Fifth
Third Bank, as amended
|
|
10
|
.26*
|
|
Loan and Security Agreement, dated
October 14, 2004, among the Registrant, Emergent Commercial
Operations Frederick Inc., formerly Advanced BioSolutions, Inc.,
Antex Biologics Inc., Emergent BioDefense Operations Lansing
Inc., formerly BioPort Corporation, and Mercantile Potomac Bank
|
|
10
|
.27*
|
|
Promissory Note, dated
October 14, 2004, from Emergent Commercial Operations
Frederick Inc., formerly Advanced BioSolutions, Inc., to
Mercantile Potomac Bank
|
|
10
|
.28*
|
|
Loan Agreement, dated
October 15, 2004, between Emergent Commercial Operations
Frederick Inc., formerly Advanced BioSolutions, Inc., and the
Department of Business and Economic Development
|
|
10
|
.29*
|
|
Deed of Trust Note, dated
October 14, 2004, between Emergent Commercial Operations
Frederick Inc., formerly Advanced BioSolutions, Inc., and the
Department of Business and Economic Development
|
|
10
|
.30*
|
|
Term Note, dated August 10,
2004, from Emergent BioDefense Operations Lansing Inc., formerly
BioPort Corporation, to Fifth Third Bank
|
|
10
|
.31*
|
|
Loan Agreement, dated
April 25, 2006, among the Registrant, Emergent Frederick
LLC and HSBC Realty Credit Corporation (USA)
|
|
10
|
.32*
|
|
Bond Purchase Agreement, dated
March 31, 2005, between the County Commissioners of
Frederick County, Emergent Commercial Operations Frederick Inc.,
formerly Emergent Biologics Inc., and Mercantile Potomac Bank
|
|
10
|
.33*
|
|
License and Co-development
Agreement, dated May 6, 2006, between Emergent Product
Development UK Limited, formerly Emergent Europe Limited, and
Sanofi Pasteur, S.A.
|
|
10
|
.34*
|
|
Product Supply Agreement, dated
June 12, 2006, between Emergent Product Development
Gaithersburg Inc. and Talecris Biotherapeutics, Inc.
|
|
10
|
.35*
|
|
Election of Fuad El-Hibri to
Participate in the Severance Plan and Termination Protection
Program
|
|
10
|
.36*
|
|
Services Agreement, dated August
1, 2006, between East West Resources Corporation and the
Registrant
|
|
10
|
.37*
|
|
Director Compensation Program
|
|
10
|
.38*
|
|
Revolving Credit Note, dated July
29, 2005, from Emergent BioDefense Operations Lansing Inc.,
formerly BioPort Corporation, to Fifth Third Bank
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.39*
|
|
Promissory Note, dated April 25,
2006, from Emergent Frederick LLC to HSBC Realty Credit
Corporation (USA)
|
|
10
|
.40*
|
|
Loan Agreement, dated August 25,
2006, among the Registrant, Emergent BioDefense Operations
Lansing Inc., formerly BioPort Corporation, and HSBC Realty
Credit Corporation (USA)
|
|
10
|
.41*
|
|
Promissory Note (Term Note), dated
August 25, 2006, from Emergent BioDefense Operations Lansing
Inc., formerly BioPort Corporation, to HSBC Realty Credit
Corporation (USA)
|
|
10
|
.42*
|
|
Promissory Note (Revolving Credit
Loan), dated August 25, 2006, from Emergent BioDefense
Operations Lansing Inc., formerly, BioPort Corporation to HSBC
Realty Credit Corporation (USA)
|
|
10
|
.43*
|
|
Agreement, dated June 16,
2005, between the Free State of Bavaria and Emergent Product
Development UK, formerly ViVacs GmbH
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm of the Registrant
|
|
23
|
.2
|
|
Consent of Independent Auditors of
Emergent Product Development UK Limited
|
|
23
|
.3
|
|
Consent of Wilmer Cutler Pickering
Hale and Dorr LLP (included in Exhibit 5.1)
|
|
24
|
.1*
|
|
Powers of Attorney (included on
signature page)
|
|
|
|
|
|
Confidential
treatment requested. Confidential materials omitted and filed
separately with the Securities and Exchange Commission.
|