UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
ý
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
Commission
file number:
001-33137
EMERGENT
BIOSOLUTIONS INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
|
14-1902018
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(IRS
Employer Identification No.)
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2273
Research Boulevard, Suite 400, Rockville, Maryland
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|
20850
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Registrant’s
Telephone Number, Including Area Code:
(301) 795 - 1800
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
Common
stock, $0.001 par value per share
|
New
York Stock Exchange
|
Series
A junior participating preferred stock purchase rights
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of Securities Act. Yes
¨
No
ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
¨
No
ý
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
ý
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
¨
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
¨
Accelerated
filer
ý
Non-accelerated
filer
¨
Smaller reporting
company
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
ý
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009 was approximately
$212,378,000 based on the price at which the registrant’s common stock was last
sold on that date as reported on the New York Stock Exchange.
As of
February 26, 2010, the registrant had 30,859,259 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s definitive
proxy statement for its 2010 annual meeting of stockholders scheduled to be held
on May 20, 2010, which is expected to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the registrant’s fiscal year
ended December 31, 2009, are incorporated by reference into Part III of
this annual report on Form 10-K. With the exception of the portions of the
registrant’s definitive proxy statement for its 2010 annual meeting of
stockholders that are expressly incorporated by reference into this annual
report on Form 10-K, such proxy statement shall not be deemed filed as part
of this annual report on Form 10-K. BioThrax®, s
pi
-VEC
ä
, MVAtor™ and Typhella
ä
are the registrant’s trademarks. Each
of the other trademarks, trade names or service marks appearing in this annual
report on Form 10-K are the property of their respective
owners.
EMERGENT
BIOSOLUTIONS INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
INDEX
PART
I
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Item
1.
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Item
1A.
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Item
1B.
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Item
2.
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Item
3.
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Item
4.
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PART
II
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Item
5.
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Item
6.
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Item
7.
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Item
7A.
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Item
8.
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Item
9.
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Item
9A.
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Item
9B.
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PART
III
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Item
10.
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Item
11.
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Item
12.
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Item
13.
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Item
14.
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PART
IV
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Item
15.
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
annual report on Form 10-K and the documents incorporated by reference herein
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934, as amended, that involve substantial risks and uncertainties. All
statements, other than statements of historical fact, including statements
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
ability to perform under our contracts with the U.S. government for sales
of BioThrax® (Anthrax Vaccine Adsorbed), our FDA-approved anthrax vaccine,
including the timing of deliveries;
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·
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our
plans for future sales of BioThrax, including our ability to obtain new
contracts with the U.S. government;
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·
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our
plans to pursue label expansions and improvements for
BioThrax;
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·
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our
ability to win a development award with the U.S. government for our
recombinant protective antigen anthrax vaccine product
candidate;
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·
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our
ability to win an award with the U.S. government for the scale-up,
qualification and validation of our new manufacturing facility in Lansing,
Michigan for the manufacture of
BioThrax;
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·
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our
plans to expand our manufacturing facilities and
capabilities;
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·
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the
rate and degree of market acceptance and clinical utility of our
products;
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·
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our
ongoing and planned development programs, preclinical studies and clinical
trials;
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·
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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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·
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the
potential benefits of our existing collaborations and our ability to
selectively enter into additional collaborative
arrangements;
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·
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the
timing of and our ability to obtain and maintain regulatory approvals for
our product candidates;
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·
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our
commercialization, marketing and manufacturing capabilities and
strategy;
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·
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our
intellectual property portfolio;
and
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·
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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 annual report, 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 annual report, including the documents that we have
incorporated by reference herein or filed as exhibits hereto, completely and
with the understanding that our actual future results may be materially
different from what we expect. We disclaim any obligation to update any
forward-looking statements.
Overview
We are a
biopharmaceutical company focused on the development, manufacture and
commercialization of vaccines and antibody therapies that assist the body’s
immune system to prevent or treat disease. For financial reporting purposes, we
operate in two principal business segments: biodefense and commercial. Our
biodefense segment focuses on vaccines and antibody therapies for use against
biological agents that are potential weapons of bioterrorism and biowarfare,
while our commercial segment focuses on vaccines and antibody therapies
targeting infectious diseases that represent significant unmet or underserved
public health needs.
We are
currently focused on vaccines and antibody therapies targeting the following
disease areas: anthrax, tuberculosis, typhoid, influenza and chlamydia. Set
forth below is a list of each of our products or product candidates that are
designed to address these disease areas.
Anthrax
BioThrax
—
also referred to as Anthrax
Vaccine Adsorbed, is the only vaccine approved by the U.S. Food and Drug
Administration, or FDA, for the prevention of anthrax disease. BioThrax is
approved for pre-exposure prevention of anthrax disease by all routes of
exposure, including inhalation.
BioThrax related programs
—
initiatives
designed to further improve BioThrax as a medical countermeasure, and include
seeeking approval for use as a post-exposure prophylaxis against anthrax disease
in combination with antibiotic treatment, extending expiry dating from four
years to five years and reducing the number of required doses from five to
three. We are also developing a BioThrax dual adjuvant vaccine product candidate
designed to provide rapid immunity, in part with funding from the National
Institute of Allergy and Infectious Diseases, or NIAID, and the Biomedical
Advanced Research and Development Authority, or BARDA.
rPA vaccine —
an anthrax
vaccine product candidate that is composed of a purified recombinant protective
antigen, or rPA, protein with an aluminum hydroxide adjuvant.
Double-mutant rPA vaccine —
an anthrax vaccine product candidate based on a double-mutant form of rPA
combined with adjuvant CpG 7909 and an aluminum hydroxide adjuvant, which we are
developing in part with funding from NIAID and BARDA.
Anthrax immune globulin therapeutic
—
a therapeutic antibody product candidate for the treatment of
symptomatic anthrax disease, which we are developing in part with funding from
NIAID and for which we initiated a Phase I/II clinical trial and pilot animal
studies in 2009.
Anthrax monoclonal antibody
therapeutic
—
a
human monoclonal antibody product candidate for treatment of patients who
present symptoms of anthrax disease, which we are developing in part with
funding from NIAID and BARDA.
Tuberculosis
Tuberculosis vaccine —
a
single-dose, injectable vaccine product candidate for use in persons who have
been vaccinated with Bacille Calmette-Guerin, or BCG, the vaccine currently
available against tuberculosis, for which we have commenced a Phase IIb clinical
trial in South Africa that is expected to conclude in 2012, and which we are
developing as part of our joint venture with the University of Oxford with
funding and services from The Wellcome Trust and the Aeras Global Tuberculosis
Vaccine Foundation.
Typhoid
Typhella™ (typhoid vaccine live oral
ZH9) —
a single-dose, drinkable vaccine product candidate that we are
developing with funding from the Wellcome Trust, for which we have completed
Phase I clinical trials in the United States, the United Kingdom and Vietnam,
and Phase II clinical trials in Vietnam and the United States.
Influenza
Influenza vaccine —
a vaccine
product candidate for prevention of influenza strains across multiple
seasons.
Chlamydia
Chlamydia vaccine —
a vaccine
product candidate designed to prevent disease caused by clinically relevant
strains of
Chlamydia
trachomatis.
We have
derived substantially all of our product revenues from sales of BioThrax to the
U.S. Department of Defense, or DoD, and the U.S. Department of Health and Human
Services, or HHS, and expect for the foreseeable future to continue to derive
substantially all of our product revenues from the sale of BioThrax to U.S.
government customers. Product revenues were $217.2 million in 2009, $169.1
million in 2008 and $169.8 million in 2007. We are focused on increasing sales
of BioThrax to U.S. government customers, expanding the market for BioThrax to
other international and domestic customers and pursuing label expansions and
improvements for BioThrax.
We also
seek to advance development of our product candidates through external funding
arrangements. Revenues from contracts and grants were $17.6 million in 2009,
$9.4 million in 2008 and $13.1 million in 2007. We continue to actively pursue
additional government-sponsored development contracts and grants and to
encourage both governmental and non-governmental agencies and philanthropic
organizations to provide development funding or to conduct clinical studies of
our product candidates.
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 our wholly owned subsidiary. We subsequently
renamed BioPort as Emergent BioDefense Operations Lansing Inc.
Our
Strategy
Our goal
is to become a leading, fully integrated biopharmaceutical company focused on
the manufacture, development and commercialization of vaccines and antibody
therapies that assist the body’s immune system to prevent or treat
disease. We are focused on four key strategic priorities to achieve
this goal and drive our long-term growth. These priorities
are:
Expand anthrax franchise.
We
derive several benefits from our anthrax-related business that are typically not
present in a non-governmentally funded setting. For example, many of
our costs of development are reimbursed by the U.S. government, reducing our
risk and in some cases also providing a profit margin for our development
work. We believe that if the government supports the development of a
biodefense product candidate, it will be more likely to procure that
product. Furthermore, cash flows generated by BioThrax sales fund our
development efforts, which we believe gives us an advantage over many of our
competitors that rely primarily on non-governmental external sources of funds.
We are focused on increasing sales of BioThrax to the U.S. government, creating
new markets for BioThrax domestically and internationally and pursuing label
expansions and improvements for BioThrax. Product candidates in our anthrax
franchise, such as our anthrax immune globulin therapeutic, human monoclonal
antibody therapeutic, and rPA vaccine, have the potential to generate product
revenue in advance of marketing approval.
Grow immune-related product pipeline
using platform technologies.
Focusing on platform technologies can help
optimize our research and development investment. Our live attenuated
modified vaccinia Ankara virus, or MVA, platform technology can potentially be
used as a viral vector for delivery of multiple vaccine antigens for different
disease-causing organisms using recombinant technology. Development
of multiple product candidates on a common platform enables us to build on
common expertise in process development and manufacturing scale-up, leverage
platform manufacturing facilities and, we believe, establish proprietary and
competitive advantages. We anticipate conducting proof-of-concept
studies in new product candidates using our proprietary MVA platform, and may
consider opportunistic acquisitions of additional platform
technologies.
Expand core biologics manufacturing
capabilities.
Since 1998, we have manufactured BioThrax at our vaccine
manufacturing facility in Lansing, Michigan. To augment our existing
manufacturing capabilities, we constructed a 50,000 square foot manufacturing
facility on our Lansing campus. In October 2009, we submitted a proposal to
BARDA for scaleup, qualification, validation and licensure of BioThrax in this
facility. In late 2009, we purchased a 56,000 square foot
manufacturing facility in Baltimore, Maryland. We expect to use this
facility to support our future product development and manufacturing needs, and
are currently renovating and improving this facility so that it will be capable
of supporting development of our product candidates. We also
anticipate using a commercial manufacturing partner for the manufacture of one
or more of our commercial products, and may explore additional alternatives to
support the manufacture of our platform products. Our employees
possess manufacturing, quality and regulatory expertise that we believe provides
advantages in bringing new products to market, and provides us with a
competitive advantage.
Complement organic growth with
strategic acquisitions.
We seek to obtain product candidates through
acquisitions and licensing arrangements with third parties, with a primary focus
on late-stage development programs. This approach enables us to avoid the
expense and time entailed in early-stage research activities and, we believe, to
minimize product development and commercialization risks and may enable us to
accelerate product development timelines. Specifically, we are primarily seeking
to acquire one or more additional product candidates either in Phase III
clinical trials or that are well positioned for entry into Phase III clinical
trials in the near term. We are also seeking to in-license one or more novel
antigens for development using our platform technology. Additionally, we may
announce, from time to time, the acquisition or license of approved or early
stage product candidates or the entry into collaborations to continue to grow
our product portfolio.
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 effective public health
management. According to a 2008 report issued by Kalorama Information, a market
research organization, the world market for preventative vaccines in 2007
totaled $16.3 billion, up from $11.7 billion in 2006. The Kalorama report
estimates that the world vaccines market will grow at a compound annual rate of
13.1% from 2008 to 2013, and exceed $36 billion by 2013, as new product
introductions continue and usage of current products expands
further. New vaccine technologies, coupled with a greater
understanding of how infectious microorganisms, 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 paid for either directly by patients or
paid for or reimbursed by managed care organizations, other private health plans
or public insurers. With respect to certain diseases affecting general public
health, particularly in developing countries, public health authorities or
non-governmental organizations may fund the cost of developing vaccines against
these diseases. According to a 2006 report issued by Frost & Sullivan, a
market research organization, public purchases of vaccines, including
immunization programs and government stockpiles, account for approximately 90%
of the total volume of worldwide vaccine sales. Although private market
purchases of vaccines represent only 10% of total worldwide vaccine sales in
terms of volume, they accounted for approximately 60% of total worldwide vaccine
revenues in 2005.
The
market for biodefense countermeasures, including vaccines and antibody
therapies, 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. Most U.S. government
spending on biodefense programs is in the form of development funding from
NIAID, BARDA and the DoD (including the Defense Advanced Research Projects
Agency, or DARPA), and procurement of countermeasures by BARDA, the Centers for
Disease Control, or CDC, and the DoD. The U.S. government is now the largest
source of development and procurement funding for academic institutions and
biotechnology companies conducting biodefense research or developing vaccines
and immunotherapies directed at potential agents of bioterror or
biowarfare.
The
Project BioShield Act, which became law in 2004, authorizes the procurement of
countermeasures for chemical, biological, radiological and nuclear attacks for
the Strategic National Stockpile, or SNS, which is a national repository of
medical assets and countermeasures designed to provide federal, 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. Project BioShield provided appropriations of $5.6 billion to
be expended over ten years into a special reserve fund. The Pandemic and
All-Hazards Preparedness Act, passed in 2006, established BARDA as the agency
responsible for awarding procurement contracts for biomedical countermeasures
and providing development funding for advanced research and development in the
biodefense arena, supplements the funding available under Project BioShield for
chemical, biological, radiological and nuclear countermeasures, and provides
funding for infectious disease pandemics. Funding for BARDA is provided by
annual appropriations by Congress. Congress also appropriates annual funding for
the CDC for the procurement of medical assets and countermeasures for the SNS
and for NIAID to conduct biodefense research. This appropriation funding
supplements amounts available under Project BioShield.
The DoD,
primarily through the Military Vaccine Agency, or 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 level of spending by the
DoD for MilVax is a function of the size of the U.S. military and the DoD’s
protocols with respect to vaccine stockpile management and active immunization.
The DoD provides development funding for biodefense vaccines through its Joint
Vaccine Acquisition Program, or JVAP. The DoD procures doses of BioThrax from
HHS, rather than from us directly, to satisfy ongoing requirements for its
active immunization program in accordance with an October 2007 Presidential
Directive that outlines the U.S. governments objective to enhance coordination
and cooperation among federal agencies with respect to countermeasure
procurement and stockpile management.
In
addition to the U.S. government, we believe that other potential markets for the
sale of biodefense countermeasures include:
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·
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state
and local governments, which we expect may be interested in these products
to protect emergency responders, such as police, fire and emergency
medical personnel;
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·
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foreign
governments, including both defense and public health
agencies;
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·
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non-governmental
organizations and multinational companies, including the U.S. Postal
Service and transportation and security companies;
and
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·
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health
care providers, including hospitals and
clinics.
|
Although
we have had modest sales to these markets to date, we believe that they may
comprise an important growth opportunity for the overall biodefense market in
the future.
Scientific
Background
The human
body’s immune system provides protection against pathogens, such as bacteria and
viruses, through immune responses that are generated by a type of white blood
cell 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 to that antigen is recalled. Generally, there are two types of
specific immune responses: humoral immune response and cell-mediated immune
response. Humoral immunity is provided by proteins, known as antibodies or
immunoglobulins, that are produced by specific 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 by interacting with other immune cells to initiate the
production of antibodies or activating cells that kill and eliminate infected
cells.
A vaccine
is normally given to a healthy person as a prophylaxis in order to generate an
immune response that will protect against future infection and/or disease caused
by a specific pathogen. Following vaccination against a specific disease, the
immune system’s memory of antigens induced by the vaccine allows for a
protective immune response to be generated against the pathogen when encountered
in the future. The use of a vaccine to stimulate a person’s immune system to
generate a protective response is termed active immunization.
An immune
globulin, also known as a polyclonal antibody, is a therapeutic that provides an
immediate protective effect. Immune globulin is normally made by collecting
plasma from individuals who have contracted a particular disease or who have
been vaccinated against a particular disease and whose plasma contains a mixture
of protective antibodies. This mixture can be composed of antibodies
that recognize and bind to different pathogen antigens or antibodies that
recognize and bind to different sites on a single antigen. These polyclonal
antibodies are isolated by fractionation of the plasma, purified and then
administered either intravenously or by intramuscular injection to
patients.
A
monoclonal antibody is also a therapeutic that provides an immediate protective
effect. However, unlike immune globulins, which can recognize and
bind to multiple antigens, monoclonal antibodies are specific to a single
antigen and are generally produced in cell culture rather than collected from
humans. Monoclonal antibodies are administered either intravenously
or by intramuscular injection to patients.
Because
it normally takes several weeks for the immune system to generate antibodies
after vaccination, immune globulins and monoclonal antibodies are used in
situations in which it is not possible to wait for active immunization to
generate the protective immune response. This use of immune globulins and
monoclonal antibodies is therefore termed passive immunization.
Products
The
following table summarizes key information about our marketed product, BioThrax,
and our product candidates. We use multiple technologies to develop our product
candidates, including bacterial fermentation, cell culture and recombinant DNA
technologies. For each 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 commercial rights to BioThrax and the
product candidates listed below.
Disease
|
Product
or Candidate
|
Description
|
Stage
of Development
|
Anthrax
|
BioThrax
|
The
only FDA approved vaccine for pre-exposure prevention of anthrax
disease
|
FDA
approved
|
|
rPA
vaccine*
|
Pre/post-exposure
prophylactic
|
Phase
II
|
|
Double-mutant
rPA vaccine*
|
Pre/post-exposure
prophylactic
|
Preclinical
|
|
Immune
globulin*
|
Therapeutic
|
Phase
I/ II
|
|
Monoclonal
antibody*
|
Therapeutic
|
Preclinical
|
|
|
|
|
Tuberculosis
|
Tuberculosis
vaccine
|
Prophylactic
|
Phase
II
|
|
|
|
|
Typhoid
|
Typhella™
(typhoid
vaccine live oral ZH9)
|
Prophylactic
|
Phase
II
|
|
|
|
|
Influenza
|
Recombinant
virally vectored influenza vaccine
|
Prophylactic
|
Preclinical
|
|
|
|
|
Chlamydia
|
Chlamydia
vaccine
|
Prophylactic
|
Preclinical
|
*
We currently intend to rely on the
FDA animal rule in seeking marketing approval for indications or 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 animal
studies and any additional supporting data. For more information about the FDA
animal rule, see “Government Regulation — Clinical Trials.”
No
assessment of the safety or efficacy of our product candidates can be considered
definitive until all clinical trials needed to support a submission for
marketing approval are completed and a license is granted by the FDA. The
results of our completed preclinical tests and Phase I and Phase II clinical
trials do not ensure that our ongoing and planned later stage clinical trials
for our product candidates will be successful. A failure of one or more of our
clinical trials can occur at any stage of testing.
The
results of a clinical trial are statistically significant if they are unlikely
to have occurred by chance. We have determined the statistical significance of
clinical 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 potential efficacy and are neither required nor
sufficient to enable a product candidate to proceed to Phase II or later stages
of 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.
Anthrax
Disease 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. Anthrax infections occur if the spores enter the body through a cut,
abrasion or open sore, or by ingestion or inhalation. Once inside the body,
anthrax spores germinate into anthrax bacteria that then multiply. Anthrax
bacteria secrete three proteins: protective antigen, lethal factor and edema
factor. Each of these proteins individually are non-toxic, but if allowed to
interact on the surface of human or animal cells, they can form the highly
potent toxins known as lethal toxin (protective antigen and lethal factor) or
edema toxin (protective antigen and edema factor).
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%.
Gastrointestinal
anthrax is also a rare form of anthrax. Gastrointestinal anthrax is generally
acquired through the consumption of meat and other food products contaminated
with anthrax spores.
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, malaise, or
weakness, lasting up to a few days. After a brief period of improvement, the
release of anthrax toxins may cause an abrupt deterioration in the health of the
infected person, with the sudden onset of symptoms, including fever, shock and
respiratory failure as the lungs fill with fluids. 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.
Market opportunity and current
treatments.
To date, the principal customer for anthrax medical
countermeasures has been the U.S. government, specifically HHS and the DoD. We
believe that federal, state and local governments and allied foreign governments
are significant potential customers for anthrax medical
countermeasures.
The only
FDA-approved vaccine for pre-exposure prophylaxis against anthrax disease is
BioThrax. The only FDA-approved products for post-exposure prophylaxis against
anthrax disease are antibiotics, which are typically administered over a 60-day
period. Antibiotics are effective against anthrax post-exposure by killing the
anthrax bacteria before the bacteria can release anthrax toxins into the body.
However, antibiotics are not effective against anthrax toxins once the toxins
are present in the body. Antibiotics also are ineffective against anthrax spores
that are in the body and that remain dormant following exposure. Anthrax spores
may remain in the body, for extended periods, which can potentially germinate
into anthrax bacteria after antibiotic treatment has ended and lead to infection
and disease. Infection may also 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. In addition, antibiotics may not be effective against
antibiotic resistant strains of anthrax. Because of these limitations, the CDC
has recommended administering BioThrax in combination with antibiotics under an
investigational new drug application, or IND, with informed consent of the
patient as a post-exposure prophylaxis against anthrax disease as an emergency
public health intervention. BioThrax may also be administered in a post-exposure
setting without informed consent under an Emergency Use Authorization, or EUA,
which can be issued in the event of a declared emergency by the commissioner of
the FDA.
Although
BioThrax is not currently approved by the FDA for post-exposure prophylaxis, we
are pursuing a label expansion for this indication. We are also developing an
anthrax immune globulin therapeutic product candidate and an anthrax monoclonal
antibody therapeutic product candidate, both of which are designed for treatment
of symptomatic patients. Several other companies also are developing
post-exposure anthrax therapeutic products. We intend to progress the
development of and pursue development and procurement contracts for both our
anthrax immune globulin and monoclonal therapeutic product
candidates. We believe that anthrax therapeutics would be eligible to
be procured by HHS under Project BioShield for inclusion in the SNS prior to
receiving marketing approval, provided that the specific product candidate is
deemed to be licensable.
BioThrax
and BioThrax Related Programs
BioThrax.
BioThrax is the
only FDA-approved vaccine for the prevention of anthrax disease. 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 sterile culture
filtrate, made from a non-virulent strain of
Bacillus anthracis
. Based on
its current product labeling, BioThrax is administered by intramuscular
injection in five doses over an 18-month period, with an annual booster dose
recommended thereafter. After the initial dose, four additional doses are given
at one, six, 12 and 18 months. BioThrax includes aluminum hydroxide as an
adjuvant. BioThrax is not currently approved as a post-exposure prophylaxis.
Following the October 2001 anthrax letter attacks, however, the CDC provided
BioThrax under an IND protocol for administration as a post-exposure prophylaxis
on a voluntary basis to Capitol Hill employees and certain others who may have
been exposed to anthrax.
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, or VAERS, database maintained by the CDC and the FDA with respect to
BioThrax. The report of any such adverse event to the VAERS database is not
proof that the vaccine caused such an event. These putative serious adverse
events, including diabetes, heart attacks, autoimmune diseases, Guillain-Barre
syndrome, lupus, multiple sclerosis, lymphoma and death, have not been causally
linked to the administration of BioThrax. In June 2009, we received
approval from the FDA of our supplemental biologics license application, or BLA,
to extend the expiry dating of BioThrax from three years to four years, which
will allow BioThrax to be stockpiled for a longer period of
time.
BioThrax
Related Programs
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Reduced dosing schedule.
The CDC completed a clinical trial in December 2009 to evaluate
whether as few as three doses of BioThrax administered over six months,
with booster doses up to three years apart, will confer an adequate immune
response. The CDC trial assessed 1,563 healthy civilian men and women
between the ages of 18 and 61, randomized to one of six groups: Group A
(original vaccination schedule of 0, 2, 4 weeks, and 6, 12, 18 months with
annual boosters out to 42 months), Group B (same schedule as Group A, but
all vaccinations given by intramuscular route), Group C (same as Group B,
but with 2-week dose dropped), Group D (same as Group B, but with 2-week,
12- and 30-month doses dropped), Group E (same as Group B, but with
2-week, 12-, 19-, and 30-month doses dropped), and the control group that
received saline placebo. According to the statistical analysis
plan of the trial, a switch in the dosing schedule would be justified by
demonstrated non-inferiority of immune response of the test arm with a
modified vaccination schedule (Group C, D, or E) to the original approved
schedule (Group A). The primary endpoints for comparison to
determine non-inferiority were (1) geometric mean antibody titer (GMT),
(2) geometric mean antibody concentration (GMC), and (3) the proportion of
subjects achieving 4-fold increase in antibody titer after vaccination.
Noninferiority had to be demonstrated for all primary endpoints in order
to support the use of specific regimens. In accordance with applicable
regulatory guidance and the FDA’s recommendations to the CDC on trial
design, all non-inferiority tests were done at the 0.025 significance
level to insure that results were not due to random
variation. A conclusion of non-inferiority, to be accepted by
the FDA, required that the upper limits of 95% confidence intervals be
less than 1.5 for GMT and GMC ratios (i.e. Group A/Group C, D, or E) and
less than 0.1 for differences in proportions of subjects achieving 4-fold
increase in antibody titer (i.e. Group A – Group C, D, or
E). In this trial, the immunogenicity for Group C, Group
D, and Group E were all non-inferior to Group A for all primary
endpoints. Based on these results, we expect to file a
supplement to our BLA requesting a change in the label to vaccinate people
using a 0, 1, 6 month schedule, with triennial
boosters.
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In this
trial, the intramuscular route of administration resulted in significantly fewer
adverse events when compared to the subcutaneous route for six of the eight
solicited local (injection site) adverse events (warmth, tenderness, erythema,
swelling, bruising and itching). Intramuscular administration
resulted in a shorter duration of the adverse event than subcutaneous
administration for the same six solicited adverse events. Few
statistically significant differences were detected in the occurrence of
systemic adverse events between the intramuscular treatment groups and the
subcutaneous treatment group.
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Expanded label indication to
include post-exposure prophylaxis.
We plan to seek approval of
BioThrax for post-exposure prophylaxis against anthrax disease, to be
administered along with antibiotics. In October 2007, we
completed a human clinical trial of BioThrax for post-exposure indication
using the anticipated dosing schedule of three doses of BioThrax given two
weeks apart to collect data that, in combination with data from
our non-clinical studies, will be used to design our anticipated pivotal
human clinical trial. Emergent is employing he FDA animal rule to attempt
to demonstrate efficacy of BioThrax in an anthrax post-exposure
setting. We have conducted non-clinical studies for a
post-exposure indication to evaluate the effect of a humanized dose of
BioThrax in combination with antibiotics compared to antibiotics alone in
rabbits exposed by inhalation to anthrax
spores.
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In 2005,
NIAID completed a proof-of-concept study 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 similar 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 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 the
administration of BioThrax in combination with an antibiotic to non-human
primates infected with anthrax. We have also completed pre-exposure active
immunization studies in rabbits and non-human primates. We believe
that the data from our planned non-clinical efficacy studies, together with the
human immunogenicity data, if favorable, will be sufficient to support the
filing with the FDA of a BLA supplement for marketing approval of BioThrax for
the post-exposure indication. In February 2007, the FDA granted Fast Track
designation for BioThrax as a post-exposure prophylaxis against anthrax disease.
In September 2007, BARDA awarded us up to $11.5 million in development funding
for this indication, $8.8 million of which was paid in the fourth quarter of
2007. We are currently engaged in discussions with the FDA regarding further
steps to secure a post-exposure prophylaxis indication.
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BioThrax dual adjuvant
vaccine.
We are developing, in part with funding from
NIAID and BARDA, a product candidate based on BioThrax combined with CpG
7909, an adjuvant that we licensed from Pfizer, Inc. We anticipate that
this candidate will, among other things, have one or more of the following
advanced characteristics: reduced number of doses required to produce a
protective immune response, room temperature storage, enhanced immune
response, longer expiry dating or a novel delivery method. We previously
collaborated with Coley Pharmaceuticals, the owner of CpG 7909 before its
sale to Pfizer, to conduct a double-blind Phase I clinical trial of
BioThrax combined with CpG 7909 that was funded by DARPA. That trial,
which was completed in 2005 and involved 69 healthy volunteers, was
designed to evaluate the safety and immunogenicity of this product
candidate compared to BioThrax alone and to CpG 7909 alone. In this Phase
I trial, the product candidate was administered in three doses by
intramuscular injection at two week intervals, and elicited an enhanced
immune response. We have obtained additional U.S. government funding to
supplement the further development of this vaccine product
candidate.
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The
immunogenicity parameters for the Phase I clinical trial of BioThrax combined
with CpG 7909 were the mean peak antibody concentration and the median time to
achieve mean peak immune response in trial participants who received BioThrax
combined with CpG 7909 as compared to trial participants who received BioThrax
alone. 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 geometric anti-PA
IgG concentration approximately 42.5 days after first injection. Participants
who received BioThrax combined with CpG 7909 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 CpG 7909 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, to
BioThrax or to CpG 7909.
Additional Anthrax Product Candidates
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rPA vaccine
.
We are developing
a recombinant form of the protective antigen protein as an anthrax
vaccine. This vaccine contains purified rPA formulated with an aluminum
hydroxide adjuvant and is designed to induce antibodies that neutralize
anthrax toxins in a manner similar to BioThrax. The vaccine product
candidate is based on development work at USAMRIID. Our rPA vaccine
product candidate has been the subject of two research and development
grants from NIAID totaling approximately $100 million. It has also been
evaluated in one Phase II clinical trial, but this trial did not achieve
statistically significant results due to product stability
issues. We believe these stability issues have since been
resolved, and that future trials will not be adversely affected by
stability concerns. In December 2009, BARDA cancelled a
previously issued procurement request for proposal, or RFP, for an rPA
vaccine for the SNS in favor of a Broad Agency Announcement, or BAA, for
rPA vaccine development. We submitted a proposal responding to the BAA in
January 2010 to develop our product
candidate.
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Double-mutant rPA vaccine.
We are developing an anthrax vaccine product candidate based on a
double-mutant form of rPA, or dmPA, combined with CpG 7909 and Alhydrogel,
an aluminum hydroxide adjuvant. In September 2009, we received
an award from NIAID under the American Recovery and Reinvestment Act that
included funding for development of a dry powder formulation and for the
manufacture of bulk drug substance and final drug product in a current
Good Manufacturing Practice, or cGMP, environment. We expect
our development efforts for this product candidate to continue throughout
2010.
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Immune globulin therapeutic.
We are developing a human anthrax immune globulin, or AIG,
therapeutic product candidate, which is a polyclonal antibody therapeutic,
as a treatment for patients who have been exposed to anthrax spores and
who present with symptoms of anthrax disease. We expect that, if approved,
this product candidate would be prescribed as an intravenous infusion
either as a monotherapy or in conjunction with a regimen of antibiotics.
We are developing our anthrax immune globulin therapeutic product
candidate using plasma produced by healthy donors who have been immunized
with BioThrax. We have engaged Talecris Biotherapeutics, Inc. to
fractionate, purify and fill our AIG at its FDA-approved facilities, and
have manufactured three full-scale lots under cGMP conditions using the
validated and approved process at Talecris. We plan to rely on the FDA’s
animal rule to support approval of this product
candidate.
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In March
2009, we commenced a Phase I/II clinical trial to evaluate the safety and
pharmacokinetics of our anthrax immune globulin therapeutic product candidate in
healthy human volunteers. We expect to complete dosing in this trial in October
2010. In addition, we are continuing to conduct non-clinical efficacy
studies. NIAID has provided us grant and contract funding for a
combination of initiatives, including studies designed to assess the
tolerability, pharmacokinetics and efficacy of this product candidate in
non-clinical studies, the development and validation of product assays, and a
human clinical trial to evaluate safety and pharmacokinetics. We are currently
assessing applicable regulatory requirements in order to make a determination
regarding further development of this product candidate.
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Monoclonal antibody
therapeutic.
We are developing a human monoclonal
antibody therapeutic product candidate as an intravenous treatment for
patients who present with symptoms of anthrax disease. The
development of this product candidate is being funded in part by BARDA
under our contract with NIAID to support efficacy testing in non-clinical
studies and the establishment of a cGMP manufacturing
process. We expect to file an Investigational New Drug
Application, or IND, in 2010 for a Phase I clinical trial to evaluate the
safety and pharmacokinetics this product candidate in healthy human
volunteers.
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Tuberculosis
Disease overview.
Tuberculosis, or TB, is an
infection caused by
Myobacterium tuberculosis,
which manifests primarily as an illness of the respiratory system and is spread
by coughing, sneezing and associated respiratory actions. According to the World
Health Organization, or WHO, TB is the world's second leading cause of death
from infectious disease in adults, after HIV/AIDS.
Prevalence, market opportunity and
current treatment.
Approximately 2 billion people were infected with
Myobacterium tuberculosis
worldwide in 2005, according to the Tuberculosis Vaccine Institiute. One
of ten people infected will develop the active form of the disease during their
lifetime. A majority of TB cases occur in individuals between the ages of 25 to
54 years old. Between 1.6 and 2 million people die annually worldwide with more
than 8 million new cases developing each year.
The economic impact of TB
in high-disease burden countries is significant. BCG, introduced in
1921, is currently the only available vaccine against tuberculosis.
BCG is
administered to infants throughout the developing world and in certain countries
in the developed world. However, BCG provides only variable protection against
tuberculosis and is not sufficiently effective in adults.
Standard
TB treatment involves a six to nine month treatment regimen with a combination
of three or four antibiotic agents. These drugs are reasonably
effective but poorly tolerated. Low patient compliance has
contributed to the emergence of multi-drug resistant TB strains, or MDR-TB, and
extensively-drug resistant strains, or XDR-TB. MDR-TB does not respond to the
standard treatment using first line-drugs, such as isoniazid and rifampicin.
Treatment of MDR-TB can last up to two years with drugs that produce more side
effects and are more expensive. According to the WHO, each year an estimated
490,000 new MDR-TB cases occur, and more than 130,000 deaths are recorded
worldwide as a result of MDR-TB infections. XDR-TB, is caused by bacteria
resistant to all of the most effective drugs, including, for example, isoniazid,
rifampicin, fluoroquinolone, and any of the second-line anti-TB injectable
drugs, such as amikacin, kanamycin or capreomycin. As a result,
XDR-TB is extremely difficult to treat. There are an estimated 40,000
new XDR-TB cases reported annually worldwide. By March 2008, XDR-TB
cases had been confirmed in more than 45 countries and in all regions of the
world. The emergence of MDR-TB and XDR-TB strains of
Myobacterium tuberculosis
complicates treating the infection, indicating that a vaccine may be the most
appropriate countermeasure for controlling TB.
Tuberculosis vaccine.
Our
tuberculosis vaccine product candidate uses the attenuated, or
weakened, modified vaccinia Ankara virus, or MVA, as a vaccine
platform to present antigen 85A to the immune system. Antigen 85A is a major
antigen from
Myobacterium
tuberculosis,
which forms part of the antigen 85
complex. Antigen 85A is highly conserved among all mycobacterial
species and is present in all strains of BCG, suggesting that antigen 85A should
elicit a strong immune response in individuals vaccinated with BCG. The vector,
or carrier, for our TB vaccine product candidate is MVA. MVA is an
attenuated strain of Vaccinia virus, the small pox vaccine, which does not
replicate in mammalian cells. Another strain of MVA has been administered to
more than 120,000 individuals as part of the smallpox eradication program and
was found to be safe and well tolerated, despite the deliberate vaccination of
high risk groups. Our tuberculosis vaccine, a strain of MVA into which the
Antigen 85A gene has been cloned - designated as MVA85A - has been designed to
increase the immune response to Antigen 85A and thus increase vaccine protective
efficacy in individuals previously vaccinated with BCG. The clinical development
of MVA85A is aimed towards the production of an effective TB vaccine for
infants, adolescents, and HIV-infected adults to augment the immunity induced by
a previous BCG vaccination. We have licensed the commercial rights to
our tuberculosis vaccine from the Oxford-Emergent Tuberculosis Consortium, or
OETC.
To date,
the MVA85A vaccine has been evaluated in seven Phase I clinical
trials. These trials were conducted in an aggregate of 126 healthy
adults (BCG-naive, BCG-vaccinated, or latently infected with TB) and 12 BCG
vaccinated adolescents living in the UK, The Gambia or South
Africa. All trials evaluated the safety and immunogenicity of various
intradermal doses of MVA85A, first in healthy adults, both BCG-vaccinated and
BCG-naive, and then also in special populations such as adolescents and
TB/HIV-infected adults. The key findings from these clinical trials
were that the MVA85A vaccine was well tolerated, with no significant safety
concerns, and previous vaccination with BCG did not affect the safety
profile. Additionally, MVA85A was effective at increasing cellular
immune responses to antigen 85A in individuals previously vaccinated with
BCG.
Ongoing
Phase I trials are intended to investigate further the safety and immunogenicity
of MVA85A in special populations such as adolescents and TB/HIV-infected
individuals. There are 5 trials currently being conducted in
adults. Additionally, three Phase II trials are also being carried
out in infants and children in sub-Saharan Africa. In The Gambia, a Phase II
open label, randomized dose escalation and non-interference
trial intended to involve approximately 216 infants is being
conducted. The purpose of this study is to evaluate the impact, if
any, of MVA85A vaccination when given at two dose levels on the immunogenicity
of Expanded Program on Immunization, or
EPI, vaccines
administered simultaneously to infants previously vaccinated with BCG. In South
Africa, an open label, non-randomized placebo-controlled Phase II trial with
approximately 168 subjects is being conducted to evaluate the safety and
immunogenicity of MVA85A in healthy children and infants who received prior BCG
vaccination.
A Phase
IIb trial in infants commenced in South Africa in the first half of
2009. Designed as a double-blind, randomized placebo-controlled
evaluation of MVA85A/AERAS-485 for safety, immunogenicity and prevention of TB
in BCG-vaccinated, HIV-negative infants, this trial is expected to include 2,784
infants. The trial is being conducted at a single site in South
Africa and infants will be followed both for the development of tuberculosis and
for serious adverse events. We currently expect this trial to conclude in
2012.
Typhoid
Disease overview.
Typhoid,
also known as typhoid fever, is caused by infection with the bacterium
Salmonella enterica
(
type
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.
Prevalence, market opportunity and
current treatment.
Typhoid fever continues to be a public health problem
in many developing countries with an estimated 22 million cases occurring per
year worldwide, resulting in approximately 200,000 deaths annually. Increasing
multi-drug resistance of the typhoid bacterium reduces effective treatment
options, increases treatment costs and results in higher rates of serious
complications and deaths. According to the CDC, approximately 400 cases of
typhoid are reported annually in the United States, of which approximately 70%
are contracted abroad. 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. According to the U.S. Office of Travel and Tourism, over 30
million people travel annually to typhoid endemic areas. This travelers market
represents our primary target market. Potential additional markets include U.S.
military personnel deployed in regions where typhoid is endemic, as well as
children and adults living in these areas.
One oral
typhoid vaccine and one injectable typhoid vaccine are currently approved for
administration in both the United States and Europe and are primarily sold for
use in the travelers market. The approved oral typhoid vaccine is available in
liquid and capsule formulations. Both formulations require multiple 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 not effectively 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 for
typhoid could be as high as 20%. Although vaccines are available, the WHO has
stated that improved vaccines against typhoid fever are desirable, especially
for children 2 years of age and older.
Typhella.
We are developing
Typhella, a live attenuated typhoid vaccine, which contains deletions in two
genes of the
Salmonella typhi
bacterium designed to attenuate virulence and limit replication in the
host. We have designed Typhella to be administered in a single drinkable dose
prior to travel to countries where typhoid is endemic.
We have
completed the following clinical trials of Typhella 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 product candidate.
In this study, Typhella was immunogenic, eliciting both cell mediated and
humoral immune responses, 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 product candidate. In
this trial, Typhella was immunogenic and well tolerated at all dose
levels.
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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 Typhella, one using bottled water and another
using tap water for reconstitution before administration. We vaccinated 16
subjects with each 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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A
single-blind, placebo controlled Phase I clinical trial of Typhella 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 Phase I trial in Vietnam. The
purpose of the trial was to evaluate the safety and immunogenicity of
Typhella when administered as a single oral dose in adults living in an
endemic area. The primary immunogenicity endpoint for this trial was the
proportion of trial participants with an immune response to
Salmonella typhi
following administration of a single oral dose of
Typhella. Based on initial data from this trial, Typhella met
the criterion for immunogenicity, with approximately 68% of subjects who
received the vaccine product candidate mounting a humoral antibody
response. Typhella was well tolerated by trial participants, with no
serious adverse events reported.
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A
single-blind randomized, placebo controlled, Phase II clinical trial of
Typhella in Vietnam in 151 healthy children between the ages of 5 and 14
years. A total of 101 children received Typhella and 50 children received
placebo. This was our first trial involving a pediatric population. We
conducted this trial in collaboration with the Wellcome Trust, Oxford
University and the Hospital for Tropical Diseases, Ho Chi Minh City,
Vietnam. The Wellcome Trust provided funding for this trial. The purpose
of this trial was to evaluate the safety and immunogenicity of Typhella in
children in an endemic area. The immunogenicity parameter for this trial
was the percentage of trial participants with an immune response to
Salmonella typhi
following administration of a single oral dose of Typhella. In this
trial, 93% of the children receiving a vaccine dose developed an immune
response as measured by increases in serum
Salmonella typhi
LPS-specific IgG antibody levels, 94% of the children receiving a
vaccine dose developed an immune response as measured by increase in serum
Salmonella typhi
LPS-specific IgA antibody levels, and 97% of the children receiving
a vaccine dose developed an immune response, which was statistically
significantly greater than the percentage of children receiving placebo
who developed an immune response. Typhella was well tolerated by trial
participants, with no serious adverse events
reported.
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A
randomized, double blind, placebo controlled, single dose, dose escalating
Phase II clinical trial conducted in the United States in 187 healthy
adult volunteers. The purpose of this trial was to determine the
immunogenicity, safety and tolerability of the vaccine product candidate
manufactured at a new facility at dose levels across the range of the
proposed manufacturing potency specification. The primary
immunogenicity endpoint for this trial was the proportion of trial
participants with an immune response to
Salmonella typhi
following administration of a single oral dose of Typhella. In this
trial, the vaccine was immunogeneic and well tolerated across the range of
doses tested.
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In these six clinical trials, Typhella 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 safety and immunogenicity of a single dose
regimen at an appropriate dose level in populations in both endemic and
non-endemic areas.
We are currently evaluating manufacturing alternatives in countries in which we
believe manufacturing costs will be feasible because we do not currently have
manufacturing resources, either internal or through a contract manufacturer, to
produce Typhella at competitively viable costs. Once we have engaged
a contract manufacturer, we expect that the remainder of our planned clinical
development program for this vaccine product candidate will consist of the
following:
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Phase II clinical trial.
We plan to conduct a Phase II clinical trial in India in children
under five years of age as a step towards conducting a Phase III clinical
trial in an area where the incidence of disease is prevalent. The purpose
of this Phase II trial is to evaluate the safety and immunogenicity of
Typhella in this endemic population in preparation for our planned Phase
III clinical trial.
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Challenge study
. We
plan to initiate a vaccine protection study using a human challenge model,
pending the provision of funding by Oxford to establish that
model.
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Disease surveillance study.
We plan to conduct a disease surveillance study in India to confirm
that a sufficient number of subjects will be included in our planned Phase
III clinical trial. The Wellcome Trust has provided funding for a portion
of this surveillance study.
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Phase III clinical trial.
We plan to conduct a single-blind Phase III clinical trial in
India, where typhoid is endemic. The purpose of this trial will be to
evaluate the efficacy of Typhella 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 the data to support the filing with
the FDA of a BLA for marketing approval of Typhella. We plan to continue
to monitor the incidence of typhoid in the trial participants for several
years after vaccination. We are currently seeking external funding to
support this trial.
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Tolerability and
immunogenicity study.
Concurrently with our planned Phase III
clinical trial in India, 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 Typhella to
support marketing approval in the United States and Europe. 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. We will seek to establish an immune correlate of
protection in the Phase III efficacy trial to allow us to extrapolate
efficacy to developed world populations. The currently approved
typhoid vaccines relied on similar clinical trials for regulatory
approval.
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Influenza
Disease overview.
Influenza, or the flu, is
a highly contagious respiratory illness caused by influenza
viruses. While there are only two types of influenza viruses that
cause significant illness in humans, types A and B, these flu viruses can easily
mutate to give rise to new subtypes, such as H1N1, H3N2 or
H5N1. These new subtypes are often sufficiently different from
previous strains so that prior immunity from vaccination or natural illness
provides little to no protection against infection. Once infected,
illness can range from a mild, upper-respiratory infection to an acute,
life-threatening illness. Influenza is often characterized by a sudden onset of
high fever, cough (usually dry), headache, muscle and joint pain, severe
malaise, sore throat and runny nose. Influenza viruses are
transmitted from person to person primarily through contact with infected
airborne droplets generated by coughing and sneezing. The time from infection to
illness can be as short as two days. The infectious period for influenza is
defined as one day before fever begins until 24 hours after the fever
ends.
Prevalence, market opportunity and
current treatment.
Influenza tends to spread rapidly in seasonal
epidemics that occur yearly during autumn and winter in temperate regions.
Illness resulting in hospitalization or death occurs mainly among high-risk
groups, including the very young, elderly or chronically ill. According to the
WHO, these annual epidemics result in approximately three to five million cases
of severe illness and 250,000 to 500,000 deaths worldwide. According to the CDC,
in the United States on an annual basis, influenza affects on average 5% to 20%
of the population, more than 200,000 people are hospitalized from flu-related
complications, and approximately 30,000 to 35,000 people die from flu or
flu-related causes.
The WHO
recommends vaccination as the most effective way to prevent the disease or
severe outcomes from the illness. Safe and effective vaccines have been
available and used for more than 60 years. Among healthy adults, an influenza
vaccine can prevent 70% to 90% of influenza-specific illness during seasons
where there has been little change in the virus. Among the elderly, the vaccine
reduces severe illnesses and complications by up to 60%, and deaths by up to
80%. Most healthy symptomatic people recover within a week without requiring
medical attention. In some cases, an antiviral drug may be
prescribed.
The
current value of the seasonal flu market, based on the 2008-2009 flu season, is
estimated to be approximately $2.8 billion across the seven major markets, with
growth of 12.6% since 2005-2006. This is the result of expanded
recommendations in the United States regarding vaccination of infants and an
increasing disease awareness resulting from recent pandemic flu
threats. Improved vaccines for the elderly, and faster and more
flexible manufacturing technologies are key unmet needs.
Manufacturing overview
.
Current flu vaccine manufacturing typically requires growing the influenza virus
in fertilized chicken eggs. This can be a lengthy and time-consuming
process and depends on the availability of a suitable supply of
eggs. Most flu vaccines, both seasonal and pandemic, are currently
produced using egg-based manufacturing processes. Influenza viruses
can also be grown using more modern cell culture technologies, in which the
influenza virus is allowed to infect and grow in mammalian cells that were
propagated to high levels using bioreactors and sterile media. This
manufacturing method is a simpler and more predictable process than traditional
egg-based manufacturing processes, but has not yet been implemented domestically
on a commercial scale.
Influenza Vaccine.
We are
developing a recombinant viral vaccine product candidate that, if successful,
would provide protection against multiple influenza strains. We
expect to design this product candidate to overcome the limitation of current
seasonal influenza vaccines, which are highly strain specific and need to be
manufactured every year to match the current circulating strains. Our approach
relies on using our live, attenuated MVA vector as a vaccine delivery
system. We believe that presentation of influenza antigens using this
delivery vector could induce broad immune responses sufficient to provide
protection against multiple influenza viruses and over multiple
seasons. Unlike traditional influenza vaccines that predominately
target the variable hemagglutinin, or HA, and neuraminidase, or NA,
antigens present on the surface of the virus, we are evaluating both the HA
antigen as well as internal, conserved antigens that do not change from year to
year. In addition, MVA has the potential for cell-based, rather than
egg-based manufacture, and we are developing this capability as part of this
program. To date, we have generated initially promising
preclinical data with these antigens and are in the process of conducting
additional preclinical studies to optimize our MVA-based product candidates for
potential future clinical development.
Chlamydia
Disease overview.
Chlamydia,
caused by infection with the bacterium
Chlamydia trachomatis
is the
most prevalent sexually transmitted bacterial disease in the world.
Chlamydia trachomatis
can cause urogenital and reproductive tract 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.
Prevalence, market opportunity and
current treatment.
The WHO estimates that approximately 92 million new
cases of
Chlamydia trachomatis
infection occur annually worldwide, of which approximately four million
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. There is no vaccine currently on the market for
Chlamydia trachomatis.
However, screening tests and antibiotic treatments have been effective at
containing
Chlamydia
trachomatis
in the United States and Europe. Although
Chlamydia trachomatis
infection can be treated 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.
Chlamydia vaccine.
We are
evaluating a recombinant protein subunit Chlamydia vaccine for clinically
relevant strains of
Chlamydia
trachomatis.
We are designing our vaccine product candidate to be
administered by intramuscular injection. We have cloned our recombinant vaccine
product candidate and produced it in
E. coli.
In preclinical
studies, our recombinant vaccine product candidate, when co-administered with an
adjuvant, protected animals against both upper reproductive tract disease and
lower reproductive tract infection induced by
Chlamydia trachomatis.
We are
also developing an MVA-based chlamydia vaccine product candidate and expect to
conduct preclinical immunogenicity and efficacy studies during
2010.
Manufacturing
We
manufacture BioThrax at our facilities in Lansing, Michigan using
well-established vaccine manufacturing procedures. In 2009, we completed
construction of a new 50,000 square foot manufacturing facility at the Lansing
campus, and we submitted a proposal to BARDA in October 2009 for scale-up,
qualification, validation and licensure for the manufacture of BioThrax in this
facility.
In
November 2009, we paid approximately $8.2 million to purchase a 56,000 square
foot manufacturing facility in Baltimore, Maryland. We expect to use
this facility to support our future product development and manufacturing needs,
and we are currently renovating and improving this facility so that it will be
capable of supporting development of our pipeline product
candidates. Our specific plans for this facility will be contingent
on the progress of our existing development programs and the outcome of our
efforts to acquire new product candidates.
We
currently rely on contract manufacturers and other third parties to manufacture
the supplies we require for preclinical studies and clinical trials and for
supplies and raw materials used for the production of BioThrax and our product
candidates. We typically acquire these supplies and raw materials on a purchase
order basis in quantities adequate to meet our needs. We believe that
there are adequate alternative sources of supply available for most of our raw
materials if any of our current suppliers were unable to meet our needs. We
anticipate that we may use our existing plant facilities in Michigan 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 to support
some of our product candidates.
Hollister-Stier
Laboratories LLC performs contract filling for BioThrax 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, 2010. We have also entered into an
agreement for contract filling operations with JHP Pharmaceuticals, LLC, which
must now be qualified and licensed by the FDA to fill BioThrax at its
facilities.
Talecris
Biotherapeutics, Inc. has agreed to perform plasma fractionation and
purification and contract filling of our anthrax immune globulin therapeutic
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 manufacturing requirements for our anthrax immune globulin therapeutic
product candidate 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.
We have agreed to pay Talecris mid-single digit royalties on net sales on a
country-by-country basis for commercial product manufactured by Talecris. Our
contract with Talecris expires December 31, 2014, and 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. Our contract also
provided for the commencement of commercial manufacturing activities as of
January 1, 2010, which would have triggered an obligation on our part to
purchase a significant amount of source plasma per year for a five-year
term. Because our anthrax immune globulin therapeutic product
candidate is not currently ready for commercial-scale manufacturing, we recently
agreed to extend commencement of the commercial term to April 1, 2010, and are
in negotiations with Talecris for a longer-term resolution regarding commercial
production. In the event that we are not able to negotiate a
satisfactory resolution, we may be required to explore other options for our
anthrax immune globulin program. Under the existing agreement, after
three years following initiation of commercial manufacturing, either party may
terminate the contract upon two years’ advance notice. We have the right to
terminate the contract, under specified circumstances, including if we
discontinue our production of anthrax immune globulin source plasma or the
development of our anthrax immune globulin therapeutic product
candidate.
We used a
contract manufacturer for the supply of Typhella for the Phase I and Phase II
trials in Vietnam, the United Kingdom and the U.S. We may use a different
contract manufacturer for the supply of this vaccine product candidate for
future trials. We have also entered into an agreement with a new contract
manufacturer for our monoclonal anthrax antibody therapeutic product
candidate.
We also
expect that we will rely on third parties for a portion of the manufacturing
process for commercial supplies of other product candidates that we successfully
develop, including fermentation for some of our vaccine product candidates and
contract fill and finish operations. The manufacture of biologic products and
the scale-up process necessary to manufacture quantities of product sufficient
for commercial launch are complex. If we are unable to secure relationships with
third party contract manufacturers that can provide sufficient supplies for the
commercial launch of our product candidates on commercially attractive terms,
our ability to capture market share may be adversely affected.
Marketing and
Sales
We
currently market and sell BioThrax directly to the U.S. government 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 for other
biodefense product candidates that we successfully develop. We may expand our
sales and marketing organization as we broaden our sales activities of
biodefense products at the state and local level, where we expect there will be
interest in these products to protect emergency responders such as police, fire
and emergency medical personnel, and other personnel whose occupation may cause
them to be at a high risk of exposure to biothreats.
We have
established marketing and sales offices in Munich, Germany and Singapore to
target sales of biodefense products to foreign governments. We have augmented
our international efforts by engaging third party marketing representatives to
identify potential opportunities to sell BioThrax in the Middle East, India,
Australia, and several countries in Southeast Asia and Europe, and anticipate
engaging additional representatives.
We expect
to increase our sales and marketing resources 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, especially in situations in which
the collaborator has particular expertise or resources for the commercialization
of our products or product candidates or access to 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. Merck & Co., GlaxoSmithKline, Sanofi
Pasteur, Novartis and Wyeth generated over 90% of the total worldwide vaccine
revenues in 2007. 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 narrowly focused companies,
including Aeras, Crucell, Cangene, Human Genome Sciences, Soligenix, Dynport
Vaccine Company LLC, Elusys, Bavarian Nordic, Panacea and PharmAthene, may also
prove to be significant competitors, particularly through collaborative
arrangements with large and established companies or through significant
development or procurement contracts with governmental agencies or philanthropic
organizations.
Our
biodefense product candidates face significant competition for U.S. government
funding for both development and procurement of medical countermeasures for
biological, chemical and nuclear threats, diagnostic testing systems and other
emergency preparedness countermeasures. 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. Our opportunity
to succeed in this industry 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.
Any
product candidate that we successfully develop and commercialize is likely to
compete with currently marketed products, such as vaccines and antibody
therapies, including antibiotics, and with other product candidates that are in
development for the same indications. Specifically, the competition
for BioThrax and our product candidates includes the following:
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BioThrax.
Although
BioThrax is the only product approved by the FDA for human use for the
prevention of anthrax infection, we face significant potential competition
for the supply of anthrax vaccines to the U.S. government. Various
agencies of the U.S. government are providing funding to our competitors
for development of an anthrax vaccine based on recombinant protective
antigen. In addition, the United Kingdom Health Protection Agency, or HPA,
manufactures an anthrax vaccine for use by the government of the United
Kingdom. Other countries as well may have anthrax vaccines for use by or
in development for their own internal
purposes.
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rPA vaccine.
PharmAthene is currently developing a recombinant protective antigen based
anthrax vaccine. BARDA has awarded a modification to an existing
development contract to PharmAthene to fund the development of their rPA
vaccine. Panacea is also developing an rPA
vaccine.
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BioThrax related programs and
d
ouble-mutant rPA
vaccine
. PharmAthene is currently developing a recombinant
protective antigen based anthrax vaccine as well as a third-generation
anthrax vaccine.
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Anthrax immune globulin and
monoclonal antibody therapeutic
.
Cangene is currently
developing an anthrax immune globulin therapeutic based on plasma
collected from military personnel who have been vaccinated with BioThrax;
Human Genome Sciences is developing a monoclonal antibody to
Bacillus anthracis,
referred to as ABthrax
™
,
as a post-exposure therapeutic for anthrax infection; Elusys Therapeutics
is developing a monoclonal antibody to
Bacillus anthracis,
known as Anthim
™
,
as a pre-exposure and post-exposure prophylaxis against anthrax infection,
as well as an active treatment of disease; and PharmAthene and Medarex are
collaborating to develop a human antibody to
Bacillus anthracis,
known as Valortim
™
,
to protect human cells from damage by anthrax toxins. The FDA has granted
Fast Track designation and orphan drug status for ABthrax and Valortim.
HHS awarded development and procurement contracts to Human Genome Sciences
and Cangene to supply their anthrax therapeutics for evaluation of
efficacy as a post-exposure therapeutic for anthrax
infection.
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Typhella (typhoid vaccine live
oral ZH9).
One oral typhoid vaccine and one type of 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. Vi-conjugable injectable
vaccines are also in development.
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Tuberculosis vaccine.
The Aeras Global Tuberculosis Vaccine Foundation is developing or
supporting the development of five tuberculosis vaccine product
candidates, one of which is in a Phase II clinical trial, and the rest of
which are either in Phase I clinical trials or close to commencing Phase I
clinical trials. The Aeras Global Tuberculosis Vaccine Foundation is also
the sponsor of the Phase IIb clinical trial of our tuberculosis vaccine
product candidate.
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Influenza vaccine
.
Seasonal and pandemic influenza vaccines produced using conventional
egg-based manufacturing methodologies have been licensed and are being
sold in both the United States and internationally by GlaxoSmith Kline,
Novartis, MedImmune and others. Several flu vaccine
manufacturers are transitioning the production of their seasonal and
pandemic vaccines from egg-based processes to cell culture in an effort to
increase supply of these products. These cell culture-based
products are in various stages of advanced development. New
influenza vaccines containing hemagglutinin (HA) antigens and/or other flu
antigens produced using recombinant DNA technology and/or incorporate
adjuvants are also under development. Some of these second
generation flu vaccine candidates are in clinical
development.
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Chlamydia vaccine.
There is no vaccine currently on the market for chlamydia. Although
we are not aware of any competing chlamydia vaccine product candidate in
clinical development, competitors may have chlamydia vaccine product
candidates in preclinical development. Screening tests and targeted
antibiotic treatments have been effective at containing chlamydia in the
United States and Europe, which may have the effect of decreasing demand
for a vaccine.
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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
February 26, 2010, we owned or licensed exclusively a total of 20 U.S. patents
and 34 U.S. patent applications relating to our biodefense and commercial
product candidates, 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 own or exclusively licensed from USAMRIID
relating to our rPA vaccine product candidate and from OETC relating to our
tuberculosis vaccine product candidate to be important.
We
consider the following patents that we own or have licensed exclusively to be
most important to the protection of our commercial vaccine product candidates
that are in clinical development.
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Typhella (typhoid vaccine).
We hold four U.S. patents relating to Typhella. These patents have
claims to the composition of matter of the vaccine product candidate and
methods of use of live 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 Typhella. Our issued U.S.
patents expire, and, if issued, our U.S. patent applications would expire,
between 2015 and 2020. We hold 107 foreign counterpart patents to our
issued U.S. patents relating to Typhella, including counterparts under the
European Patent Convention and in Japan, that expire, and 14 foreign
patent applications that, if issued, would expire, between 2015 and 2020.
Additional patents relating to Typhella and delivery of vaccine antigens
are discussed below under “STM
technology.”
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STM technology.
We own
four U.S. 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 product candidate. In
addition, we have one pending U.S. patent application with additional
claims to methods for identifying virulence genes using our STM
technology. We also own 50 foreign counterpart patents,
including counterparts under the European Patent Convention and in Japan.
These patents relating to the STM method will expire in 2015. We also hold
14 foreign patent applications that, if issued would expire in 2015. Our
rights under these patents are licensed on a limited non-exclusive basis
to third parties to practice the STM method with respect to specific
microorganisms, not including
Salmonella typhi
or
hepatitis virus.
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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. We may become subject to patent
interference proceedings or claims that our products infringe or violate the
intellectual property rights of third parties. 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 or for the label expansions and improvements that we are pursuing
for BioThrax, our only intellectual property protection for BioThrax, aside from
the BioThrax trademark, 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 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 employees,
consultants, scientific advisors 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.
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 own 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 USAMRIID and OETC, which are described below.
We also have a license agreement with the Bavarian State Ministry of the
Environment and Public Health, or StMUG, relating to our MVA vector technology
that we may use in the development of future product candidates, which is also
described below.
USAMRIID
agreement
. In connection with our acquisition of our rPA
vaccine product candidate in May 2008, we became a licensee under an October
2003 agreement with USAMRIID pursuant to which we have exclusive worldwide
rights under the licensed patent technology to develop, manufacture and
commercialize product candidates for human use as a vaccine for the prevention
or treatment of anthrax infection. The licensed patent technology
includes two U.S. patents with claims to the strain of
B. anthracis
used to prepare
our rPA vaccine product candidate and methods of making a recombinant protective
antigen vaccine. The patents expire in 2014. There are no
foreign counterpart patents or applications.
Under the
license agreement, we are required to pay USAMRIID a small annual license fee,
aggregate payments of up to $535,000 upon the achievement of specified
development and regulatory milestones and mid single-digit royalties on sales of
licensed products to non-U.S. government customers. Our obligation to
pay royalties continues 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. In addition, we are required to pay USAMRIID a
specified fee per dose for any sales by us to a U.S. government
agency.
The
license agreement requires us to expend reasonable efforts and resources to
carry out the development and marketing of the inventions described and claimed
in the licensed patent technology, and once licensed products are being utilized
and have been made available to the public, to continue to make those licensed
products available to the public. We also bear responsibility for the
preparation, filing, prosecution and maintenance of patent applications and
patents included in the licensed patent technology.
USAMRIID
may terminate the license agreement if necessary to meet requirements for public
use specified by government regulations that we do not reasonably
satisfy. We may terminate the license agreement at any time upon 90
days advance written notice. Each party has the right to terminate
the license agreement following the occurrence of a material breach by the other
party, subject to USAMRIID’s ability to cure any breach.
OETC agreement
. In July 2008,
we entered into a technology license agreement with OETC pursuant to which we
obtained rights to develop, manufacture and commercialize product candidates
containing MVA85A for the prevention or treatment of
Mycobacterium tuberculosis
in
humans. Generally, our rights to manufacture the licensed product and
to commercialize it in developed countries are exclusive. The
licensed patent portfolio includes one U.S. patent application, which if issued
as a patent would expire in 2025. The licensed patent portfolio also
includes five foreign patents and 26 foreign patent applications, which if
issued as patents would expire in 2025.
Under the
license agreement, we paid OETC an initial signing fee of $750,000 and are
required to make aggregate payments of up to $89.5 million upon the achievement
of specified development, regulatory and sales milestones and pay escalating mid
single-digit to low double-digit royalties on sales of the licensed product in
developed countries. Our obligation to pay royalties continues on a
product-by-product and country-by-country basis until the later of ten years
from first commercial sale of the first licensed product in that country and the
expiration of the last-to-expire valid claim of the licensed patent application
in that country. We also reimbursed patent costs of approximately
$120,000 incurred by the University of Oxford and Isis Innovation Limited prior
to entering into the license agreement and have agreed to reimburse OETC for
future patent costs in specified developed countries. In addition, we
have agreed that to retain our commercial license rights, if the planned Phase
IIb clinical trial of the licensed product in infants is successful, we will
fund and undertake a Phase III clinical trial of the licensed product in
infants.
Under the
OETC license agreement, we are generally required to use reasonable efforts to
obtain regulatory approvals for an infant indication, and, if so approved, an
adolescent indication, and thereafter an indication for HIV infected adults;
develop a scaled-up manufacturing process that is cell-based and capable of
achieving minimum dose quantities; market a licensed product in countries in the
developed world for each indication for which regulatory approval has been
received; and attain a minimum level of annual sales of the licensed product in
the developed world.
The term
of the license agreement lasts until the later of 20 years from the grant of the
first marketing approval for a licensed product and the expiration of the
last-to-expire valid claim of the licensed patent application. We may
terminate the license agreement upon 30 days advance written notice if
regulatory approval is not obtained to commence the planned Phase IIB clinical
trial of the licensed product in infants by December 1, 2009 or if no subjects
in such trial have been dosed by May 31, 2010; following receipt of the final
report from the Phase IIb clinical trial of the licensed product in infants, a
bridging study and an age de-escalation study, whichever is later; or if OETC
terminates its underlying license agreement with Isis Innovation Limited for a
material breach of that agreement.
We may
terminate the license agreement upon 60 days advance written notice if any
clinical trial of the licensed product is suspended or terminated for safety
reasons or upon 90 days advance written notice if a clinical trial for an infant
indication within the development plan agreed by the parties does not meet
predetermined criteria for success. We may terminate the license
agreement upon 12 months advance written notice at any time after we receive the
final results in writing from the Phase IIb clinical trial of the licensed
product in infants. We and OETC each have the right to terminate the
license agreement following the occurrence of a material uncured breach by the
other party.
MVA platform technology.
In
July 2006, in connection with our acquisition of ViVacs GmbH, or ViVacs, a
German limited liability company, we acquired a license agreement with StMUG
that provides us the non-exclusive, worldwide right to develop and produce
viruses and viral products, including recombinant viral vectors, using MVA.
Under the license agreement, we are required to pay StMUG low single digit
royalties based on the net amounts or license fees that we receive from
third-party licensees who use MVA to develop products that are used for
research or diagnostic purposes and a mid-teens royalty based on the license
fees that we receive from products developed using MVA that are licensed as
starting material for the production of a smallpox vaccine.
The
license agreement does not have a specified term. In addition, StMUG may
terminate the license agreement upon the insolvency or liquidation of our wholly
owned subsidiary, Emergent Product Development GmbH, formerly ViVacs GmbH. Our
MVA 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 using recombinant technology. We are
currently exploring potential product candidates based on our MVA platform,
including a broadly cross protective influenza vaccine candidate.
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
products, including drugs and biological products. These agencies and other
federal, state and local entities regulate the 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 product and product
candidates.
U.S.
Government Regulation
In the
United States, BioThrax and our product candidates are regulated by the FDA as
biological products. Biological products 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 of development may result in various
adverse consequences, including delay in approving or refusal to approve a
product. Violations of regulatory requirements after product approval also may
result in enforcement actions, including withdrawal of product approval,
labeling restrictions, seizure of products, fines, injunctions and civil and
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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laboratory
and preclinical tests, including animal
testing;
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submission
to the FDA of an Investigational New Drug application, or IND, which must
become effective before clinical trials may
begin;
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completion
of human clinical trials and other studies evaluating the safety and
efficacy of the proposed product for each intended
use;
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FDA
inspection of facilities in which the product is manufactured, processed,
filled, packed and held to determine compliance with cGMP;
and
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submission
to the FDA and approval of an NDA, in the case of a drug, or a BLA
containing, among other things, preclinical, nonclinical and clinical
data; proposed labeling; and information to demonstrate that
the product will be safe and effective (in the case of an NDA) or safe,
pure and potent (in the case of a BLA), and 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 and the IND
Preclinical
studies include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, as well as animal studies to begin to assess its
potential safety and efficacy. We submit the results of the preclinical studies,
together with manufacturing information, analytical data, relevant literature,
and any available clinical data or experience in humans to the FDA as part of an
IND, which must become effective before we may begin human clinical trials. The
IND submission also contains one or more clinical trial protocols and an
investigation plan, 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, or IRB, 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 a clinical trial. The FDA, the IRB, or the sponsor may suspend
a clinical trial at any time on various ground, including a finding that the
study subjects are being exposed to an unacceptable health risk or that the
proposed clinical trials will not yield sufficient data to support licensure or
approval of the product.
Clinical
Trials
Human
clinical trials are typically conducted in three sequential phases, some of
which may overlap or be omitted in some cases:
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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, distribution, metabolism
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, and preliminary information related to the efficacy of the product
for specific targeted diseases, 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 has the potential to be
effective and appears to potentially have 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 the dosage amount(s), clinical efficacy, and
safety. Prior to commencing Phase III clinical trials , many sponsors
elect to meet with FDA officials to discuss the conduct and design of the
proposed trial or trials.
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Clinical
trials must be conducted in compliance with good clinical practice, or GCP,
requirements, which, among other things, provide standards for the protection of
human subjects. In addition, federal law now requires the listing, on a
publicly-available website, of registry and results information for most
clinical trials that we conduct. The federal requirements for submission of
results information will continue to be phased-in over the next year. Some
states have similar or more supplemental clinical trial reporting
laws.
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,” under some circumstances approval of such products 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
drug or 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 requirements
including post-marketing study requirements, restrictions imposed on marketing
or distribution or requirements to provide information to patients.
Marketing
Approval
In the
United States, if a product is regulated as a drug, an NDA must be submitted and
approved before 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
biological product, the purity and potency of the product candidate. Both NDAs
and BLAs must contain 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 an inspection of 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 or
processes fail to pass the FDA inspection, we may not receive approval to market
these products. The FDA may also conduct an audit of the clinical trial data
used to support the NDA or BLA.
The FDA
may refuse to approve an NDA or BLA if the applicable regulatory criteria are
not satisfied or if the FDA believes that additional clinical data is necessary.
Even if additional clinical data are 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 evaluation and mitigation
strategy, or REMS, or otherwise limit the scope of any approval or limit
labeling. Once issued, the FDA may withdraw product approval if compliance with
regulatory standards is not maintained or if problems, including concerns about
the safety or effectiveness of the product, occur after the product reaches the
market. In addition, in certain circumstances the FDA may require additional
testing and surveillance programs for approved products that have been
commercialized. The FDA has the power to prevent or limit further marketing or
distribution of a product based on the results of these post-marketing studies
or programs.
Fast
Track Designation
In
February 2007, the FDA granted Fast Track designation for BioThrax as a
post-exposure prophylaxis against anthrax infection. The FDA’s Fast Track
designation program is designed to facilitate the development and review of new
drugs, including biological products that are intended to treat serious or
life-threatening conditions and that demonstrate the potential to address unmet
medical needs for the conditions. Fast Track designation applies to a
combination of the product and the specific indication for which it is being
studied. Thus, it is the development program for a specific drug for a specific
indication that receives Fast Track designation. The sponsor of a product
designated as being in a Fast Track drug development program may engage in early
communication with the FDA, including timely meetings and early feedback on
clinical trials, and may submit portions of an application on a rolling basis
rather than waiting to submit a complete application. Products in Fast Track
drug development programs also may receive priority review or accelerated
approval, under which an application may be reviewed within six months after a
complete NDA or BLA is accepted for filing or sponsors may rely on a surrogate
endpoint for approval, respectively. The FDA may notify a sponsor that its
program is no longer classified as a Fast Track development program if the Fast
Track designation is no longer supported by emerging data or the designated drug
development program is no longer being pursued.
Post-Marketing
Regulation
Any
products manufactured or distributed by us pursuant to FDA licenses 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 product;
and
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advertising
and promotion restrictions.
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As a
condition of NDA or BLA approval, the FDA may require post-approval testing and
surveillance to monitor a product’s safety or efficacy. The FDA also
may impose other conditions, including labeling restrictions which can
materially impact the potential market and profitability of a
product.
The FDCA
and the FDA’s rules for advertising and promotion require, among other things,
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 certain planned
changes to the approved product, product labeling or manufacturing
process.
Drug
manufacturers, distributors and their subcontractors are required to register
their establishments with the FDA and state agencies. The cGMP requirements for
biological products in particular are extensive and compliance with them
requires considerable time, resources and ongoing investment. 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. For all drugs and biological products, the regulations require
investigation and correction of any deviations from cGMP requirements 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 all cGMP
requirements. 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.
We, our
collaborators or our 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 or Untitled Letters from the FDA asking us, our collaborators or
third party contractors to take or refrain from taking certain
actions;
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withdrawal
of the product from the market;
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FDA’s
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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injunctions
or the imposition of civil or criminal
penalties.
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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 biological product, 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, 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.
Regulation
of Immune Globulin Products
Products
derived from humans, including our anthrax immune globulin therapeutic
candidate, 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 IRB approval or to an IND, depending on factors such as whether
donors are to be vaccinated according to the vaccine’s 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.
Legislation
and 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 legislation and regulation described
below.
Project
BioShield
The
Project BioShield Act of 2004, or Project BioShield, 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,
or FAR, for procuring 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.
Under
Project BioShield, the Secretary of HHS, with the concurrence of the Secretary
of the Department of Homeland Security, or DHS, and upon the approval of the
President, can contract to purchase unapproved countermeasures for the SNS in
specified circumstances. The U.S. Congress is notified of a recommendation for a
stockpile purchase after Presidential approval. Project BioShield specifies that
a company supplying the countermeasure to the SNS 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; and
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there
is no adequate alternative to the product that is approved and
available.
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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.
Safety
Act
The
Support Anti-Terrorism by Fostering Effective Technologies Act, or 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, or PREP Act, enacted by
Congress in 2005 provides immunity to manufacturers from all claims under state
or federal law for “loss” arising out of the administration or use of a “covered
countermeasure.” However, injured persons may still bring a suit for “willful
misconduct” against the manufacturer under some circumstances. “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 October 2008, the
Secretary of HHS issued a declaration that BioThrax and our anthrax immune
globulin therapeutic
have been included as
covered countermeasures under the PREP Act. We cannot predict whether Congress
will fund the relevant PREP Act compensation programs or whether the necessary
prerequisites for immunity would be triggered with respect to our product or
product candidates.
Changing Legal and
Regulatory Landscape
Periodically legislation is introduced in the U.S. Congress that could change
the statutory provisions governing the approval, manufacturing and marketing of
drugs, including biological products. For example, previous
Congresses have considered, and the current Congress is considering, among other
things, comprehensive health reform legislation and proposed legislation to
permit the marketing of biosimilar biological products that rely on data
submitted in an innovator’s application to support their approval or
licensure. It is not possible to predict whether and when such
legislative changes will be enacted or what those changes would entail,
including whether the changes would provide innovators with a period of data
exclusivity or the length of any such exclusivity period.
In
addition, FDA regulations and guidance are often revised or reinterpreted by the
FDA in ways that may significantly affect our business and products. We cannot
predict whether or when legislation impacting our business will be enacted, what
FDA regulations, guidance or interpretations may change, or what the impact of
such changes, if any, may be in the future.
Foreign
Regulation
In
addition to regulations in the United States, we may 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 usually 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 product
candidate and the specific requirements of that jurisdiction. The requirements
governing the 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, in the European Union, 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/mutual recognition 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, neurodegenerative disorder, diabetes, auto-immune diseases and
other immune dysfunctions or 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/mutual recognition procedures provide for mutual recognition of
national approval decisions. Under these procedures, the holder of a national
marketing authorization may submit an application to a member state of its
choice (the reference member state, or RMS) and identify other member states in
which it also wishes to seek approval (concerned member states, or CMS). The RMS
reviews the application and circulates an assessment report to each CMS, which
must then decide whether to accept the RMS determination. If a member state does
not accept the RMS position, the disputed points are referred to the Committee
for Medicinal Products for Human Use, or CHMP, within the European Medicines
Agency, or EMEA. The CHMP adopts an opinion, which the European Commission uses
as a basis for a decision that is binding on all member states.
European
Union member states generally do not have separate rules or review procedures
for biological products 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 WHO 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
In the
United States, under the Orphan Drug Act, special incentives exist for sponsors
to develop drug and biological 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 or one that affects more than 200,000
individuals in the United States and for which there is no reasonable
expectation that the cost of developing and making available the drug for the
disease or condition will be recovered from sales of the drug 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. Requests for orphan drug
designation must be submitted prior to submission of an application for
marketing authorization for a rare disease or condition. 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 of the drug for the designated orphan disease or condition.
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 subsequent application from another applicant,
however, 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 public’s 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 a similar system to encourage the development and
marketing of medicinal products for rare diseases. Applications for orphan
designations are submitted to the EMEA and reviewed by a Committee on Orphan
Medicinal Products, or COMP, comprising representatives of the member states,
patient groups and other persons. The final decision is made by the European
Commission.
In the
European Union, a product can be designated as an orphan drug if it is intended
for either (i) a life-threatening or chronically debilitating condition
affecting not more than 5 in 10,000 persons in the European Union when the
application is made; or (ii) a serious and chronic condition in the European
Union for which, without incentives, it is unlikely that the marketing of the
product in the European Union 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 Union or, if such
method exists, that the medicinal product will be of significant benefit to
those affected by that condition. The COMP assesses the orphan status at both
the time of first designation and also in parallel with the review of every
marketing authorization application for an orphan medicine.
After a
marketing authorization has been granted in the European Union 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 even if they are similar, if
they are safer, more effective or otherwise clinically superior to
it.
Our
anthrax immune globulin therapeutic product candidate has been granted orphan
drug status in the United States and the European Union, and our tuberculosis
vaccine product candidate has been granted orphan drug status in the European
Union.
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 medicinal 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 increasing focus on drug and biologic pricing
in recent years. There are currently no direct government price controls over
private sector purchases in the United States. However, the Veterans Health Care
Act establishes mandatory price discounts for certain federal purchasers,
including the U.S. Department of Veterans Affairs, the U.S. Department of
Defense, or DoD, and the U.S. Public Health Service; the discounts are based on
prices charged to other customers.
Under the
Medicaid program, a joint federal/state program that provides medical coverage
to certain low income families and individuals, pharmaceutical manufacturers
must pay prescribed rebates on specified drugs, including biological products,
to enable them to be eligible for reimbursement. Vaccines are generally exempt
from these rebate requirements, and vaccines for Medicaid-eligible children are
primarily provided through the Vaccines for Children Program. Medicare, the
federal program that provides medical coverage for the elderly and disabled,
generally reimburses for physician-administered drugs, including biological
products, on the basis of the product’s average sales price, although the
principal vaccines that are reimbursed under Part B, Influenza, Pneumococcal and
Hepatitis B, are reimbursed based on average wholesale price.
Outpatient drugs and other vaccines may be reimbursed under Medicare Part D.
Part D is administered through private entities that attempt to negotiate price
concessions from pharmaceutical manufacturers. Various states have adopted
further mechanisms that seek to control drug 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 and exerts
additional downward pressure on the prices of pharmaceutical
products.
Public
and private health care payors control costs and influence drug and biologic
pricing through a variety of mechanisms, including negotiating discounts with
the manufacturers and 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 conditions or 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 certain specified
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 PHSA. Federal and state governments purchase the
majority of all pediatric vaccines produced in the United States, primarily
through the Vaccines for Children Program implemented by the U.S. Congress in
1994. The Vaccines 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
Union, 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 FAR 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 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 and accounting systems, statutorily
controlled pricing, sourcing and subcontracting restrictions and statutorily
mandated processes for adjudicating contract disputes.
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, or 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 certain vaccines to go through the
compensation program, as administered by the U.S. Court of Federal Claims,
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 of a covered vaccine may be found liable in a civil action. The
Vaccine Injury Act may not reduce or limit our liability arising out of product
liability claims.
Hazardous
Materials and Select Agents
Our
development and manufacturing processes may 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, U.S. Department of
Agriculture, or USDA, 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 USDA 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 inspections 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 subject to regulation by various
federal, state and local authorities. In the United States, in addition to the
FDA, such authorities, include 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 and the False Claims Act,
with the privacy provisions of the Health Insurance Portability and
Accountability Act and the Health Information Technology for Economic and
Clinical Health Act, and with similar state laws. Pricing and rebate programs
must comply with 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. In addition, 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 U.S. Department of the Treasury, the
antiboycott provisions of the Export Administration Act and the Internal Revenue
Code and the Foreign Corrupt Practices Act. Outside the United
States, advertising and promotion of medicinal products, along with associated
commercial practices, are often subject to significant government regulation by
local authorities.
Personnel
As of
December 31, 2009, we had 652 employees, including 172 employees engaged in
product development, 310 employees engaged in manufacturing, 11 employees
engaged in sales and marketing and 159 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 are represented by a labor union or covered by collective
bargaining agreements. We believe that our relations with our employees are
good.
Available
Information
We
maintain a website at
www.emergentbiosolutions.com
.
We make available, free of charge on our website, our annual report on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
as soon as reasonably practicable after we electronically file those reports
with, or furnish them to, the Securities and Exchange Commission, or
SEC.
We also
make available, free of charge on our website, the reports filed with the SEC by
our executive officers, directors and 10% stockholders pursuant to Section 16
under the Exchange Act as soon as reasonably practicable after copies of those
filings are provided to us by those persons. In addition, we intend to make
available on our website all disclosures that are required to be posted by
applicable law, the rules of the SEC or the New York Stock Exchange listing
standards regarding any amendment to, or waiver of, our code of business conduct
and ethics. The information contained on, or that can be accessed through, our
website is not a part of, or incorporated by reference, in this annual report on
Form 10-K.
Risks Related to Our
Dependence on U.S. Government Contracts
We have derived
substantially all of our revenue from sales of BioThrax under
contracts with
HHS or the DoD. If HHS or DoD demand for BioThrax is reduced, 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 only marketed product, to the U.S. government. We are
currently party to two contracts with the U.S. Department of Health and
Human Services, or HHS, to supply doses of BioThrax for placement into the
Strategic National Stockpile, or SNS. We are not currently party to a
procurement contract with the U.S. Department of Defense, or DoD, which
currently procures doses of BioThrax directly from the SNS. If the SNS
priorities change, or if the DoD dose requirements from the SNS are reduced, our
revenues could be substantially reduced.
Our
existing and prior contracts with HHS and the DoD 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 price per dose, the
number of doses and the timing of deliveries for BioThrax sales to the
U.S. government.
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:
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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;
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the
need to accurately estimate the resources and cost structure that will be
required to perform any contract that we might be
awarded;
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that
we may be ineligible to respond to a request for proposal issued by the
government;
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that
third parties could submit protests to our responses to requests for
proposal that could result in delays or withdrawals of those requests for
proposal; and
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that
we may incur or could suffer expenses or delays if our competitors protest
or challenge contract awards made to us pursuant to competitive bidding
and that any such protest or challenge would result in the resubmission of
bids based on modified specifications, or in termination, reduction or
modification of the awarded
contract.
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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
December 2009, BARDA cancelled a previously issued procurement RFP for an rPA
vaccine for the SNS in favor of BAA for rPA vaccine development. We
submitted a proposal responding to the BAA in January 2010 to develop our rPA
vaccine product. Additionally, 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 ongoing funding decisions by
the
government.
Reduced or discontinued funding of these contracts could cause our
financial
condition and operating results to suffer materially.
Our
principal customer for BioThrax is the U.S. government. In addition, we
anticipate that the U.S. government will be the principal customer for any
other biodefense products that we successfully develop. Over its lifetime, a
U.S. government program may be implemented through the award of many
different individual contracts and subcontracts. The funding of some government
programs is subject to Congressional appropriations, generally made on a fiscal
year basis even though a program may continue for several years. Our government
customers are subject to stringent budgetary constraints and political
considerations. For example, the sale of most supplied doses under our most
recent contract with HHS is subject to the annual appropriations process. If
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
regulations
and obligations under our U.S. government contracts and various federal
statutes
and regulations.
Our
business with the U.S. government is subject to specific procurement
regulations and a variety of other legal compliance obligations. These laws and
rules include those related to:
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government
security regulations;
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protection
of the environment;
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accuracy
of records and the recording of
costs; and
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foreign
corrupt practices.
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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 perform those contracts. If our estimates
are not accurate,
we may not be able to earn an adequate return or may incur a loss
under these
contracts.
Our
existing and prior contracts for the supply of BioThrax with HHS and the DoD
have been fixed price contracts. We expect that our future contracts with the
U.S. government for BioThrax as well as contracts for biodefense product
candidates that we successfully develop also 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 to absorb any costs in excess of the
fixed price. Estimating costs that are related to performance in accordance with
contract specifications is difficult, particularly where the period of
performance is over several years. 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, some of which may be customary, 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:
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terminate
existing contracts, in whole or in part, for any reason or no
reason;
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unilaterally
reduce or modify contracts or subcontracts, including equitable price
adjustments;
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cancel
multi-year contracts and related orders if funds for contract performance
for any subsequent year become
unavailable;
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decline
to exercise an option to renew a
contract;
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exercise
an option to purchase only the minimum amount, if any, specified in a
contract;
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decline
to exercise an option to purchase the maximum amount, if any, specified in
a contract;
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claim
rights to products, including intellectual property, developed under the
contract;
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take
actions that result in a longer development timeline than
expected;
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direct
the course of a development program in a manner not chosen by the
government contractor;
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suspend
or debar the contractor from doing business with the government or a
specific government agency;
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pursue
criminal or civil remedies under the False Claims Act and False Statements
Act; and
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control
or prohibit the export of products.
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Generally,
government contracts, including our HHS contracts for BioThrax, contain
provisions permitting unilateral termination or modification, in whole or in
part, at the government’s 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.
Legal proceedings
challenging the U.S. government’s use of BioThrax may be costly to
defend and could
limit future purchases of BioThrax by the U.S. government.
Legal
proceedings could be costly to defend, and the results could reduce demand for
BioThrax by the U.S. government. For example, a group of unnamed military
personnel filed a lawsuit in 2003 seeking to enjoin the DoD from administering
BioThrax on a mandatory basis without informed consent of the recipient or a
Presidential waiver, and a federal court issued the requested injunction in
2004. In 2005, the FDA issued an order affirming the BioThrax license, and, as a
result, an appellate court ruled in February 2006 that the injunction was
dissolved. In October 2006, the DoD announced that it was resuming a mandatory
vaccination program for BioThrax for designated personnel and contractors. In
December 2006, the same counsel who brought the prior lawsuit filed a new
lawsuit contending that the FDA’s 2005 final order should be set aside and that
BioThrax is not properly approved for use in the DoD’s vaccination program. In
February 2008, the federal district court in which that case was pending
dismissed the action, concluding that the FDA did not make a clear error of
judgment in reaffirming the safety and efficacy of BioThrax. On September 29,
2009, the United States Court of Appeals for the District of Columbia Circuit
issued its opinion in
Rempfer
v. Torti,
affirming the February 29, 2008 finding of the
District Court that the FDA did not violate the Administrative Procedure Act in
connection with its December 19, 2005 Final Order classifying BioThrax as safe
and effective. The plaintiffs’ petition for writ of certiorari in the
United States Supreme Court was denied on March 1, 2010.
Although
we are not a party to any lawsuits challenging the DoD’s mandatory use of
BioThrax, if a court were to again enjoin the DoD’s use of BioThrax on a
mandatory basis, the amount of future purchases of BioThrax by the
U.S. government could be affected. Furthermore, contractual indemnification
provisions and statutory liability protections may not fully protect us from all
related liabilities, and statutory liability protections could be revoked or
amended to reduce the scope of liability protection. For example, although we
have invoiced the DoD for reimbursement of our costs incurred with respect to
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 for defense costs associated with those claims. In addition,
lawsuits brought directly against us by third parties, even if not successful,
would require us to spend time and money defending the related litigation that
may not be reimbursed by insurance carriers or covered by indemnification under
existing contracts.
Risks Related to Our
Financial Position and Need for Additional Financing
We
may not maintain profitability in future periods or on a consistent
basis.
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 five fiscal years, we have not been
profitable for every quarter during that time. Our profitability is
substantially dependent on revenues from BioThrax product sales. Revenues from
BioThrax product sales have fluctuated significantly in recent quarters, and we
expect that they will continue to fluctuate significantly from quarter to
quarter based on several factors, including the timing of our fulfilling orders
from the U.S. government. Additionally, our profitability may be adversely
affected as we progress through various stages of ongoing or planned clinical
trials for our product candidates. We may not be able to achieve
consistent profitability on a quarterly basis or sustain or increase
profitability on an annual basis.
Our indebtedness
may limit cash flow available to invest in the ongoing needs of our
business.
As of
December 31, 2009, we had $65.7 million principal amount of debt
outstanding. We may seek to raise substantial external debt financing to provide
additional financial flexibility. Our leverage could have significant adverse
consequences, including:
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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;
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increasing
the amount of interest that we have to pay on debt with variable interest
rates if market rates of interest
increase;
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increasing
our vulnerability to general adverse economic and industry
conditions;
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limiting
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
compete; and
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placing
us at a competitive disadvantage compared to our competitors that have
less debt.
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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. In addition, the covenants under our existing debt instruments and
the pledge of our existing assets as collateral limit our 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. We also expect our 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 may undertake additional
facility projects in the future.
As of
December 31, 2009, we had $102.9 million of cash and cash equivalents. 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;
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the
acquisition of, and capital improvements to, new
facilities;
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the
timing of, and the costs involved in, completion of qualification and
validation activities related to our manufacturing facility in Lansing,
Michigan, the build out of our new manufacturing facility in Baltimore,
and any other new facilities;
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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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the
extent to which we lend money to third
parties;
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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;
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the
extent to which we acquire or invest in companies, businesses, products
and technologies;
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our
ability to obtain development funding from government entities and
non-government and philanthropic
organizations; and
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our
ability to establish and maintain
collaborations.
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Our
committed external sources of funds consist of the borrowing availability under
our revolving line of credit with Fifth Third Bank and grant and development
funding of some of our candidates. 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. Difficult economic
conditions may make it difficult to obtain financing on attractive terms or at
all. Lenders may be able to impose covenants on us that could be difficult to
satisfy, which could put us at increased risk of defaulting on debt. If
financing is unavailable or lost, we could be forced to delay, reduce the scope
of or eliminate our research and development programs or reduce our planned
commercialization efforts.
Our
ability to borrow additional amounts under our loan agreement 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
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 are in the
process of expanding our manufacturing facilities and entering into
arrangements with
contract manufacturing organizations. Delays in completing
facilities, or
delays or failures in obtaining regulatory approvals for new
manufacturing
facility projects or new contract manufacturing partners, could limit
our
potential revenues and growth.
We
continually evaluate alternatives for the manufacture of various product
candidates. We may seek to acquire one or more additional facilities or sign
agreements with contract manufacturing organizations. We have constructed a
50,000 square foot manufacturing facility on our Lansing, Michigan campus,
which is designed to produce multiple fermentation-based vaccines, subject to
developing, obtaining approval of, implementing and complying with appropriate
change-over procedures. Additionally, in 2009 we acquired a facility in
Baltimore, Maryland that we expect to utilize for certain product development or
manufacturing projects. In order to do so, we anticipate that we will be
required to make certain capital expenditures to upgrade and maintain this
facility.
Constructing,
preparing and maintaining a facility for manufacturing purposes is a significant
project. For example, for our new facility in Lansing, the process for
qualifying and validating for FDA licensure will be costly and time consuming,
may result in unanticipated delays and may cost more than expected due to a
number of factors, including regulatory requirements. The costs and time
required to comply with current good manufacturing practices, or cGMP,
regulations or similar regulatory requirements for sales of our products outside
the U.S., may be significant. If our qualification and validation activities are
delayed, we may not be able to meet our obligations to our customers, which may
limit our opportunities for growth. Costs associated with constructing,
qualifying and validating manufacturing facilities could require us to raise
additional funds from external sources, and we may not be able to do so on
favorable terms or at all.
We may
seek permission from the FDA to use our new manufacturing facility in Lansing
for the manufacture of both BioThrax and our rPA vaccine product candidate. This
could require approval from the FDA of change-over procedures. If approval of
such change-over procedures is delayed or not obtained, we may not be able to
utilize this facility for the manufacture of both BioThrax and our rPA vaccine
product candidate, which may limit our ability to grow our
revenues.
BioThrax and our
vaccine and therapeutic product candidates are complex to
manufacture and
ship, which could cause us to experience delays in revenues or
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 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 maintaining master seed banks
and preventing drift, obtaining materials, seed growth, fermentation,
filtration, filling, labeling, packaging, storage and shipping and quality
control and testing, may result in lot failures or manufacturing shut-down,
delay in the release of lots, product recalls, spoilage or regulatory action.
Success rates can vary dramatically at different stages of the manufacturing
process, which can lower yields and increase costs. From time to time we
experience deviations in the manufacturing process that may take significant
time and resources to resolve and if unresolved may affect manufacturing output
and could cause us to fail to satisfy customer orders or contractual
commitments, lead to a termination of one or more of our contracts, lead to
delays in our clinical trials, result in litigation or regulatory action against
us, or cause the FDA to cease releasing product until the deviations are
explained and corrected, any of which could be costly to us and negatively
impact our business.
We also
depend on certain single-source suppliers for materials and services necessary
for the manufacture of our product and product candidates. A disruption in the
availability of such materials or services from these suppliers could require us
to qualify and validate alternative suppliers. If we are unable to locate or
establish alternative suppliers, our ability to manufacture our products could
be adversely affected and also could cause us to fail to satisfy customer orders
or contractual commitments, lead to a termination of one or more of our
contracts, lead to delays in our clinical trials or result in litigation or
regulatory action against us, any of which could be costly to us and otherwise
harm our business.
FDA
approval is required for the release of each lot of BioThrax. We will not be
able to sell any lots that fail to satisfy the release testing specifications.
We must provide the FDA with the results of potency testing before lots are
released for sale. We have one mechanism for conducting this potency testing
that is reliant on a unique animal strain for which we have no alternative. In
developing alternatives, we may face significant regulatory hurdles. In the
event of a problem with this strain, if we have not developed alternatives, we
would not be able to provide the FDA with required potency testing.
In
addition, under our contacts with HHS to deliver doses of BioThrax, we are
responsible for shipping BioThrax and our product candidates must be maintained
at a prescribed temperature range during shipping, and variations from that
temperature range could result in loss of product and could adversely affect our
profitability. Delays, lot failures, shipping deviations, spoilage or other loss
during shipping could cause us to fail to satisfy customer orders or contractual
commitments, lead to a termination of one or more of our contracts, lead to
delays in our clinical trials or result in litigation or regulatory action
against us, any of which could be costly to us and otherwise harm our
business.
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 or slow downs;
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protests,
including by animal rights
activists;
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damage
to or destruction of the facility;
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regional
power shortages; or
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As our
equipment ages, it will need to be replaced. Replacement of equipment has the
potential to introduce variations in the manufacturing process that may result
in lot failures or manufacturing shut-down, delay in the release of lots,
product recalls, spoilage or regulatory action.
In
addition, providers of bioterrorism countermeasures could be subject to an
increased risk of terrorist activities. For example, the U.S. government
has designated our Lansing facility as a facility requiring additional security
to protect against potential terrorist threats to the facility. 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.
If the company on
which 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, or Hollister-Stier. Our contract with
Hollister-Stier expires on December 31, 2010. We have not established
internal redundancy for our filling functions, however, we have identified and
contracted with an additional provider that we believe can handle our filling
needs. Before this party may perform filling services for us, it must be
qualified and licensed by the FDA. Such qualification and licensure may require
use of a significant number of doses of BioThrax for consistency lots and
stability testing that we may not be able to sell in the future once testing is
complete. If Hollister-Stier is unable to perform filling services for us, we
would need to obtain FDA approval of our potential substitute filler, engage,
qualify and license an alternative filling company or develop our own filling
capabilities. Any new contract filling company or filling capabilities that we
acquire or develop will need to be approved by the FDA. Identifying and engaging
a new contract filling company or developing our own filling capabilities and
obtaining FDA approval could involve significant time and cost. As a result, we
might not be able to deliver BioThrax orders on a timely basis and our revenues
could decrease.
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, 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, or
choose to commercialize products for which the market is smaller than we
anticipate, we could incur significant unrecoverable costs from creating excess
capacity. 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.
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, or plan to rely, on third parties to manufacture the supplies of
our vaccine and therapeutic product candidates that we require for preclinical
and clinical development, including our anthrax immune globulin therapeutic,
anthrax monoclonal therapeutic, Typhella vaccine, tuberculosis vaccine and
chlamydia vaccine product candidates. Any significant delay in obtaining
adequate supplies of our product candidates could adversely affect our ability
to develop or commercialize these product candidates. For example, in 2008 the
initial manufacturer of our anthrax monoclonal therapeutic informed us it was
discontinuing contract manufacturing operations and we were forced to secure
alternative manufacturing resources.
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 and contract fill and finish
operations and we rely on those manufacturers to comply with a wide variety of
rules and regulations. If our contract manufacturers are unable to scale-up
production to generate enough materials for commercial launch, if manufacturing
is of insufficient quality, or if the costs of manufacturing are prohibitively
high, the success of those products may be jeopardized. For example, we are
currently evaluating manufacturing alternatives for Typhella in countries in
which we believe manufacturing costs will be economical. 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.
Third
party manufacturers under 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 or
develop our own manufacturing capabilities to satisfy our
requirements.
If
alternative suppliers are not available or are delayed in fulfilling our
requirements, or if we are unsuccessful in developing our own manufacturing
capabilities, we may not be able to obtain adequate supplies of our product
candidates on a timely basis. A change of manufacturers would require review and
approval from the FDA and the applicable foreign regulatory agencies. This
review may be costly and time consuming. There are a limited number of
manufacturers that operate under the FDA’s cGMP requirements and that are both
capable of manufacturing for us and willing to do so.
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 U.S. 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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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. We are also subject to
a variety of environmental laws in Michigan regarding underground storage tanks.
One such tank on our Lansing campus has leaked in the past. The State of
Michigan removed the tank, continues to monitor the situation and has agreed to
indemnify us for any resulting liabilities. In the event that the State of
Michigan does not indemnify us, or if our insurance does not cover the exposure
of any remediation that may be necessary, we may be required to spend
significant amounts on remediation efforts. In addition to complying with
environmental and occupational health and safety laws, we must comply with
special regulations relating to biosafety administered by the Centers for
Disease Control and Prevention, or 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 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. These laws and regulations may limit the countries in which
we may conduct development and manufacturing activities. 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 or we
could be suspended from the right to do business with the
U.S. government.
Our insurance
policies may not adequately compensate us for all liabilities that we
may incur
in the event of unanticipated costs, exposing us to potential expense and
reduced
profitability.
We hold a
number of insurance policies in an effort to protect ourselves against
extraordinary or unanticipated costs. Our general liability and excess insurance
policies provide for coverage up to annual aggregate limits of $12 million,
with coverage of $1 million per occurrence and $2 million in the
aggregate for general liability and $10 million per occurrence and in the
aggregate for excess liability. Both policies exclude coverage for liabilities
relating to 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 facility
with coverage of $1 million per occurrence and $2 million annual aggregate
limit and a $25,000 per claim deductible. We hold product liability and clinical
trial liability insurance policies for our commercial products and each clinical
trial we are conducting in amounts we deem appropriate.
These
policies are subject to deductibles, exclusions and coverage limitations.
Circumstances may arise where we face liabilities that are not covered by these
policies, or where our coverage is not adequate, which may expose us to
significant liabilities and significantly and adversely affect our business or
financial position.
Risks Related to Product
Development
Our business
depends significantly on our success in completing development and
commercialization
of our product candidates at acceptable costs. If we are unable to
commercialize
these product candidates, or experience significant delays or unanticipated
costs 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 vaccines and therapeutic product candidates. In addition to
BioThrax product sales, our ability to generate near term revenue is dependent
on the success of our development programs, on the U.S. government’s
interest in providing development funding for or procuring our product
candidates, on the interest of non-governmental organizations in providing grant
funding for development of our product candidates and on the commercial
viability of those product candidates. The commercial success of our product
candidates will depend on many factors, including accomplishing the following in
an economical manner:
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successful
development, formulation and cGMP scale-up of biological manufacturing
that meets FDA requirements;
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successful
development of animal models by the
U.S. government;
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successful
completion of non-clinical development, including studies in approved
animal models;
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the
expense of filing, prosecuting, defending and enforcing any patent claims
and other intellectual property
rights;
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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 SNS prior to FDA
approval;
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establishing
commercial manufacturing processes of our own or arrangements with
contract manufacturers;
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manufacturing
stable commercial supplies of product candidates, including materials
based on recombinant technology;
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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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If, as a
result of the foregoing factors or otherwise, we are prevented from developing
and commercializing a product candidate in an economically acceptable manner,
that product program may be adversely affected and the commercial success of the
product candidate may be harmed. For example, we recently agreed with
Talecris Biotherapeutics, Inc. to extend the commencement date of the commercial
term for manufacture of our anthrax immune globulin product
candidate. We are currently in negotiations with Talecris for a
longer-term resolution regarding commercial production; however, in the event
that we are not able to negotiate a satisfactory resolution we may be required
to explore other options for our anthrax immune globulin program that could
result in less favorable commercial success for this product candidate, or no
commercial success at all.
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 studies and clinical trials to establish proof of
concept, safety and efficacy of our product candidates. Preclinical and clinical
testing is expensive, difficult to design and implement, can take many years to
complete, and the outcome of such trials is uncertain. 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.
For
example, in December 2008, we and Sanofi Pasteur determined that the joint
efforts of our collaboration had not identified a viable product candidate,
which effectively ended most material development activities under our
meningitis B product development program. Additionally, our flu and
chlamydia vaccine product candidates are still in preclinical stages of
development, and if we are unable to successfully complete these development
efforts and commence clinical trails for these product candidates, our business
and opportunities for growth could be materially harmed.
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 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 vaccine and therapeutic product candidates in humans. If we are not
successful in completing the development and commercialization of our vaccine
and therapeutic product candidates, or if we are significantly delayed in doing
so, our business will be materially harmed.
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 could escalate and become cost
prohibitive;
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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;
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we
may not be successful in recruiting a sufficient number of qualifying
subjects for our clinical
trials; 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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For
example, the standard of care for the treatment of patients infected with
hepatitis B impacted our ability to recruit participants for our Phase II
clinical trial in the United Kingdom and Serbia because we administered our
product candidate as a monotherapy, causing us to cease enrollment in this
trial. If we are required to cease enrollment in other product candidate
clinical trials or are not able to commence such trials in a region in which our
enrollment efforts are successful, we will be unable to progress the clinical
programs for such product candidates. In addition, because some of our current
and future vaccine product candidates contain live attenuated viruses, our
testing of these vaccine product candidates is subject to additional risk. For
example, there have been reports of serious adverse events following
administration of live vaccine products in clinical trials conducted by other
vaccine developers. Also, for some of our current and future vaccine product
candidates, we expect to conduct clinical trials in chronic carriers of the
disease that our product candidate seeks to prevent. There have been reports of
disease flares in chronic carriers following administration of live vaccine
products.
If we are
required to conduct additional clinical trials or other testing of our product
candidates beyond those that we currently contemplate, if our clinical trials
are not well designed, 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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Our
product development costs will also increase if we experience delays in testing,
are required to conduct additional testing, or experience delays in product
approval. 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 the
Project BioShield Act, the Secretary of HHS can contract to purchase
countermeasures for the SNS 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 might not be selected by the
Secretary under this authority. Moreover, this authority could result in
increased competition for our products and product candidates.
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 foreign governments and state and local governments, which we expect
will be interested in BioThrax to protect emergency 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
undeveloped, and we may not be successful in generating meaningful sales of
BioThrax to these potential customers. To date, we have made only modest sales
to these customers. In particular, we have supplied small amounts of BioThrax
directly to several foreign governments. In 2007, 2008 and 2009, our sales of
BioThrax to customers other than the U.S. government represented a small
portion 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 may make it difficult for us to achieve significant sales of
BioThrax to customers other than the U.S. government. For example, many
foreign governments require licensure of BioThrax in their jurisdiction before
they will consider procuring doses. Additionally, 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 and related technology, 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 prohibitions could limit our sales of BioThrax to foreign
governments and other foreign customers. In addition, U.S. government
demand for anthrax vaccine may limit supplies of BioThrax available for sale to
non-U.S. government customers. For example, our efforts to develop domestic
commercial and international sales may be impeded by the DoD’s right under the
Defense Production Act to require us to deliver doses that we do not currently
anticipate. Furthermore, the DoD’s sale of BioThrax to foreign governments under
the Foreign Military Sales program has and may continue to have an adverse
effect on our ability to sell BioThrax internationally.
Our
ability to meet any potential 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 primary manufacturing facility in Lansing, Michigan
to manufacture BioThrax for current sales to U.S. government customers.
Additionally, we have constructed another manufacturing facility at our Lansing
campus that is available for production of BioThrax, subject to final
qualification and validation activities. To prepare for the event that we obtain
significant orders for BioThrax from customers other than the
U.S. government that cannot be accommodated by our existing facilities, we
may explore additional manufacturing alternatives that would enable us to
increase our manufacturing capacity and, as a result, allow us to increase sales
of BioThrax to customers other than the U.S. government. If we are
successful in this effort, it could be several years until a facility is
qualified and validated and able to produce saleable vaccine. If we are
unsuccessful in this effort, our opportunities for growth could be
limited.
Laws and
regulations governing international operations may preclude us from
developing,
manufacturing and selling certain product candidates outside of the
United States and
require us to develop and implement costly compliance
programs.
As we
continue to expand our operations outside of the United States, we must comply
with numerous laws and regulations relating to international business
operations. The creation and implementation of international business practices
compliance programs is costly and such programs are difficult to enforce,
particularly where reliance on third parties is required.
The
Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or
business from paying, offering, or authorizing payment or offering of anything
of value, directly or indirectly, to any foreign official, political party or
candidate for the purpose of influencing any act or decision of the foreign
entity in order to assist the individual or business in obtaining or retaining
business. The FCPA also obligates companies whose securities are listed in the
United States to comply with certain accounting provisions requiring the company
to maintain books and records that accurately and fairly reflect all
transactions of the corporation, including international subsidiaries, and to
devise and maintain an adequate system of internal accounting controls for
international operations. The anti-bribery provisions of the FCPA are enforced
primarily by the U.S. Department of Justice. The Securities Exchange
Commission, or SEC, is involved with enforcement of the books and records
provisions of the FCPA.
Compliance
with the FCPA is expensive and difficult, particularly in countries in which
corruption is a recognized problem. In addition, the FCPA presents particular
challenges in the pharmaceutical industry because, in many countries, hospitals
are operated by the government, and doctors and other hospital employees are
considered foreign officials. Certain payments to hospitals in connection with
clinical studies and other work have been deemed to be improper payments to
government officials and have led to FCPA enforcement actions. China is an
example of one jurisdiction in which we are contemplating future expansion where
we will need to exercise caution to ensure our compliance with the
FCPA.
Various
laws, regulations and executive orders also restrict the use and dissemination
outside of the United States, or the sharing with certain
non-U.S. nationals, of information classified for national security
purposes, as well as certain products and technical data relating to those
products. Our expanding presence outside of the United States will require us to
dedicate additional resources to comply with these laws, and these laws may
preclude us from developing, manufacturing or selling certain products and
product candidates outside of the United States, which could limit our growth
potential and increase our development costs.
The
failure to comply with laws governing international business practices may
result in substantial penalties, including suspension or debarment from
government contracting. Violation of the FCPA can result in significant civil
and criminal penalties. Indictment alone under the FCPA can lead to suspension
of the right to do business with the U.S. government until the pending
claims are resolved. Conviction of a violation of the FCPA can result in long
term disqualification as a government contractor. The termination of a
government contract or relationship as a result of our failure to satisfy any of
our obligations under laws governing international business practices would have
a negative impact on our operations and harm our reputation and ability to
procure government contracts. The SEC also may suspend or bar issuers from
trading securities on United States exchanges for violations of the FCPA’s
accounting provisions.
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 vaccine and
therapeutic 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.
In
addition, notwithstanding favorable findings regarding the safety and efficacy
of BioThrax by the FDA in its final ruling in December 2005, the 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 then-licensed 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
vaccine’s efficacy against inhalational anthrax. Continued reiteration of these
concerns could have a detrimental effect on the market acceptance of
BioThrax.
The use
of vaccines carries a risk of adverse health effects. The adverse reactions that
have been associated with the administration of BioThrax 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 adverse event to the vaccine
adverse event reporting system database is not proof that the vaccine caused
such event. Serious adverse events, including diabetes, heart attacks,
autoimmune diseases, including Guillian Barre syndrome, lupus, 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 from sales of 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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the
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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the
sufficiency of coverage or reimbursement by third
parties.
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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 management’s time and attention from other
business concerns. For example, between 2001 and 2006, members of the military
and various activist groups who oppose mandatory inoculation with BioThrax
petitioned the FDA and the federal courts to revoke the license for BioThrax and
to terminate the DoD program for the mandatory administration of BioThrax to
military personnel. Although the DoD has prevailed in those challenges to date,
the actions of these groups have created negative publicity about
BioThrax.
Additional
lawsuits, publicity campaigns or other negative publicity may adversely affect
the degree of market acceptance of, and thereby limit the demand for, BioThrax
and our biodefense product candidates. In such event, our ability to
market and sell such products may be hindered and the commercial success of
BioThrax and other products we develop will be harmed, thereby reducing our
revenues.
We have a small
sales and marketing 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 through a small, targeted sales and
marketing 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, which will be expensive
and time consuming.
We may
not be able to attract, hire, train and retain qualified sales and marketing
personnel to build a significant or effective sales and marketing force for
sales of biodefense product candidates to customers 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. 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 vaccine and therapeutic products 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 vaccine and therapeutics
are a number of pharmaceutical companies that have vaccine programs, including
Merck & Co., GlaxoSmithKline, Sanofi Pasteur, Pfizer, and Novartis, as
well as smaller more focused companies engaged in vaccine and therapeutic
development, such as Aeras, Crucell, Cangene, Human Genome Sciences, Soligenix,
Dynport Vaccine Company, Elusys, Bavarian Nordic and PharmAthene.
Any
vaccine and therapeutic product candidate that we successfully develop and
commercialize is likely to compete with currently marketed products, including
antibiotics and antiviral drugs, 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 intend to seek marketing
approval.
Although
BioThrax is the only anthrax vaccine approved by the FDA for the prevention of
anthrax infection, the government is funding the development of new products
that could compete with BioThrax, and could eventually procure those new
products in addition to, or instead of, BioThrax, potentially reducing our
BioThrax revenues. We also face competition for our biodefense product
candidates. For example, HHS has awarded a development and SNS procurement
contract to a competitor for an anthrax immune globulin therapeutic and is
assisting this company in its production efforts by providing it with BioThrax
doses that we delivered for placement into the SNS so that it can immunize
donors and obtain plasma for its anthrax immune globulin therapeutic product
candidate. HHS has awarded another development and SNS procurement contract to
another competitor for an anthrax monoclonal antibody as a post-exposure
therapeutic for anthrax infection. One oral typhoid vaccine and one injectable
typhoid vaccine are currently approved and administered in the U.S. and
Europe. The Aeras Global Tuberculosis Vaccine Foundation is developing or
supporting the development of five tuberculosis vaccine product candidates in
addition to ours, any of which could present competitive risks. Numerous
companies have vaccine product candidates in development that would compete with
any of our commercial product candidates for which we are seeking to 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 competing for government funding and 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 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 U.S. government 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, or PREP Act, which was signed
into law in December 2005, creates immunity for manufacturers of biodefense
countermeasures when the Secretary of HHS issues a declaration for their
manufacture, administration or use. A PREP Act declaration is meant to provide
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 protection under the PREP Act in cases of willful misconduct. Upon a
declaration by the Secretary of HHS, 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. Therefore, 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. In October
2008, the Secretary of HHS issued a PREP Act declaration identifying BioThrax
and our anthrax immune globulin therapeutic candidate as covered
countermeasures. We do not know, however, whether the PREP Act will provide
adequate protection or survive anticipated legal challenges to its
validity.
In August
2006, the Department of Homeland Security approved our application under the
Support Anti-Terrorism by Fostering Effective Technology Act, or 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 U.S. 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 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 prior contracts with the DoD and HHS provided that the
U.S. government would indemnify us for any damages resulting from product
liability claims, our current contracts with HHS do not contain such
indemnification, and we may not be able to negotiate similar indemnification
provisions in future contracts.
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. For example, we have been a defendant in
lawsuits filed on behalf of military personnel who alleged that they were
vaccinated with BioThrax by the DoD and claimed damages resulting from personal
injuries allegedly suffered because of the vaccinations. The plaintiffs in these
lawsuits claimed different injuries and sought varying amounts of damages.
Although we successfully defended these lawsuits, we cannot ensure that we will
be able to do so in the future.
Under our
prior BioThrax contracts with the DoD and HHS, the U.S. government
indemnified 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
the DoD for uninsured costs incurred in defending these claims; however, the DoD
has not acted on our requests for reimbursement. The collection process can be
lengthy and complicated, and there is no guarantee that we will be able to
recover these amounts from the U.S. government.
If we
cannot successfully defend ourselves against future claims that our product or
product candidates caused injuries and if we are not entitled to indemnity by
the U.S. government, or if the U.S. government does not honor its
indemnification obligations, we will incur substantial liabilities. Regardless
of merit or eventual outcome, product 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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the
inability to commercialize any products that we may
develop.
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We
currently have product liability insurance for coverage up to a $15 million
annual aggregate limit with a deductible of $75,000 per claim up to $375,000 in
aggregate. The amount of insurance that we currently hold may not be adequate to
cover all liabilities that may occur. Product liability insurance is difficult
to obtain and 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 large
scale deployment of BioThrax as a countermeasure to bioterrorism threats. We
rely on statutory protections in addition to insurance to mitigate our liability
exposure 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
U.S. and in other markets. Reimbursement by a third party payor may depend
upon a number of factors, including the third party payor’s 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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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 product 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 U.S., 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 non-governmental, charitable or philanthropic organizations fund
the cost of vaccines.
Medicare
Part B reimburses for physician-administered drugs and biologics based on
the product’s “average sales price.” This reimbursement methodology went into
effect in 2005 and has generally led to lower Medicare reimbursement levels than
under the reimbursement methodology in effect prior to that time. The Medicare
Part D outpatient prescription drug benefit went into effect in January
2006. Coverage under Medicare Part D is provided primarily through private
entities, which act as plan sponsors and negotiate price concessions from
pharmaceutical manufacturers.
In
addition, Congress is considering various legislative proposals to reform the
U.S. health care system. These legislative proposals generally are intended
to expand health care coverage to currently uninsured Americans and to limit the
rate of increase in health care spending. Such legislation, if enacted, could
decrease the price we receive or our sales volume for any approved products
which, in turn, could adversely affect our operating results and our overall
financial condition.
Certain products
we may develop may 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
Medicaid 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 our 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 U.S., which may include
re-importation from foreign countries where the drugs are sold at lower prices
than in the U.S. 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 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,
chairman of our Board of Directors and our chief executive officer, and Daniel
J. Abdun-Nabi, a member of our Board of Directors and our president and chief
operating officer, to be key to our BioThrax operations and our efforts to
develop and commercialize our product candidates. Both of these key employees
are at will employees and can terminate their employment at any time. 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 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 is
subject to audit by the U.S. government and a negative audit could
adversely affect
our business.
U.S. government
agencies such as the Defense Contract Audit Agency, or the DCAA, routinely audit
and investigate government contractors. These agencies review a contractor’s
performance under its contracts, cost structure and compliance with applicable
laws, regulations and standards.
The DCAA
also reviews the adequacy of, and a contractor’s compliance with, its internal
control systems and policies, including the contractor’s 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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suspension
of payments;
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suspension
or prohibition from conducting 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 conduct 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 the
FCPA;
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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. Although we ultimately prevailed in this litigation, we spent
significant time and money defending the litigation. U.S. 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 conduct business and, in
some instances, impose additional 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 U.S. government in the manufacturing
process for
BioThrax.
We have
the right to use certain property and equipment that is owned by the
U.S. government, referred to as government furnished equipment, or GFE, at
our Lansing, Michigan site in the manufacture of BioThrax. We have the option to
purchase all or part of the existing GFE from the U.S. government on terms to be
negotiated with the U.S. government. If the U.S. government modifies the terms
under which we use the GFE in a manner that is unfavorable to us, including
substantially increasing the usage fee, or we are unable to reach an agreement
with the U.S. government concerning the terms of the purchase of that part of
the GFE necessary for our business, our business could be harmed. If the
U.S. government were to terminate or fail to extend all BioThrax supply
contracts with us, we potentially could be required to rent or purchase that
part of the GFE necessary for the continued production of BioThrax in our
current manufacturing 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 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 establish the product candidate’s 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 our product candidates, 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 with substantial evidence of the product’s safety and
effectiveness in treating the targeted indication based on data derived from
adequate and well controlled clinical trials, including Phase III safety
and efficacy trials conducted in patients with the disease or condition being
targeted. However, our biodefense product candidates require slightly different
treatment. Specifically, because humans are rarely exposed to anthrax 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. This is known as the
FDA’s animal rule.
We intend
to use the animal rule in pursuit of FDA approval for BioThrax as a
post-exposure prophylaxis, our anthrax immune globulin therapeutic candidate,
our rPA anthrax vaccine, our anthrax monoclonal antibody therapeutic, our
BioThrax dual adjuvant vaccine, and our double mutant rPA vaccine. We cannot
guarantee that the FDA will permit us to proceed with licensure of any of our
BioThrax related programs or our other product candidates under the animal rule.
Even if we are able to proceed pursuant to the animal rule, the FDA may decide
that our data are insufficient for approval and require additional preclinical,
clinical or other studies, refuse to approve our products, or place restrictions
on our ability to commercialize those products.
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 the regulatory
review for a 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
vaccine and therapeutic 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
continual requirements of and review by the FDA and other regulatory bodies. 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 or prior notice
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. In March
2007, the FDA notified us that our manufacturing facility license is no longer
subject to the notice of intent to revoke.
After
approving the renovated Lansing facilities in December 2001, the FDA conducted
routine, biannual inspections of the Lansing facilities in September 2002, May
2004, May 2006 and March 2008. Following each of these inspections, the FDA
issued inspectional observations on Form FDA 483, some of which were
significant. We responded to the FDA regarding the inspectional observations
relating to each inspection and, where necessary, implemented corrective action.
All observations from each of those inspections were successfully closed
out. In December 2005, the FDA stated in its final order on BioThrax
that at that time we were in substantial 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.
The FDA
conducted a routine, biannual inspection of the Lansing facility in December
2009. Following this inspection, the FDA issued inspectional observations on
Form FDA 483. We are in the process of implementing corrective action where
necessary and anticipate that all observations from the 2009 inspection will be
successfully closed out in the near future. If in connection with
this inspection or with any future inspection the FDA finds that we are not in
substantial compliance with cGMP requirements, or if the FDA is not satisfied
with the corrective actions we take in connection with any such inspection, 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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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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shut
down, or substantial limitations of the operations in, manufacturing
facilities;
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refusal
to permit the import or export of
products;
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injunctions
or the imposition of civil or criminal
penalties.
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If our
competitors are able to obtain orphan drug exclusivity for their products
that
are the same as
our products, we may be precluded from selling or obtaining approval of
our
competing products by the applicable regulatory authorities for a
significant
period of
time.
If one of
our competitors 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 competitor’s 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 or the FDA determines that the holder of the orphan drug
exclusivity cannot assure the availability of sufficient quantities of the drug.
We have obtained orphan drug status from the FDA and in the European Union for
our anthrax immune globulin therapeutic product candidate and in the European
Union for our tuberculosis vaccine product candidate; however, none of our other
products or product candidates has been designated as an orphan drug and there
is no guarantee that the FDA will grant such designation in the future. 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 may have
obtained will not block the approval of that competitive product.
The Fast Track
designation for our product candidates may not actually lead to a
faster
development, regulatory review or approval.
We have
obtained a Fast Track designation from the FDA for BioThrax as a post-exposure
prophylaxis against anthrax infection and for our anthrax immune globulin
therapeutic product candidate. However, we may not experience a faster
development process, review or approval compared to conventional FDA procedures.
The FDA may withdraw a Fast Track designation if the FDA believes that the
designation is no longer supported by data from our clinical development
program. Fast Track designation does not guarantee that we will qualify for or
be able to take advantage of the FDA’s expedited review procedures or that any
application that we may submit to the FDA for regulatory approval will be
accepted for filing or ultimately approved.
Failure to obtain
regulatory approval in international jurisdictions could prevent us
from marketing
our products abroad.
We intend
to have some or all of 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 obtain regulatory 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 commercialize our product candidates
domestically and
internationally.
For each
of our product candidates, we plan to evaluate the merits of retaining
commercialization rights 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 for accessing 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, or the
arrangements that we establish may not turn out to be productive or beneficial
for us. The terms of any collaboration or other arrangements that we establish
may not be favorable to us.
Any
collaboration that we enter into may not be successful. For example, based on
preclinical studies performed under a license agreement that we entered into
with Sanofi Pasteur, both parties determined that the joint efforts had not
identified a promising meningitis B vaccine product candidate and we mutually
terminated the collaboration. Additionally, 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.
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;
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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; or
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our
collaborators may decide not to continue to work with us in the
development of product candidates.
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Collaborations
with pharmaceutical companies and other third parties often are terminated or
allowed to expire by the other party. Such terminations or expirations could
adversely affect us financially and could harm our business
reputation.
If third parties
on whom we rely for clinical or non-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 as a result, our business may suffer.
We do not
have the ability to independently conduct the clinical or non-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 and non-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 and non-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 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, 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.
We expect
to rely on data from clinical trials conducted by third parties 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
results of a clinical trial conducted by the CDC. 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.
Risks Related to Our
Intellectual Property
Protection
of our intellectual property rights could be costly, and if we fail to protect
them, our business could be harmed.
Our
success, particularly with respect to our commercial business, will depend in
large part on our ability to obtain and maintain protection in the U.S. and
other countries for the intellectual property covering or incorporated into our
technology and products. This protection is very costly. The patentability of
technology in the field of vaccine and therapeutic development 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 duration of patent 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 U.S. and other countries
may diminish the value of our intellectual property or narrow the scope of our
patent protection, or result in costly defense measures.
Our
patents also may not afford us protection against competitors with similar
technology. Because patent applications in the U.S. 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.
For
example, we licensed an oligonucleotide adjuvant, CpG 7909, for use in our
double mutant rPA product candidate and our BioThrax dual adjuvant vaccine
product candidate from Coley Pharmaceutical Group, Inc. Coley, which was
subsequently acquired by Pfizer Inc., is responsible for prosecuting,
maintaining and defending these licensed patent rights. Coley notified us that a
patent interference had been declared in the U.S. Patent and Trademark Office
between our licensed patent and a third party patent application, which could
result in revocation of the patent we have licensed. We may not know the outcome
for a considerable period of time.
If we are unable
to in-license any intellectual property necessary to develop,
manufacture or
sell any of our product candidates, we will not be successful in
developing or
commercializing such product candidate.
We expect
that we may need to in-license various components or technologies, including,
for example, adjuvants and novel delivery systems, for some of our current or
future product candidates. We may be unable to obtain the necessary licenses on
acceptable terms, or at all. If we are unable to obtain such licenses, we could
be prevented or delayed from continuing further development or from commercially
launching the applicable product candidate.
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 and expect to enter into additional
license agreements in the future. For example, we consider our license from the
Oxford-Emergent Tuberculosis Consortium to our tuberculosis vaccine
product candidate to be material to our business. 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.
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 or the label
expansions and improvements that we are pursuing for BioThrax, our only
intellectual property protection for BioThrax, other than the BioThrax
trademark, 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. Additionally, third parties may
be successful in obtaining patent protection for technologies that cover
development and commercialization activities in which we are already engaged.
Third parties may own or control these patents and intellectual property rights
in the U.S. 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 or if an injunction is granted
against us. 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, Bavarian Nordic sued Acambis for patent infringement and other
claims arising out of Acambis’ importation of an MVA-based smallpox vaccine for
biodefense use by the U.S. government. Bavarian Nordic claimed that its
patents broadly covered the manufacture of MVA-based biological products and
that Bavarian Nordic had rights in the biological materials used by Acambis. The
Acambis strain has a distinct lineage from the strains used by us. That
litigation was terminated by a settlement and consent order. Bavarian Nordic
subsequently sued Oxford BioMedica PLC, Oxford BioMedica Ltd. and Biomedica
Inc., collectively Oxford BioMedica, alleging that Oxford BioMedica has
infringed certain Bavarian Nordic U.S. patents by making, using, and
importing, and inducing others to use Oxford BioMedica’s experimental drug
TroVax
®
,
which is an MVA-based therapeutic cancer vaccine. The Oxford
BioMedica strain also has a distinct lineage from the strain used by
us. The lawsuit was settled by agreement between the
parties. While the terms of the settlement have not been published,
the parties have announced that Oxford BioMedica received a license for TroVax
under Bavarian Nordic’s MVA patents, and in return Bavarian Nordic received a
license under Oxford BioMedica’s patents on heterologous prime boost technology
and a sublicense under certain patents licensed by Sanofi to Oxford BioMedica.
Typically, patent infringement settlements are structured to specifically cover
the alleged infringing product, and the settlement has no direct impact on other
products in the field. Accordingly, we do not believe that the
Acambis or Oxford BioMedica settlements will have any adverse effect on our
plans for commercialization of our tuberculosis vaccine or our MVA platform.
Bavarian Nordic also filed legal proceedings against the Bavarian State Ministry
of the Environment and Public Health, or StMUG, in which Bavarian Nordic
questioned StMUG’s rights to convey MVA strains to third parties. This lawsuit
was dismissed and an appeal by Bavarian Nordic was withdrawn in June 2009. We
have licensed from StMUG rights to materials and technology related to MVA. Our
MVA platform technology, which has the potential to be used as a viral vector
for delivery of certain vaccine antigens for different disease-causing
organisms, is based in part on these rights.
Our
ability to use our MVA platform technology, or to develop and manufacture
MVA-based products such as our tuberculosis product candidate, could be
negatively affected by pending or future patent infringement litigation or other
legal actions brought by Bavarian Nordic or other parties challenging our rights
to use MVA materials or technology. To protect our interests, we have filed
oppositions in the European Patent Office against four of Bavarian Nordic’s
patents covering certain aspects of the MVA technology. The European Patent
Office has called for hearings in one of these oppositions to be held in June
2010 and in an additional two of these proceedings in October 2010. We are also
a party to a trademark invalidation proceeding in the U.S. and certain
foreign trademark offices. In addition, we may in the future become party to
additional trademark invalidation or interference proceedings. 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.
Since our
inception we have pursued an acquisition strategy to build our business. 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 a
portion of our pipeline of vaccine and therapeutic product candidates through
our acquisition of Microscience Limited in a share exchange in 2005 and our
acquisitions of substantially all of the assets, for cash, of Antex
Biologics, Inc. in 2003 and of ViVacs GmbH in 2006.
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 vaccine and therapeutic 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 vaccine and
therapeutic field to increase, which may result in 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 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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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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prioritizing
product portfolios;
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disruption
of our ongoing business;
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difficulty
and expense in assimilating and integrating the operations, products,
technology, information systems or personnel of the acquired
company;
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diversion
of management’s 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;
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challenges
and costs associated with reductions in work
force; and
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subsequent
loss of key personnel.
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If we are
unable to successfully manage and integrate our acquisitions, our ability to
develop new products and continue to expand our product pipeline may be
limited.
Risks Related to Our Common
Stock
Fuad El-Hibri,
chief executive officer and chairman of our Board of Directors, has
substantial
control over us, 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.
Mr. El-Hibri
has the ability to control the election of the members of our Board of Directors
through his ownership interests among our significant stockholders. As of
February 26, 2010, Mr. El-Hibri was the beneficial owner of approximately
39% of our outstanding common stock. Because Mr. El-Hibri has significant
influence over 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 of control of us 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 changes in control that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive
a premium for their 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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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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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. 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% or more of our
voting stock, for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Accordingly, Section 203
may discourage, delay or prevent a change in control of us.
Our stockholder
rights plan could prevent a change in control of us in instances in
which some
stockholders may believe a change in control is in their best
interests.
Under a
rights agreement that establishes our stockholder rights plan, we issue to each
of 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 of $150
in cash, subject to adjustments.
Our
stockholder rights plan is intended to protect stockholders in the event of an
unfair or coercive offer to acquire us 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.
Our stock price
is volatile and purchasers of our common stock could incur
substantial
losses.
Our stock
price has been, and is likely to continue to be, volatile. From
November 15, 2006, when our common stock first began trading on the New
York Stock Exchange, through December 31, 2009, our common stock has traded as
high as $27.00 per share and as low as $4.40 per share. The stock market in
general and the market for biotechnology companies in particular have
experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. The market price for our common stock may
be influenced by many factors, including:
|
·
|
the
success of competitive products or
technologies;
|
|
·
|
results
of clinical trials of our product candidates or those of our
competitors;
|
|
·
|
decisions
and procurement policies by the U.S. government affecting BioThrax
and our biodefense product
candidates;
|
|
·
|
regulatory
developments in the U.S. and foreign
countries;
|
|
·
|
developments
or disputes concerning patents or other proprietary
rights;
|
|
·
|
the
recruitment or departure of key
personnel;
|
|
·
|
variations
in our financial results or those of companies that are perceived to be
similar to us;
|
|
·
|
market
conditions in the pharmaceutical and biotechnology sectors and issuance of
new or changed securities analysts’ reports or
recommendations;
|
|
·
|
general
economic, industry and market
conditions; and
|
|
·
|
the
other factors described in this “Risk Factors”
section.
|
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. Our current and 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 the sole source of gain for
our stockholders for the foreseeable future.
A significant
portion of our total outstanding shares 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 could
occur at any time. These sales 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. For example, we have filed a registration statement that
would permit us to issue up to $100 million in common
stock. Moreover, holders of an aggregate of approximately
11.2 million shares of our common stock outstanding as of February 26, 2010
have the right to require us to register these shares of common stock under
specified circumstances.
Not
applicable.
The
following table sets forth general information regarding our materially
important properties:
Location
|
Use
|
Segment
|
Approximate
square feet
|
Owned/leased
|
Lansing,
Michigan
|
Manufacturing
operations facilities, office space and laboratory space
|
Biodefense
|
214,000
|
Owned
|
Baltimore,
Maryland
|
Future
manufacturing facilities and office and laboratory space
|
Biodefense/Commercial
|
56,000
|
Owned
|
Gaithersburg,
Maryland
|
Office
and laboratory space
|
Biodefense/Commercial
|
48,000
|
Owned
|
Wokingham,
England
|
Office
and laboratory space
|
Commercial
|
29,000
|
Leases
expire 2016
|
Rockville,
Maryland
|
Office
space
|
Biodefense/Commercial
|
23,000
|
Lease
expires 2016
|
Munich,
Germany
|
Office
and laboratory space
|
Commercial
|
16,000
|
Lease
expires 2015
|
Frederick,
Maryland
|
Held
for sale
|
Biodefense/Commercial
|
290,000
|
Owned
|
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. It also includes our new 50,000 square foot
manufacturing facility which we financed in part with a term loan from a
commercial leader. 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. In December 2001, the FDA approved a supplement to our
manufacturing facility license for the manufacture of BioThrax at the renovated
facilities.
Baltimore,
Maryland
. We own a 56,000 square foot manufacturing facility
in Baltimore, Maryland. We expect to use this facility to support our
future product development and manufacturing needs, and we are currently
renovating and improving this facility so that it will be capable of supporting
development of our pipeline product candidates. Our specific plans
for this facility will be contingent on the progress of our existing development
programs and the outcome of our efforts to acquire new product
candidates.
Other.
We own or lease three
separate product development facilities. Our facility in Gaithersburg, Maryland,
which we purchased in November 2009, is approximately 48,000 square feet and
contains a combination of laboratory and office space. Our facility in
Wokingham, England consists of approximately 29,000 square feet in two
buildings, and contains a combination of laboratory and office space. Our
facility in Munich, Germany is approximately 16,000 square feet and contains a
combination of laboratory and office space. Our facility in Rockville, Maryland
contains approximately 23,000 square feet of office space, including our
executive offices.
We own
two buildings of approximately 145,000 square feet each on a 15-acre site in
Frederick, Maryland. We are actively seeking to sell these
facilities. Accordingly, we have classified these buildings as held
for sale in our balance sheet, and have recorded an impairment expense of
approximately $7.3 million in 2009 related to costs previously capitalized based
on the difference between the carrying value of the assets and their estimated
fair value less costs to sell.
Litigation Against Protein Sciences Corporation.
We are
currently pursuing three legal actions against PSC and its senior management
arising out of a letter of intent, a loan and security agreement and related
promissory note, and an asset purchase agreement between us and PSC that were
entered into in 2008. Under those agreements, we agreed to acquire substantially
all of PSC’s assets and to provide funding to PSC to enable it to continue
operations through the anticipated closing date of the asset purchase
transaction. Between March 2008 and June 2008, we provided PSC with
$10 million in funding under the loan and security agreement and related
promissory note. PSC’s obligations to us under these agreements is secured by
substantially all of PSC’s assets, including PSC’s intellectual property. The
note accrued interest at an annual rate of 8% through December 31, 2008, a
default rate of 11% through May 31, 2009, and a default rate of 14% since
June 1, 2009. PSC has not repaid any portion of the loan. As of December
31, 2009, $10 million of principal was outstanding and $1.8 million of
interest was accrued and unpaid.
On
June 8, 2009, after the expiration of a five-month forbearance period on
the loan, we initiated legal proceedings in the Superior Court of the State of
Connecticut, Judicial District of New Haven, to acquire possession of the
collateral by foreclosing on PSC’s physical assets that secure the loan. In
addition, we and several other creditors of PSC filed a federal involuntary
bankruptcy petition against PSC on June 22, 2009 in the United States
Bankruptcy Court for the District of Delaware. In September 2009, the bankruptcy
court concluded that PSC was insolvent and that PSC’s debt to us was valid and
not subject to a bona fide dispute, but the bankruptcy court declined to force
PSC into involuntary bankruptcy, finding that the foreclosure proceeding, not
the bankruptcy action, was the proper mechanism of recovery. We intend to
continue to pursue the Connecticut action for possession of its physical assets
in an effort to recover amounts due to us. PSC has filed a motion to stay the
Connecticut action for possession pending a decision in the New York litigation
against PSC, which is described below. Such motion has been briefed and
argued and we are awaiting a decision from the Connecticut state
court.
In addition to the action seeking possession of the physical assets, we continue
to pursue two separate lawsuits that we filed regarding this matter: one against
PSC on July 9, 2008, and the other against PSC’s executive management team,
which consists of Daniel D. Adams, PSC’s Chief Executive Chairman, and Manon
M.J. Cox, PSC’s President and Chief Executive Officer, on October 3, 2008.
The lawsuit against PSC is pending in the Supreme Court of the State of New York
and includes, among other things, claims for fraud, breach of contract, breach
of the duty of good faith and fair dealing, unjust enrichment and unfair
business practices. The lawsuit against Mr. Adams and Ms. Cox is
pending in the United States District Court for the District of Connecticut and
alleges, among other things, that these individuals engaged in fraudulent
conduct in connection with their efforts to obtain $10 million in bridge
financing from us. PSC has moved to dismiss the New York action, and that
motion remains pending. Mr. Adams and Ms. Cox moved to dismiss the
Connecticut action, and the court denied that motion with respect to the fraud
claims and granted it with respect to unfair business practice claims. In our
lawsuits against PSC and PSC’s executive management team, we seek monetary
damages of no less than $13 million, punitive damages, declaratory
judgment, injunctive relief to protect the collateral for the loan, and other
appropriate relief. PSC, Mr. Adams, and Ms. Cox have not yet asserted
any counterclaims in either lawsuit, but PSC has stated that it may assert
counterclaims for “among other things, breach of contract, intentional
misrepresentations, tortious interference with business relations and unfair
trade practices.”
We
intend to pursue full repayment of the loan, as well as other relief as
described in our pleadings in the pending lawsuits against PSC and PSC’s
executive management.
BioThrax product liability
litigation.
Between 2001 and 2003, over 100 individual plaintiffs filed a
series of lawsuits in which they claimed damages resulting from personal
injuries allegedly caused by vaccination with BioThrax by the DoD. In April
2006, the U.S. District Court for the Western District of Michigan entered
summary judgment in our favor in four consolidated lawsuits brought by
approximately 120 claimants. The District Court’s ruling in these consolidated
cases was based on two grounds. First, the District Court found that we were
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 were 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 risks arising from the use of the product. The District Court found
that we established each of those factors.
In 2005
and 2006, we were named as a defendant in three federal lawsuits, each filed on
behalf of a single plaintiff, claiming different injuries caused by DoD’s
immunization with BioThrax. Each plaintiff sought a different amount of damages.
The plaintiff in the first case alleged that the vaccine caused erosive
rheumatoid arthritis and requested damages in excess of $1 million. The
plaintiff in the second case alleged that the vaccine caused Bell’s palsy and
other related conditions and requested damages in excess of $75,000. The
plaintiff in the third case alleged 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 requested damages in
excess of $10 million. Each of these lawsuits has been dismissed with
prejudice, and no BioThrax product liability cases remain pending.
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 Lansing Inc., or EBOL, 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.
EBOL is currently a named defendant in 38 lawsuits pending in two jurisdictions:
one in California and 37 in Illinois. The products at issue in these lawsuits
are pediatric vaccines. 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. We no longer manufacture any products that contain
thimerosal.
PART
II
Market Information and
Holders
Our
common stock trades on the New York Stock Exchange under the symbol “EBS”. The
following table sets forth the high and low sales prices per share of our common
stock during each quarter of the years ended December 31, 2009 and
2008:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
27.00
|
|
|
$
|
15.31
|
|
|
$
|
19.95
|
|
|
$
|
18.25
|
|
Low
|
|
$
|
12.23
|
|
|
$
|
9.15
|
|
|
$
|
12.09
|
|
|
$
|
12.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
9.17
|
|
|
$
|
11.14
|
|
|
$
|
15.17
|
|
|
$
|
26.40
|
|
Low
|
|
$
|
4.93
|
|
|
$
|
8.22
|
|
|
$
|
9.62
|
|
|
$
|
11.22
|
|
As of
February 26, 2010, the closing price per share of our common stock on the New
York Stock Exchange was $14.66 and we had 22 holders of record of our common
stock. This number does not include beneficial owners whose shares are held by
nominees in street name.
Dividend
Policy
We have
not declared, or paid any cash dividends on our common stock since becoming a
publicly traded company in November 2006. 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.
Recent Sales of Unregistered
Securities
None.
Use of
Proceeds
Not applicable.
Purchases of Equity
Securities
Not
applicable.
You
should read the following selected consolidated financial data together with our
consolidated financial statements and the related notes included in this annual
report on Form 10-K and the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section of this annual report.
We have
derived the consolidated statement of operations data for the years ended
December 31, 2009, 2008 and 2007 and the consolidated balance sheet data as of
December 31, 2009 and 2008 from our audited consolidated financial statements,
which are included in this annual report on Form 10-K. We have derived the
consolidated statements of operations data for the years ended December 31, 2006
and 2005 and the consolidated balance sheet data as of December 31, 2007, 2006
and 2005 from our audited consolidated financial statements, which are not
included in this annual report on Form 10-K. Our historical results for any
prior period are not necessarily indicative of results to be expected in any
future period.
|
|
Year
Ended December 31,
|
|
(in thousands, except share and
per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
217,172
|
|
|
$
|
169,124
|
|
|
$
|
169,799
|
|
|
$
|
147,995
|
|
|
$
|
127,271
|
|
Contracts
and grants
|
|
|
17,614
|
|
|
|
9,430
|
|
|
|
13,116
|
|
|
|
4,737
|
|
|
|
3,417
|
|
Total
revenues
|
|
|
234,786
|
|
|
|
178,554
|
|
|
|
182,915
|
|
|
|
152,732
|
|
|
|
130,688
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
46,262
|
|
|
|
34,081
|
|
|
|
40,309
|
|
|
|
24,125
|
|
|
|
31,603
|
|
Research
and development
|
|
|
74,588
|
|
|
|
59,470
|
|
|
|
53,958
|
|
|
|
45,501
|
|
|
|
18,381
|
|
Selling,
general & administrative
|
|
|
73,786
|
|
|
|
55,076
|
|
|
|
55,555
|
|
|
|
44,601
|
|
|
|
42,793
|
|
Purchased
in-process research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
477
|
|
|
|
26,575
|
|
Litigation
settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,000
|
)
|
Total
operating expenses
|
|
|
194,636
|
|
|
|
148,627
|
|
|
|
149,822
|
|
|
|
114,704
|
|
|
|
109,352
|
|
Income
from operations
|
|
|
40,150
|
|
|
|
29,927
|
|
|
|
33,093
|
|
|
|
38,028
|
|
|
|
21,336
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,418
|
|
|
|
1,999
|
|
|
|
2,809
|
|
|
|
846
|
|
|
|
485
|
|
Interest
expense
|
|
|
(7
|
)
|
|
|
(47
|
)
|
|
|
(71
|
)
|
|
|
(1,152
|
)
|
|
|
(767
|
)
|
Other
income (expense), net
|
|
|
(50
|
)
|
|
|
134
|
|
|
|
156
|
|
|
|
293
|
|
|
|
55
|
|
Total
other income (expense)
|
|
|
1,361
|
|
|
|
2,086
|
|
|
|
2,894
|
|
|
|
(13
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
41,511
|
|
|
|
32,013
|
|
|
|
35,987
|
|
|
|
38,015
|
|
|
|
21,109
|
|
Provision
for income taxes
|
|
|
14,966
|
|
|
|
12,055
|
|
|
|
13,051
|
|
|
|
15,222
|
|
|
|
5,325
|
|
Net
income
|
|
$
|
26,545
|
|
|
$
|
19,958
|
|
|
$
|
22,936
|
|
|
$
|
22,793
|
|
|
$
|
15,784
|
|
Net
loss attributable to noncontrolling interest
|
|
|
4,599
|
|
|
|
724
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
income attributable to Emergent BioSolutions Inc.
|
|
$
|
31,144
|
|
|
$
|
20,682
|
|
|
$
|
22,936
|
|
|
$
|
22,793
|
|
|
$
|
15,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share — basic
|
|
$
|
1.02
|
|
|
$
|
0.69
|
|
|
$
|
0.79
|
|
|
$
|
0.99
|
|
|
$
|
0.77
|
|
Earnings
per share — diluted
|
|
$
|
0.99
|
|
|
$
|
0.68
|
|
|
$
|
0.77
|
|
|
$
|
0.93
|
|
|
$
|
0.69
|
|
Weighted
average number of shares — basic
|
|
|
30,444,485
|
|
|
|
29,835,134
|
|
|
|
28,995,667
|
|
|
|
23,039,794
|
|
|
|
20,533,471
|
|
Weighted
average number of shares — diluted
|
|
|
31,375,305
|
|
|
|
30,458,098
|
|
|
|
29,663,127
|
|
|
|
24,567,302
|
|
|
|
22,751,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
(in
thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
102,924
|
|
|
$
|
91,473
|
|
|
$
|
105,730
|
|
|
$
|
76,418
|
|
|
$
|
36,294
|
|
Working
capital
|
|
|
139,113
|
|
|
|
98,866
|
|
|
|
88,649
|
|
|
|
82,990
|
|
|
|
29,023
|
|
Total
assets
|
|
|
344,689
|
|
|
|
290,788
|
|
|
|
273,508
|
|
|
|
238,255
|
|
|
|
100,332
|
|
Total
long-term liabilities
|
|
|
46,173
|
|
|
|
37,418
|
|
|
|
46,688
|
|
|
|
35,436
|
|
|
|
10,502
|
|
Total
stockholders’ equity
|
|
|
243,815
|
|
|
|
199,349
|
|
|
|
171,159
|
|
|
|
138,472
|
|
|
|
59,737
|
|
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 annual report
on Form 10-K. Some of the information contained in this discussion and analysis
or set forth elsewhere in this annual report on Form 10-K, 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 “Special Note Regarding Forward Looking Statements” and “Risk
Factors” sections of this annual report for a discussion of important factors
that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following
discussion and analysis.
Overview
Product
Portfolio
We are a
biopharmaceutical company focused on the development, manufacture and
commercialization of vaccines and antibody therapies that assist the body’s
immune system to prevent or treat disease. For financial reporting purposes, we
operate in two business segments, biodefense and commercial.
Our
biodefense segment focuses on vaccines and antibody therapies for use against
biological agents that are potential weapons of bioterrorism or biowarfare. Our
product candidates in this segment are focused on anthrax. We manufacture and
market BioThrax
®
(Anthrax Vaccine Adsorbed), the only vaccine licensed by the U.S. Food and
Drug Administration, or FDA, for the prevention of anthrax infection. In
addition to BioThrax, we are developing a recombinant protective antigen, or
rPA, anthrax vaccine, an anthrax immune globulin therapeutic, an anthrax
monoclonal antibody therapeutic, a BioThrax dual adjuvant vaccine, and an
advanced double-mutant protective antigen anthrax vaccine.
Our
commercial segment focuses on vaccines and antibody therapies for use against
infectious diseases and other medical conditions that have resulted in
significant unmet or underserved public health needs. Our product candidates in
this segment include a tuberculosis vaccine, a typhoid vaccine, an influenza
vaccine and a chlamydia vaccine.
Our
biodefense segment has generated net income for each of the last five fiscal
years. Our commercial segment has generated revenue through development
contracts and grant funding. None of our commercial product candidates has
received marketing approval and, therefore, our commercial segment has not
generated any product sales revenues. As a result, our commercial segment has
incurred a net loss for each of the last five fiscal years.
Product
Sales
We have
derived substantially all of our product sales revenues from BioThrax sales to
the U.S. Department of Health and Human Services, or HHS, and the
U.S. Department of Defense, or DoD, and expect for the foreseeable future
to continue to derive substantially all of our product sales revenues from the
sales of BioThrax to the U.S. government. Our total revenues from BioThrax
sales were $217.2 million and $169.1 million for years ended
December 31, 2009 and 2008, respectively. We are focused on increasing
sales of BioThrax to U.S. government customers, expanding the market for
BioThrax to other customers domestically and internationally and pursuing label
expansions and improvements for BioThrax.
Contracts
and Grants
We seek
to advance development of our product candidates through external funding
arrangements. We may slow down development programs or place them on hold during
periods that are not covered by external funding. We have received external
funding awards for the following development programs:
·
|
BioThrax
post-exposure prophylaxis
|
·
|
BioThrax dual
adjuvant vaccine
|
·
|
Anthrax
immune globulin therapeutic
|
·
|
Anthrax
monoclonal antibody therapeutic
|
·
|
Advanced
double-mutant protective antigen
|
·
|
Recombinant
botulinum vaccine
|
·
|
Typhella
(typhoid vaccine live oral ZH9)
|
Additionally,
our tuberculosis vaccine product candidate is indirectly supported by grant
funding provided to The University of Oxford by The Wellcome Trust and Aeras
Global Tuberculosis Vaccine Foundation.
We
continue to actively pursue additional government sponsored development
contracts and grants and to encourage both governmental and non-governmental
agencies and philanthropic organizations to provide development funding or to
conduct clinical studies of our product candidates.
Manufacturing Infrastructure
We
conduct our primary vaccine manufacturing operations at a multi-building campus
on approximately 12.5 acres in Lansing, Michigan. To augment our existing
manufacturing capabilities, we have constructed a 50,000 square foot
manufacturing facility on our Lansing campus. We have incurred costs of
approximately $79 million through December 2009 for the building and
associated capital equipment, as well as for validation and qualification
activities required for regulatory approval and initiation of manufacturing. We
suspended the completion of those activities for approximately one year as we
commenced a change-over process to plan for the potential use of the facility
for the manufacture of our rPA anthrax vaccine product candidate under an
anticipated HHS contract for the development of a recombinant anthrax vaccine.
This change-over process was successfully completed. During the fourth quarter
of 2009, we recommenced qualification and validation activities for the
commercial manufacture of BioThrax. We designed this facility to be
campaignable subject to complying with appropriate change-over procedures, and
we may seek permission from the FDA to use the facility for the manufacture of
both BioThrax and our rPA anthrax vaccine product candidate. In the event we do
not manufacture our rPA anthrax vaccine product candidate in this building, we
intend to use the facility for the manufacture of BioThrax and potentially for
additional products.
In
November 2009, we paid approximately $8.2 million to purchase a building in
Baltimore, Maryland for product development and manufacturing purposes, and have
begun renovation and improvement of this facility. Our specific plans for this
facility will be contingent on the progress of our existing development programs
and the outcome of our efforts to acquire new product candidates. As we proceed
with this project, we expect the costs to be substantial and will likely seek
external sources of funds to finance the project.
In
October 2009, we paid approximately $6.4 million to purchase the product
development facility in Gaithersburg, Maryland that we previously leased. We are
in the process of developing plans and cost estimates for renovations and
improvements to the facility. These plans will be contingent on the progress of
our existing development programs.
We also
own two buildings in Frederick, Maryland that we currently expect to sell.
Accordingly, we have classified these buildings as held for sale in our balance
sheet, and recorded an impairment expense of approximately $7.3 million in
2009 related to costs previously capitalized, based on the difference between
the carrying value of the assets and their estimated fair value less costs to
sell. We continue to actively seek to sell these
buildings.
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 U.S. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses.
On an
ongoing basis, we evaluate our estimates and judgments, including those related
to accrued expenses, fair value of 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 that require no continuing performance on
our part if four basic criteria have been met:
|
·
|
there
is persuasive evidence of an
arrangement;
|
|
·
|
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 have
generated BioThrax sales revenues under U.S. government contracts with HHS
and the DoD. Under our current contract with HHS, we invoice HHS and recognize
the related revenues upon acceptance by the government at the delivery site, at
which time title to the product passes to HHS.
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
as we perform specific development activities, and we may also be entitled to
additional fees. We recognize revenue upon incurring accepted reimbursable
costs. The amounts that we receive under these contracts vary greatly
from quarter to quarter, depending on the scope and nature of the work
performed. We record the reimbursement of our costs and any
associated fees as contracts and grants revenue and the associated costs as
research and development expense.
Accounts
Receivable
Accounts
receivable are stated at invoice amounts and consist primarily of amounts due
from HHS as well as amounts due under reimbursement contracts with other
government entities and non-government and philanthropic organizations. Because
the 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.
Income
Taxes
Under the
asset and liability method of income tax accounting, deferred tax assets and
liabilities are determined based on the differences between the financial
reporting and the tax basis of assets and liabilities and are measured using the
tax rates and laws that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A net
deferred tax asset or liability is reported on the balance sheet. 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 the financial
reporting and tax basis of assets and liabilities.
We have
historically incurred net operating losses for income tax purposes in some
states, primarily Maryland, 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 Limited,
or Microscience, and Antex Biologics, Inc., or 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.
Uncertainty
in income taxes is accounted for using 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. We recognize in our
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.
Stock-based
Compensation
In
accordance with stock-based compensation accounting guidance, all share-based
payments to employees, including grants of employee stock options, are
recognized in the income statement based on their estimated grant date fair
values.
We value
our share-based payment transactions using the Black-Scholes valuation model. We
measure the amount of compensation cost based on the fair value of the
underlying equity award on the date of grant. We recognize compensation cost
over the period that an employee provides service in exchange for the
award.
The
effect of this accounting treatment on net income attributable to Emergent
BioSolutions Inc. and earnings per share in any period 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.
Financial Operations
Overview
Revenues
On
September 25, 2007, we entered into an agreement with HHS to supply
18.75 million doses of BioThrax to HHS for placement into the Strategic
National Stockpile, or the SNS. The term of the agreement is from
September 25, 2007 through September 24, 2010. The firm fixed price
for the 18.75 million doses, net of a discount for a portion of the doses,
is $400 million in the aggregate. In June 2009, we received FDA approval of
our supplement to our biologics license application, or BLA, to extend the
expiry dating of BioThrax from three years to four years. As a result of this
approval, HHS agreed to increase the price per dose under the agreement by
eliminating the discount for the final 13.25 million doses sold, up to a
total of approximately $34 million. In conjunction with this approval, we
billed HHS approximately $34 million for doses delivered through July 31,
2009. Under this agreement, we provided all shipping services related to
delivery of doses into the SNS over the term of the agreement, for which HHS
paid us approximately $2 million. We invoiced HHS for each delivery upon
acceptance of BioThrax doses delivered into the SNS. In July 2009, we completed
delivery of the doses under this agreement. The agreement also provided for HHS
to pay us up to $11.5 million in milestone payments in connection with us
advancing a program to obtain a post-exposure prophylaxis indication for
BioThrax. These funds are payable upon achievement of specific program
milestones. In October 2007, we achieved the initial milestone and received
payment from HHS of $8.8 million.
On
September 30, 2008, we entered into an agreement with HHS to supply up to
14.5 million doses of BioThrax to HHS for placement into the SNS. The term
of the agreement is from September 30, 2008 through September 30,
2011. Delivery of doses under the agreement commenced in September 2009 and will
continue through September 2011. Funds for the procurement of the first
10.2 million doses of BioThrax have been committed. Procurement of the
remaining 4.3 million doses will be funded through the annual
appropriations process for the SNS. Four-year expiry dated product will be
invoiced at a higher price than three-year expiry dated product. The total
purchase price for the 14.5 million doses will be up to approximately
$400 million, assuming the delivery of four-year expiry dated product.
Through December 31, 2009, we have delivered approximately 2.7 million
doses under this agreement. We have agreed to provide all shipping services
related to delivery of doses into the SNS over the term of the agreement, for
which HHS has agreed to pay us approximately $1.9 million. We invoice HHS
under the agreement upon acceptance of each delivery of BioThrax doses to the
SNS.
We have
received contract and grant funding from NIAID and BARDA for the following
development programs:
Product
Candidate
|
Funding
Source
|
Award
Date
|
Amount
(Up
to)
|
Performance
Period
|
Anthrax
immune globulin therapeutic
|
NIAID
|
September-2007
|
$9.5
million
|
9/2007 — 12/2011
|
Recombinant
botulinum vaccine
|
NIAID
|
June-2008
|
$1.8
million
|
6/2008 — 5/2011
|
BioThrax
dual adjuvant vaccine
|
NIAID
|
July-2008
|
$2.8
million
|
7/2008 — 6/2013
|
Anthrax
monoclonal antibody therapeutic
|
NIAID/BARDA
|
September-2008
|
$24.3
million
|
9/2008 — 8/2012
|
BioThrax
dual adjuvant vaccine
|
NIAID/BARDA
|
September-2008
|
$29.7
million
|
9/2008 — 9/2011
|
Double-mutant
protective antigen anthrax vaccine
|
NIAID
|
September-2009
|
$4.9
million
|
9/2009 — 8/2011
|
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 and work done under new and existing
contracts and grants.
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 facilities, utilities and salaries 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.
We
determine the cost of product sales for doses sold during a reporting period
based on the average manufacturing cost per dose in the period those doses were
manufactured. We calculate the average manufacturing cost per dose in the period
of manufacture by dividing the actual costs of manufacturing in such period by
the number of units produced in that period. In addition to the fixed and
variable manufacturing costs described above, the average manufacturing cost per
dose depends on the efficiency of the manufacturing process, utilization of
available manufacturing capacity and the production yield for the period of
production.
Research
and Development Expenses
We
expense research and development costs as incurred. Our research and development
expenses consist primarily of:
|
·
|
salaries
and related expenses for personnel;
|
|
·
|
fees
to professional service providers for, among other things, preclinical and
analytical testing, independently monitoring our clinical trials and
acquiring and evaluating data from our clinical trials and non-clinical
studies;
|
|
·
|
costs
of contract manufacturing services for clinical trial
material;
|
|
·
|
costs
of materials used in clinical trials and research and
development;
|
|
·
|
depreciation
of capital assets used to develop our
products; and
|
|
·
|
operating
costs, such as the operating costs of facilities and the legal costs of
pursuing patent protection of our intellectual
property.
|
We
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 expect that development
spending for our product pipeline will increase as our product development
activities continue based on ongoing advancement of our product candidates, and
as we prepare for regulatory submissions and other regulatory activities. 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 programs that we may initiate, costs associated with
manufacturing our product candidates on a large scale basis for later stage
clinical trials, and our ability to use or rely on data generated by government
agencies, such as studies with BioThrax conducted by the Centers for Disease
Control and Prevention, or CDC.
In July
2008, we entered into a joint venture with the University of Oxford, or Oxford,
and certain Oxford researchers to conduct clinical trials in the advancement of
a vaccine product candidate for tuberculosis, resulting in the formation of the
Oxford-Emergent Tuberculosis Consortium, or OETC. We have a 51% equity interest
in OETC and control the OETC Board of Directors. In addition, we have certain
funding and service obligations of up to approximately $20 million related
to our investment through 2011 to support further development of the vaccine
product candidate and a Phase IIb proof of concept study in humans, primarily in
the form of services to be performed by our personnel on behalf of the joint
venture. As part of this arrangement, we have entered into a license agreement
with the joint venture pursuant to which we obtained rights to develop,
manufacture and commercialize pharmaceutical compositions intended to prevent or
treat tuberculosis in humans in developed countries. Oxford’s contributions
include support from the Wellcome Trust and the Aeras Global Tuberculosis
Vaccine Foundation for the Phase IIb clinical trial in the form of cash and
services.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of salaries and other
related costs for personnel serving the executive, sales and marketing, business
development, finance, accounting, information technology, legal and human
resource functions. Other costs include facility costs not otherwise included in
cost of product sales or research and development expense and professional fees
for legal and accounting services. We currently market and sell BioThrax
directly to HHS with a small, targeted marketing and sales group. 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 primarily of interest income and interest
expense. We earn interest income on our cash, cash equivalents and a note
receivable, and we incur interest expense on our indebtedness. We capitalize
interest
based on
the cost of major ongoing projects which have not yet been placed in service,
such as new manufacturing facilities. 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.
Results of
Operations
Year Ended December 31, 2009 Compared to Year Ended December 31,
2008
Revenues
Product
sales revenues increased by $48.0 million, or 28%, to $217.2 million for 2009
from $169.1 million for 2008. This increase in product sales revenues was
primarily due to payments from HHS of approximately $34.0 million related to the
approval of four-year expiry dating for BioThrax, obtained in June 2009, coupled
with an 8% increase in the number of doses sold in 2009. Product
sales revenues in 2009 consisted of BioThrax sales to HHS of $216.4 million and
aggregate international and other sales of $703,000. Product sales revenues in
2008 consisted of BioThrax sales to HHS of $167.6 million and aggregate
international and other sales of $1.5 million.
Contracts
and grant revenues increased by $8.2 million, or 87%, to $17.6 million in 2009
from $9.4 million in 2008. Contracts and grants revenues for 2009 consisted of
$17.4 million in development contract revenue from NIAID and BARDA and $211,000
from Sanofi Pasteur under a collaboration agreement with Sanofi Pasteur, which
was terminated in December 2008. Contracts and grants revenues for 2008
consisted of $4.4 million from the Sanofi Pasteur collaboration, related to
recognition upon termination of the collaboration in December 2008 of deferred
revenue associated with the upfront payment received in 2006 as well as
development service revenue, $3.2 million in development contract and grant
revenue from NIAID and other governmental agencies, and $1.8 million from the
sale of technology rights and related materials and documentation pertaining to
our Pertussis technology.
Cost
of Product Sales
Cost of
product sales increased by $12.2 million, or 36%, to $46.3 million for 2009 from
$34.1 million for 2008. This increase was attributable to the 8% increase in the
number of BioThrax doses sold and an increase in average cost per dose sold
associated with reduced production yield in the period during which the doses
sold were produced.
Research
and Development Expenses
Research
and development expenses increased by $15.1 million, or 25%, to
$74.6 million for 2009 from $59.5 million for 2008. This increase
reflects higher contract service costs, and includes increased expenses of
$16.6 million on product candidates that are categorized in the biodefense
segment, decreased expenses of $7.1 million on product candidates
categorized in the commercial segment, and increased expenses of
$5.7 million in other research and development, which are in support of
technology platforms and central research and development
activities.
The
increase in spending on biodefense product candidates, detailed in the table
below, was primarily attributable to the timing of development efforts on
various programs as we completed various studies and prepared for subsequent
studies and trials, coupled with increased spending on product candidates that
we acquired in 2008. The increase in spending for BioThrax related programs was
due to the preparation for and conduct of clinical and non-clinical feasibility,
efficacy and stability studies to support applications for marketing approval of
these programs, along with formulation development and manufacture of clinical
material. The increase in spending for the recombinant protective antigen
anthrax vaccine was related primarily to costs incurred to respond to a request
for proposal from BARDA and the continued advancement of the product candidate.
The decrease in spending for our double mutant protective antigen vaccine
resulted from the timing of feasibility and stability studies. The increase in
spending for our anthrax immune globulin therapeutic candidate was primarily due
to the commencement of clinical and non-clinical studies during 2009. The
increase in spending for the anthrax monoclonal therapeutic candidate was
primarily for manufacture of a working cell bank, formulation development and
the conduct of non-clinical studies. The increase in spending for our botulinum
vaccine product candidates resulted from conducting non-clinical studies and the
manufacture of master and working cell banks. We expect that spending for our
botulinum vaccine candidates will decrease in the future, due primarily to
reduced interest in and funding for these product candidates by the U.S.
government.
The
decrease in spending on commercial product candidates, detailed in the table
below, was primarily attributable to the timing of development efforts and to
the termination or scaling back of certain programs. The increase in spending
for our tuberculosis vaccine product candidate is related to the formation of
our joint venture with the University of Oxford in July 2008, the procurement of
licenses, and preparation for and conduct of a Phase IIb clinical trial, which
commenced in April 2009. The spending for Typhella in 2008 resulted from the
manufacture of clinical material and conducting a Phase IIb clinical trial in
the United States. These activities did not continue in 2009, resulting in
the decrease in spending. The increase in spending for our influenza vaccine
product candidate is related to preparation for and conduct of feasibility and
immunogenicity studies. The spending for our hepatitis B therapeutic
vaccine product candidate was related to our Phase II clinical trial in the
United Kingdom and Serbia and other development activities. We have
significantly reduced ongoing spending with regard to this product candidate
while we investigate options to sell or outlicense the related technology, and
expect that future spending will be reduced. The decrease in spending for our
group B streptococcus vaccine product candidate resulted from our decision not
to proceed with Phase I clinical trials for two of the protein components of the
vaccine product candidate. We expect that spending for our group B streptococcus
vaccine product candidate will continue to be minimal in the future. The
decrease in spending for our chlamydia candidate, which is in preclinical
development, is related to a decrease in development activities while seeking
external funding. The decrease in spending for our meningitis B vaccine product
candidate resulted from the termination of our collaboration with Sanofi-Pasteur
in December 2008.
The
increase in other research and development expenses was primarily attributable
to spending associated with the development activities targeting our two
technology platforms, MVA and
spi
-VEC, and central research
and development activities.
We
continue to assess, and may alter, our future development plans for our products
based on the interest of the U.S. government or non-governmental and
philanthropic organizations in providing funding for further development or
procurement.
Our
principal research and development expenses for 2009 and 2008 are shown in the
following table:
|
|
Year
ended
|
|
|
|
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Biodefense:
|
|
|
|
|
|
|
BioThrax
related programs
|
|
$
|
15,748
|
|
|
$
|
7,159
|
|
Recombinant
protective antigen anthrax vaccine
|
|
|
8,450
|
|
|
|
6,563
|
|
Double
mutant protective antigen vaccine
|
|
|
560
|
|
|
|
2,540
|
|
Anthrax
immune globulin therapeutic
|
|
|
6,890
|
|
|
|
6,126
|
|
Anthrax
monoclonal therapeutic
|
|
|
7,215
|
|
|
|
1,062
|
|
Botulinum
vaccines
|
|
|
4,011
|
|
|
|
2,871
|
|
Total
biodefense
|
|
|
42,874
|
|
|
|
26,321
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Tuberculosis
vaccine
|
|
|
11,711
|
|
|
|
2,145
|
|
Typhella
|
|
|
5,083
|
|
|
|
15,431
|
|
Influenza
vaccine
|
|
|
2,822
|
|
|
|
1,511
|
|
Hepatitis
B therapeutic vaccine
|
|
|
3,521
|
|
|
|
3,010
|
|
Group
B streptococcus vaccine
|
|
|
202
|
|
|
|
6,539
|
|
Chlamydia
vaccine
|
|
|
567
|
|
|
|
1,220
|
|
Meningitis
B vaccine
|
|
|
158
|
|
|
|
1,313
|
|
Total
commercial
|
|
|
24,064
|
|
|
|
31,169
|
|
Other
|
|
|
7,650
|
|
|
|
1,980
|
|
Total
|
|
$
|
74,588
|
|
|
$
|
59,470
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased by $18.7 million, or 34%, to
$73.8 million for 2009 from $55.1 million for 2008. This increase
includes approximately $5.0 million in increased litigation services and
other professional services, a $7.3 million impairment charge associated with
our Frederick, Maryland facilities and a $1.4 million charge associated
with acquisitions that were in progress but not completed as of
December 31, 2008, as well as increased personnel costs related to the
growth of our business. The majority of the expense is attributable to the
biodefense segment, in which selling, general and administrative expenses
increased by $5.9 million, or 14%, to $48.8 million for 2009 from
$43.0 million for 2008. Selling, general and administrative expenses
related to our commercial segment increased by $12.8 million, or 105%, to
$25.0 million for 2009 from $12.2 million for 2008, reflecting
increased litigation services, along with the charges discussed above related to
the Frederick facilities and acquisitions in progress.
Total
Other Income (Expense)
Total
other income decreased by $725,000, or 35%, to $1.4 million for 2009 from $2.1
million for 2008. This decrease resulted primarily from a decrease in interest
income of $581,000 primarily as a result of lower investment return on average
invested cash balances related to a decline in interest rates.
Income
Taxes
Provision
for income taxes increased by $2.9 million, or 24%, to $15.0 million
for 2009 from $12.1 million for 2008. The provision for income taxes for
2009 resulted primarily from our income before provision for income taxes and
the loss attributable to noncontrolling interest of $46.1 million and an
effective annual tax rate of approximately 32%. The provision for income taxes
for 2008 resulted primarily from our income before provision for income taxes
and the loss attributable to noncontrolling interest of $32.7 million and an
effective annual tax rate of approximately 37%. The decrease in the effective
tax rate was primarily due to the benefit of certain costs capitalized for book
purposes that are deductible for tax purposes. The provision for income taxes
also reflects research and development tax credits of $835,000 for 2009 and
$819,000 for 2008.
Net
Loss Attributable to Noncontrolling Interest
Net loss
attributable to noncontrolling interest increased by $3.9 million to
$4.6 million for 2009 from $724,000 for 2008. The increase resulted from
increased development activities and related expenses incurred by our joint
venture with the University of Oxford, which was established in July 2008. These
amounts represent the portion of the loss incurred by the joint venture for 2009
and 2008, respectively, that is attributable to Oxford.
Year Ended December 31, 2008 Compared to Year Ended December 31,
2007
Revenues
Product
sales revenues decreased by $675,000, or 0.4%, to $169.1 million for 2008 from
$169.8 million for 2007. This decrease in product sales revenues was primarily
due to a 16% decrease in the number of doses of BioThrax delivered, offset by a
18% increase in the average sales price per dose attributable to a discounted
price provided to HHS due to the limited remaining shelf life for certain doses
delivered in the third and fourth quarters of 2007. Product sales revenues in
2008 consisted of BioThrax sales to HHS of $167.6 million and aggregate
international and other sales of $1.5 million. Product sales revenues in 2007
consisted of BioThrax sales to HHS of $141.6 million, sales to the DoD of $26.2
million and aggregate international and other sales of $2.0
million.
Contracts
and grant revenues decreased by $3.7 million, or 28%, to $9.4 million in 2008
from $13.1 million in 2007. Contracts and grants revenues for 2008 consisted
of $4.4 million from the Sanofi Pasteur collaboration, related to
recognition upon termination of the collaboration in December 2008 of deferred
revenue associated with the upfront payment received in 2006 as well as
development service revenue, $3.2 million in development contract and grant
revenue from NIAID and other governmental agencies, and $1.8 million from the
sale of technology rights and related materials and documentation pertaining to
our Pertussis technology. Contracts and grants revenues for 2007 consisted of a
milestone payment of $8.8 million from HHS in connection with our advancing a
program to obtain a post-exposure prophylaxis indication for BioThrax, $3.1
million from the Sanofi Pasteur collaboration, related to recognition of
deferred revenue associated with the upfront payment received in 2006 as well as
development service revenue, and $1.2 million in grant revenue from the NIH and
the Wellcome Trust.
Cost
of Product Sales
Cost of
product sales decreased by $6.2 million, or 15%, to $34.1 million for 2008 from
$40.3 million for 2007. This decrease was attributable to a 16% decrease in the
number of doses of BioThrax delivered.
Research
and Development Expenses
Research
and development expenses increased by $5.5 million, or 10%, to $59.5 million for
2008 from $54.0 million for 2007. This increase reflects additional personnel
and contract service costs, and includes increased expenses of $1.6 million on
product candidates that are categorized in the biodefense segment, $5.0 million
on product candidates categorized in the commercial segment, partially offset by
a decrease of $1.1 million in other research and development expenses, which are
in support of technology platforms and central research and development
activities.
The
increase in spending on biodefense product candidates, detailed in the table
below, was primarily attributable to the timing of development efforts on
various programs as we completed various studies and prepared for subsequent
studies and trials, coupled with increased spending on product candidates that
we acquired during the year. The spending for BioThrax related programs was due
to formulation development and preparing for and conducting clinical and
non-clinical, feasibility efficacy and stability studies to support applications
for marketing approval of these related programs. The spending for the
recombinant protective antigen anthrax vaccine was related primarily to the
purchase of this vaccine product candidate from VaxGen in May 2008 and continued
advancement of this product candidate. The spending in our advanced anthrax
vaccines program resulted from conducting feasibility studies. The decrease in
spending in our anthrax immune globulin therapeutic candidate was primarily due
to the timing of costs related to plasma collection. The spending for the
anthrax monoclonal therapeutic candidate was primarily due to the purchase of
this vaccine product candidate and related technology in March 2008 and
continued advancement of this product candidate. The decrease in spending for
our botulinum vaccine product candidates resulted from enhanced spending in 2007
to advance this program to the process development stage and the manufacture of
clinical trial material, coupled with lower spending in 2008 and going forward
as we have scaled back our development efforts on our botulinum toxoid vaccine
product candidate pending the receipt of third party development
funding.
The
increase in spending on commercial product candidates, detailed in the table
below, primarily reflects additional personnel and contracted services. The
spending for our tuberculosis vaccine product candidate related to the formation
of our joint venture with the University of Oxford in July 2008 and preparation
for a Phase IIb clinical trial. The increase in spending for Typhella
resulted from the manufacture of clinical material and initiating and conducting
a Phase IIb study in the U.S., which commenced in the second quarter of 2008.
The spending for our influenza vaccine product candidate was related to
immunogenicity studies. The decrease in spending for our hepatitis B
therapeutic vaccine product candidate resulted from the cessation of new patient
enrollment from our ongoing Phase II clinical trial in the United Kingdom and
Serbia as a result of patient recruiting difficulties because we administer our
product candidate as a monotherapy. The spending for our group B
streptococcus vaccine product candidate resulted from preparing for Phase I
clinical trials for two of the protein components of the vaccine product
candidate. We decided not to proceed with these trials and, as a result spending
for our group B streptococcus vaccine product candidate will be significantly
reduced in the future. The decrease in spending for our chlamydia
vaccine product candidate, which is in preclinical development, was related to
slowing development while seeking external funding.
The
decrease in other research and development expenses was primarily attributable
to spending associated with the development of our two technology platforms, MVA
and
spi-
Vec.
We
continue to assess, and may alter, our future development plans for our products
based on the interest of the U.S. government or non-governmental and
philanthropic organizations in providing funding for further development or
procurement.
Our
principal research and development expenses for 2008 and 2007 are shown in the
following table:
|
|
Year
ended
|
|
|
|
December 31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Biodefense:
|
|
|
|
|
|
|
BioThrax
related programs
|
|
$
|
7,159
|
|
|
$
|
5,175
|
|
Recombinant
protective antigen anthrax vaccine
|
|
|
6,563
|
|
|
|
-
|
|
Advanced
anthrax vaccines
|
|
|
2,540
|
|
|
|
2,719
|
|
Anthrax
immune globulin therapeutic
|
|
|
6,126
|
|
|
|
7,717
|
|
Anthrax
monoclonal therapeutic
|
|
|
1,062
|
|
|
|
-
|
|
Botulinum
vaccines
|
|
|
2,871
|
|
|
|
9,133
|
|
Total
biodefense
|
|
|
26,321
|
|
|
|
24,744
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Tuberculosis
vaccine
|
|
|
2,145
|
|
|
|
-
|
|
Typhella
|
|
|
15,431
|
|
|
|
9,641
|
|
Influenza
vaccine
|
|
|
1,511
|
|
|
|
-
|
|
Hepatitis
B therapeutic vaccine
|
|
|
3,010
|
|
|
|
5,370
|
|
Group
B streptococcus vaccine
|
|
|
6,539
|
|
|
|
6,790
|
|
Chlamydia
vaccine
|
|
|
1,220
|
|
|
|
3,146
|
|
Meningitis
B vaccine
|
|
|
1,313
|
|
|
|
1,212
|
|
Total
commercial
|
|
|
31,169
|
|
|
|
26,159
|
|
Other
|
|
|
1,980
|
|
|
|
3,055
|
|
Total
|
|
$
|
59,470
|
|
|
$
|
53,958
|
|
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased by $479,000, or 1%, to $55.1
million for 2008 from $55.6 million for 2007. The decrease in selling, general
and administrative expenses was driven by the recovery of approximately $2.1
million from the DoD and our insurance company in previously expensed legal fees
associated with BioThrax litigation, partially offset by an increase of
approximately $1.8 million in our headquarters and staff organization to support
the overall growth of our business. The increase related to the growth of our
business is primarily attributable to the addition of personnel and increased
legal and other professional services for our headquarters organization. The
majority of the expense is attributed to the biodefense segment, in which
selling, general and administrative expenses for 2008 remained consistent with
2007 at $43.0 million. Selling, general and administrative expenses related to
our commercial segment decreased by $330,000, or 3%, to $12.2 million for 2008
from $12.5 million for 2007.
Total
Other Income (Expense)
Total
other income decreased by $806,000, or 28%, to income of $2.1 million for 2008
from income of $2.9 million for 2007. This increase resulted primarily from a
decrease in interest income of $810,000 as a result of lower investment return
on average invested cash balances related to a decline in interest
rates.
Income
Taxes
Provision
for income taxes decreased by $1.0 million, or 8%, to $12.1 million for 2008
from $13.1 million for 2007. The provision for income taxes for 2008 resulted
primarily from our income before provision for income taxes and the loss
attributable to noncontrolling interest of $32.7 million and an effective annual
tax rate of 37%. The provision for income taxes for 2007 resulted primarily from
our income before provision for income taxes of $36.0 million and an effective
annual tax rate of 36%. The increase in the effective annual tax rate is due
primarily to a reduction in state valuation allowances in 2007 related to the
expected utilization of net operating losses, partially offset by a reduction in
state and local taxes in 2008. The provision for income taxes also reflects
research and development tax credits of $819,000 for 2008 and $880,000 for
2007.
Net
Loss Attributable to Noncontrolling Interest
Net loss
attributable to noncontrolling interest of $724,000 in 2008 resulted from the
formation of our joint venture with the University of Oxford in July
2008. This amount represents the portion of the loss incurred by the
joint venture in 2008 that is attributable to Oxford.
Liquidity and Capital
Resources
Sources of Liquidity
We have
funded our cash requirements from inception through 2009 principally with a
combination of revenues from BioThrax product sales, debt financings and
facilities and equipment leases, development funding from government entities
and non-government and philanthropic organizations, the net proceeds from our
initial public offering and from the sale of our common stock upon exercise of
stock options. We have operated profitably for each of the five years ended
December 31, 2009.
As of
December 31, 2009, we had cash and cash equivalents of $102.9 million.
Additionally, at December 31, 2009, our accounts receivable balance was
$54.9 million.
Cash
Flows
The
following table provides information regarding our cash flows for the years
ended December 31, 2009, 2008 and 2007.
|
|
Year ended
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating
activities(1)
|
|
$
|
29,894
|
|
|
$
|
7,588
|
|
|
$
|
54,790
|
|
Investing
activities
|
|
|
(33,287
|
)
|
|
|
(30,813
|
)
|
|
|
(43,969
|
)
|
Financing
activities
|
|
|
14,844
|
|
|
|
8,968
|
|
|
|
18,491
|
|
Total
net cash provided (used in)
|
|
$
|
11,451
|
|
|
$
|
(14,257
|
)
|
|
$
|
29,312
|
|
(1)
Includes the effect of exchange rate changes on cash and cash
equivalents.
Net cash
provided by operating activities of $29.9 million in 2009 was due
principally to our net income attributable to Emergent BioSolutions Inc. of
$31.1 million, a net increase in deferred income taxes related to timing
differences of $7.6 million, and non-cash charges of $7.2 million for
development expenses from our joint venture with the University of Oxford,
$7.3 million related to the impairment of our Frederick facilities,
$5.0 million for depreciation and amortization and $5.0 million for
stock-based compensation, partially offset by a $30.0 million increase in
accounts receivable related to amounts billed in the fourth quarter of 2009 for
which payment was not received until January 2010.
Net cash
provided by operating activities of $7.6 million in 2008 resulted principally
from our net income of $20.7 million, partially offset by an increase in
accounts receivable of $6.0 million due to amounts billed primarily to HHS in
December 2008 that were collected in 2009 and a decrease in income taxes payable
of $6.7 million due to the timing of payment of our 2007 income tax liability
and estimated tax payments related to our 2008 income tax
liability.
Net cash
provided by operating activities of $54.8 million in 2007 resulted principally
from our net income of $22.9 million, a decrease in accounts receivable of $24.5
million due to amounts billed primarily to HHS in December 2006 that were
collected in 2007, partially offset by amounts billed in December 2007 and
outstanding at year end, a decrease in inventory of $9.3 million related to
increased product sales in 2007, and $4.8 million from the impact of non-cash
depreciation and amortization, partially offset by a decrease in income taxes
payable of $5.2 million due to the timing of payment of the 2006 income tax
liability offset by the pending payable for 2007 income taxes.
Net cash
used in investing activities for the years ended December 31, 2009, 2008 and
2007 resulted principally from the purchase of property, plant and equipment
and, in 2008, the issuance of a note receivable in the amount of $10 million.
Capital expenditures in 2009 include $8.2 million for the purchase of our
Baltimore facility, $6.4 million for the purchase of our Gaithersburg facility,
$7.6 million in construction and related costs for our new manufacturing
facility in Lansing, Michigan and approximately $11.1 million in infrastructure
investments and other equipment. Capital expenditures in 2008 relate primarily
to $13.1 million in construction and related costs for our new manufacturing
facility in Lansing, Michigan and approximately $7.7 million in infrastructure
investments and other equipment. Capital expenditures in 2007 relate primarily
to $30.3 million for construction of our new building in Lansing, and
approximately $13.7 million in infrastructure investments and other
equipment.
Net cash
provided by financing activities of $14.8 million in 2009 resulted
primarily from $57.2 million in proceeds from indebtedness, including
borrowings under our revolving line of credit with Fifth Third Bank of $45.0
million and $12.2 million in loans related to the financing of the purchases of
our Baltimore and Gaithersburg facilities coupled with $4.5 million in proceeds
from the exercise of stock options. These cash inflows were partially offset by
$48.6 million in principal payments on indebtedness, including
$45.0 million in payments on our revolving line of credit with Fifth Third
Bank.
Net cash
provided by financing activities of $9.0 million in 2008 resulted primarily from
$60.0 million in proceeds from borrowings under our revolving line of credit
with Fifth Third Bank, $5.0 million from the release of restricted cash related
to our continuing compliance with the debt covenants specified in our HSBC term
loan, $1.3 million related to excess tax benefits from the exercise of stock
options, and $3.4 million in proceeds from stock option exercises, partially
offset by $60.8 million in principal payments on indebtedness, including $56.8
million in payments on our revolving line of credit with Fifth Third
Bank.
Net cash
provided by financing activities of $18.5 million in 2007 resulted primarily
from $15.3 million in additional proceeds from a term loan with HSBC related to
financing a portion of the costs related to the construction of our new building
in Lansing, $17.9 million in proceeds from borrowings under our revolving line
of credit with Fifth Third Bank, $6.0 million related to excess tax benefits
from the exercise of stock options, and $2.5 million in proceeds from stock
option exercises, partially offset by $18.0 million in principal payments on
long-term indebtedness, including $15.0 million in payments on our revolving
line of credit with Fifth Third Bank, and restricted cash deposits in 2007
consisting of $5.0 million in restricted cash in conjunction with our June 2007
HSBC term loan.
Contractual
Obligations
The
following table summarizes our contractual obligations at December 31,
2009:
|
|
Payments
due by period
|
|
(in
thousands)
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
After
2014
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
indebtedness
|
|
$
|
50,718
|
|
|
$
|
5,791
|
|
|
$
|
14,724
|
|
|
$
|
2,331
|
|
|
$
|
2,331
|
|
|
$
|
25,541
|
|
|
$
|
-
|
|
Operating
lease obligations
|
|
|
11,950
|
|
|
|
1,817
|
|
|
|
1,800
|
|
|
|
1,767
|
|
|
|
1,786
|
|
|
|
1,806
|
|
|
|
2,974
|
|
Contractual
settlement liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total contractual
obligations
|
|
$
|
62,668
|
|
|
$
|
7,608
|
|
|
$
|
16,524
|
|
|
$
|
4,098
|
|
|
$
|
4,117
|
|
|
$
|
27,347
|
|
|
$
|
2,974
|
|
There are
a number of uncertainties that we face in the development of new product
candidates that prevent us from making a reasonable estimate of the cash
obligations under our material license and collaboration
agreements. Because of these uncertainties, the preceding table
excludes contingent contractual payments that we may become obligated to make
under such agreements. These agreements typically provide for the
payment of milestone fees upon achievement of specified research, development
and commercialization milestones, such as the commencement of clinical trials,
the receipt of funding awards, the receipt of regulatory approvals, and the
achievement of sales milestones. 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 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, and the aggregate
payments could be as much as approximately $160 million. The success
of our efforts to commercialize our product candidates depends on many factors,
including those set forth in “
Risk Factors—Our business depends
significantly on our success in completing development and commercialization of
our product candidates at acceptable costs,
” and is highly
uncertain. Even if these efforts are successful, the timing of
success is highly unpredictable and variable. The same is true for any
contingent contractual royalty payments that we may be obligated to make upon
successful commercialization of these product candidates. We do not
expect that any such payments would have an adverse effect on our financial
position, operations and capital resources because, if payable, we expect that
the benefits associated with the achievement of the relevant milestones or the
achievement of revenue would offset the burden of making these
payments. We are not obligated to pay any minimum royalties under our
existing contracts.
Debt
Financing
As of
December 31, 2009, we had $65.7 million principal amount of debt outstanding,
comprised primarily of the following:
|
·
|
$2.5
million outstanding under a loan from the Department of Business and
Economic Development of the State of Maryland used to finance eligible
costs incurred to purchase our first facility in Frederick,
Maryland;
|
|
·
|
$6.0
million outstanding under a mortgage loan from PNC Bank used to finance
the remaining portion of the purchase price for our first Frederick
facility;
|
|
·
|
$7.3
million outstanding under a mortgage loan from HSBC Realty Credit
Corporation used to finance the purchase price for our second facility on
the Frederick site;
|
|
·
|
$22.8
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;
|
|
·
|
$7.0
million outstanding under a mortgage loan from HSBC Realty Credit
Corporation used to finance the purchase of our facility in Baltimore,
Maryland;
|
|
·
|
$5.l
million outstanding under a mortgage loan from HSBC Realty Credit
Corporation used to finance the purchase of our facility in Gaithersburg,
Maryland; and
|
|
·
|
$15.0
million outstanding under a $15.0 million revolving line of credit with
Fifth Third Bank, the balance of which we repaid in January
2010.
|
|
Some
of our debt instruments contain financial and operating covenants. In
particular:
|
|
·
|
Under
our 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. Our plans for this facility have changed, and we currently
plan to sell both Frederick buildings. As such we have not met the
requirements for the loan to be forgivable as of December 31, 2009. We
have reached an agreement with the State of Maryland to repay the loan in
full by September 30, 2010, with an earlier repayment due upon sale of the
building.
|
|
·
|
Under
our mortgage loan from PNC 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 term loan with HSBC Realty Credit Corporation to finance a portion of
the costs of our facility expansion in Lansing, Michigan, we are required
to maintain on an annual basis a book leverage ratio of less than 1.00. In
addition, we are required to maintain on a quarterly basis a debt coverage
ratio of not less than 1.25 to
1.00.
|
|
·
|
Under
our mortgage loan with HSBC Realty Credit Corporation for our Gaithersburg
facility, we are required to maintain on an annual basis a book leverage
ratio of less than 1.00. In addition, we are required to maintain on a
quarterly basis a debt coverage ratio of not less than 1.25 to
1.00.
|
|
·
|
Under
our mortgage loan with HSBC Realty Credit Corporation for our Baltimore
facility, we are required to maintain on an annual basis a book leverage
ratio of less than 1.00. In addition, we are required to maintain on a
quarterly basis a debt coverage ratio of not less than 1.25 to
1.00.
|
|
·
|
Under
our revolving 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 with HSBC Realty Credit Corporation 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 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, software and other equipment that we purchased with the proceeds of
our loans from PNC Bank, the State of Maryland and HSBC Realty Credit
Corporation serve as collateral for these loans. Our line of credit with Fifth
Third Bank is secured by accounts receivable under our HHS and DoD contracts.
Our term loan with HSBC Realty Credit Corporation is secured by substantially
all of Emergent BioDefense Operations’ assets, other than accounts receivable
under our HHS and DoD 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 PNC Bank, we began 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 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 to purchase our second
facility in Frederick, Maryland, we are required to make monthly principal
payments. A residual principal repayment of approximately $7.0 million is due
upon maturity in April 2011. Interest is payable monthly and accrues at an
annual rate equal to the three month LIBOR plus 3.00%.
Under our
term loan with HSBC Realty Credit Corporation, which we refinanced in December
2009, we are required to make monthly principal payments. A residual principal
payment of $15.2 million is due upon maturity in December 2014. Interest is
payable monthly and accrues at an annual rate equal to the three month LIBOR
plus 3.25%.
Under our
mortgage loan from HSBC Realty Credit Corporation to purchase our Gaithersburg
facility, we are required to make monthly principal payments. A residual
principal repayment of approximately $3.5 million is due upon maturity in
November 2014. Interest is payable monthly and accrues at an annual rate equal
to the three month LIBOR plus 3.25%.
Under our
mortgage loan from HSBC Realty Credit Corporation to purchase our Baltimore
facility, we are required to make monthly principal payments. A residual
principal repayment of approximately $4.7 million is due upon maturity in
November 2014. Interest is payable monthly and accrues at an annual rate equal
to the three month LIBOR plus 3.25%.
Under our
revolving line of credit with Fifth Third Bank, any outstanding principal is due
upon maturity in June 2010. The principal amount outstanding at any time under
the line of credit may not exceed 75% of total eligible accounts receivable
under our HHS and DoD contracts. Consistent with the terms of this agreement, we
repaid $15.0 million of outstanding principal under the line of credit in
January 2010. 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.
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, beginning in 2006. These tax benefits are
primarily based on our investment in our Lansing facility. In addition, we must
maintain a specified number of employees in Lansing to continue to qualify for
these tax benefits.
Funding
Requirements
We expect
to continue to fund our anticipated operating expenses, capital expenditures and
debt service requirements from existing cash and cash equivalents, revenues from
BioThrax product sales and other committed sources of funding. There are
numerous risks and uncertainties associated with BioThrax product sales and with
the development and commercialization of our product candidates.
We may
seek additional external debt financing to provide additional financial
flexibility. Our committed external sources of funds consist of the borrowing
availability under our revolving line of credit with Fifth Third Bank and grant
and development funding of some of our product candidates. Our ability to borrow
additional amounts under our loan agreement is subject to our satisfaction of
specified conditions.
Our
future capital requirements will depend on many factors, including:
|
·
|
the
level and timing of BioThrax product sales and cost of product
sales;
|
|
·
|
the
acquisition of, and capital improvements to new
facilities;
|
|
·
|
the
timing of, and the costs involved in, completion of qualification and
validation activities related to our manufacturing facility in Lansing,
Michigan and, any new facilities;
|
|
·
|
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
extent to which we lend money to third
parties;
|
|
·
|
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.
|
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.
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.
Recent Accounting
Pronouncements
In
January 2010, the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Update, or ASU, No. 2010-06, which amended
Accounting Standards Codification, or ASC, Topic 820 regarding improving
disclosures about fair value measurements. The amendments in ASU
No. 2010-06 will provide more robust disclosures about (1) the different
classes of assets and liabilities measured at fair value, (2) the valuation
techniques and inputs used, (3) the activity in Level 3 fair value measurements,
and (4) the transfers between Levels 1, 2, and 3. This amendment is effective
for financial statements issued for interim and annual periods ending after
December 15, 2010. We do not anticipate this amendment will have a material
impact on our financial statements.
In
January 2010, the FASB issued ASU No. 2010-02, which amended ASC Topic 810
regarding accounting and reporting for decreases in ownership of a subsidiary.
The amendments in ASU No. 2010-02 clarifies what type of subsidiaries or
asset groups the scope of the decrease in ownership applies. These amendments
also clarify that the decrease in ownership guidance does not apply to certain
transactions even if they involve businesses. This amendment is effective for
financial statements issued for interim and annual periods beginning on or after
December 15, 2009 for entities that have adopted the pending content that
links to ASC 10-10-65-1. We do not anticipate this amendment will not have a
material impact on our financial statements.
In
January 2010, the FASB issued ASU No. 2010-01, which amended ASC Topic 505
regarding distributions to shareholders with components of stock and cash. The
amendments in ASU No. 2010-01 clarify that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock,
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate, is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend for
purposes of applying ASC Topics 505 and ASC Topic 260. This amendment is
effective for financial statements issued for interim and annual periods ending
after December 15, 2009. We do not anticipate this amendment will have a
material impact on our financial statements.
In
December 2009, the FASB issued ASU No. 2009-17, which amended ASC Topic 810
regarding variable interest entities. The amendments in ASU No. 2009-17
replace the quantitative-based risks and rewards calculation for determining
which reporting entity, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which reporting
entity has the power to direct the activities of a variable interest entity that
most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. The amendments also require additional disclosures about a
reporting entity’s involvement in variable interest entities, which will enhance
the information provided to users of financial statements. This amendment is
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. We do not expect that the adoption of this amendment will have a
material impact on our financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, which amended ASC Topic
605 regarding multiple-deliverable revenue arrangements. The amendments in ASU
No. 2009-13 establish a selling price hierarchy for determining the selling
price of a deliverable. In addition, this amendment replaces the term “fair
value” in the revenue allocation guidance with “selling price”. ASU
No. 2009-13 will eliminate the residual method of allocation and require
that arrangement consideration be allocated at the inception of the arrangement
to all deliverables using the relative selling price method and will require
that an entity determine its best estimate of selling price in a manner that is
consistent with that used to determine the price to sell the deliverable on a
standalone basis. ASU No. 2009-13 will significantly expand the disclosures
related to an entity’s multiple-deliverable revenue arrangements. In the year of
adoption, entities will be required to disclose information that enables the
users of financial statements to understand the effect of adopting ASU
No. 2009-13.
This
amendment is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. If early adoption is elected and the period of
adoption is not the beginning of the entity’s fiscal year, the entity will be
required to apply the amendments in ASU No. 2009-13 retrospectively from
the beginning of the entity’s fiscal year. The adoption of this amendment will
have an impact on our financial statements to the extent we are a party to
multiple-deliverable revenue arrangements.
In June
2009, the FASB issued ASU No. 2009-01,
The FASB Accounting
Standards Codification
tm
and the Hierarchy of Generally
Accepted
Accounting
Principles — a replacement of FASB Statement No. 162
, an
amendment to ASC Topic 105,
Generally Accepted
Accounting Principles
. The
FASB ASC will be the source of authoritative U.S. generally accepted
accounting principles, or GAAP, recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission, or SEC, under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The ASC supersedes all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the ASC will
become non-authoritative. ASU No. 2009-01 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. This statement did not have a material impact on our financial
statements.
In June
2009, the FASB issued Statement of Financial Accounting Standards, or SFAS,
No. 167,
Amendments to
FASB Interpretation No. 46(R),
or SFAS No. 167, included
in ASC Topic 810. SFAS No. 167 amends Interpretation 46(R) to replace
the quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity.
SFAS No. 167 requires an additional reconsideration event when
determining whether an entity is a variable interest entity when any changes in
facts and circumstances occur such that the holders of the equity investment at
risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly
impact the entity’s economic performance. It also requires ongoing assessments
of whether an enterprise is the primary beneficiary of a variable interest
entity. SFAS No. 167 amends FASB Interpretation No. 46(R) to
require additional disclosures about an enterprise’s involvement in variable
interest entities. We adopted the provisions of SFAS No. 167 effective
January 1, 2009. Earlier application is prohibited. We do not anticipate
this statement will have a material impact on our financial
statements.
In May
2009, the FASB issued SFAS No. 165,
Subsequent Events,
or
SFAS No. 165, which was later included in ASC Topic 855.
SFAS No. 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
SFAS No. 165 sets forth: (1) the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. We have
adopted SFAS No. 165 during the three months ended September 30,
2009. The provisions of SFAS No. 165 will impact our financial
statements to the extent that we have material subsequent events.
In April
2009, the FASB issued FASB Staff Position, or FSP, SFAS No. 141(R)-1,
Accounting for Assets Acquired
and Liabilities Assumed in
a Business Combination That Arise
from Contingencies,
or FSP SFAS No. 141(R)-1, which was later
included in ASC Topic 805. FSP SFAS No. 141(R)-1 amends the initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. We adopted FSP SFAS No. 141(R)-1 effective
January 1, 2009, and it will impact our financial statements to the extent
that we are a party to a business combination.
ITEM
7A.
|
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, and our
long-term indebtedness. We currently do not hedge interest rate exposure or
interest on foreign currency exchange exposure, and the movement of foreign
currency exchange rates could have an adverse or positive impact on our results
of operations. 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 a
significant impact on the realized value of our investments, but would likely
increase the interest expense associated with our debt.
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
Board of
Directors and Stockholders of Emergent BioSolutions Inc. and
Subsidiaries
We have
audited the accompanying consolidated balance sheets of Emergent BioSolutions
Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2009. These financial
statements are the responsibility of the Company's 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. An audit 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, 2009 and 2008, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Emergent BioSolutions Inc. and Subsidiaries’
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 5, 2010 expressed an unqualified opinion thereon.
/s/Ernst & Young
LLP
McLean,
Virginia
March 5,
2010
Emergent
BioSolutions Inc. and Subsidiaries
|
|
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
102,924
|
|
|
$
|
91,473
|
|
Accounts
receivable
|
|
|
54,872
|
|
|
|
24,855
|
|
Inventories
|
|
|
13,521
|
|
|
|
18,325
|
|
Note
receivable
|
|
|
10,000
|
|
|
|
10,000
|
|
Deferred
tax assets, net
|
|
|
1,870
|
|
|
|
-
|
|
Income
tax receivable, net
|
|
|
2,574
|
|
|
|
-
|
|
Restricted
cash
|
|
|
215
|
|
|
|
208
|
|
Prepaid
expenses and other current assets
|
|
|
7,838
|
|
|
|
8,026
|
|
Total
current assets
|
|
|
193,814
|
|
|
|
152,887
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
131,834
|
|
|
|
124,656
|
|
Assets
held for sale
|
|
|
13,960
|
|
|
|
-
|
|
Deferred
tax assets, net
|
|
|
3,894
|
|
|
|
12,073
|
|
Other
assets
|
|
|
1,187
|
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
344,689
|
|
|
$
|
290,788
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
17,159
|
|
|
$
|
18,254
|
|
Accrued
expenses and other current liabilities
|
|
|
1,570
|
|
|
|
1,399
|
|
Accrued
compensation
|
|
|
14,926
|
|
|
|
11,380
|
|
Indebtedness
under line of credit
|
|
|
15,000
|
|
|
|
15,000
|
|
Long-term
indebtedness, current portion
|
|
|
5,791
|
|
|
|
6,248
|
|
Income
taxes payable
|
|
|
-
|
|
|
|
951
|
|
Deferred
tax liabilities, net
|
|
|
-
|
|
|
|
557
|
|
Deferred
revenue
|
|
|
255
|
|
|
|
232
|
|
Total
current liabilities
|
|
|
54,701
|
|
|
|
54,021
|
|
|
|
|
|
|
|
|
|
|
Long-term
indebtedness, net of current portion
|
|
|
44,927
|
|
|
|
35,935
|
|
Other
liabilities
|
|
|
1,246
|
|
|
|
1,483
|
|
Total
liabilities
|
|
|
100,874
|
|
|
|
91,439
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 15,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
0 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
30,831,360 and 30,159,546 shares issued and outstanding at
|
|
|
|
|
|
|
|
|
December 31, 2009 and 2008, respectively
|
|
|
31
|
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
120,492
|
|
|
|
109,170
|
|
Accumulated
other comprehensive loss
|
|
|
(1,476
|
)
|
|
|
(859
|
)
|
Retained
earnings
|
|
|
122,152
|
|
|
|
91,008
|
|
Total
Emergent BioSolutions Inc. stockholders' equity
|
|
|
241,199
|
|
|
|
199,349
|
|
Noncontrolling
interest in subsidiary
|
|
|
2,616
|
|
|
|
-
|
|
Total
stockholders’ equity
|
|
|
243,815
|
|
|
|
199,349
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
344,689
|
|
|
$
|
290,788
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Emergent
BioSolutions Inc. and Subsidiaries
|
|
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
217,172
|
|
|
$
|
169,124
|
|
|
$
|
169,799
|
|
Contracts
and grants
|
|
|
17,614
|
|
|
|
9,430
|
|
|
|
13,116
|
|
Total
revenues
|
|
|
234,786
|
|
|
|
178,554
|
|
|
|
182,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
46,262
|
|
|
|
34,081
|
|
|
|
40,309
|
|
Research
and development
|
|
|
74,588
|
|
|
|
59,470
|
|
|
|
53,958
|
|
Selling,
general and administrative
|
|
|
73,786
|
|
|
|
55,076
|
|
|
|
55,555
|
|
Income
from operations
|
|
|
40,150
|
|
|
|
29,927
|
|
|
|
33,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,418
|
|
|
|
1,999
|
|
|
|
2,809
|
|
Interest
expense
|
|
|
(7
|
)
|
|
|
(47
|
)
|
|
|
(71
|
)
|
Other
income (expense), net
|
|
|
(50
|
)
|
|
|
134
|
|
|
|
156
|
|
Total
other income (expense)
|
|
|
1,361
|
|
|
|
2,086
|
|
|
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
41,511
|
|
|
|
32,013
|
|
|
|
35,987
|
|
Provision
for income taxes
|
|
|
14,966
|
|
|
|
12,055
|
|
|
|
13,051
|
|
Net
income
|
|
|
26,545
|
|
|
|
19,958
|
|
|
|
22,936
|
|
Net
loss attributable to noncontrolling interest
|
|
|
4,599
|
|
|
|
724
|
|
|
|
-
|
|
Net
income attributable to Emergent BioSolutions Inc.
|
|
$
|
31,144
|
|
|
$
|
20,682
|
|
|
$
|
22,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
$
|
1.02
|
|
|
$
|
0.69
|
|
|
$
|
0.79
|
|
Earnings
per share - diluted
|
|
$
|
0.99
|
|
|
$
|
0.68
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares - basic
|
|
|
30,444,485
|
|
|
|
29,835,134
|
|
|
|
28,995,667
|
|
Weighted-average
number of shares - diluted
|
|
|
31,375,305
|
|
|
|
30,458,098
|
|
|
|
29,663,127
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Emergent
BioSolutions Inc. and Subsidiaries
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
26,545
|
|
|
$
|
19,958
|
|
|
$
|
22,936
|
|
Adjustments
to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
5,007
|
|
|
|
2,510
|
|
|
|
2,541
|
|
Depreciation
and amortization
|
|
|
4,999
|
|
|
|
4,964
|
|
|
|
4,817
|
|
Deferred
income taxes
|
|
|
7,604
|
|
|
|
2,006
|
|
|
|
5,589
|
|
Non-cash
development expenses from joint venture
|
|
|
7,215
|
|
|
|
724
|
|
|
|
-
|
|
Loss
(gain) on disposal of property and equipment
|
|
|
61
|
|
|
|
(135
|
)
|
|
|
24
|
|
Provision
for impairment of long-lived assets
|
|
|
7,328
|
|
|
|
-
|
|
|
|
-
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(1,852
|
)
|
|
|
(1,336
|
)
|
|
|
(6,003
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(30,017
|
)
|
|
|
(6,038
|
)
|
|
|
24,514
|
|
Inventories
|
|
|
6,207
|
|
|
|
(1,428
|
)
|
|
|
9,337
|
|
Income
taxes
|
|
|
(3,525
|
)
|
|
|
(6,714
|
)
|
|
|
(5,169
|
)
|
Prepaid
expenses and other assets
|
|
|
(1,230
|
)
|
|
|
(4,949
|
)
|
|
|
(2,828
|
)
|
Accounts
payable
|
|
|
(1,334
|
)
|
|
|
(457
|
)
|
|
|
(12
|
)
|
Accrued
expenses and other liabilities
|
|
|
(66
|
)
|
|
|
(523
|
)
|
|
|
(1,557
|
)
|
Accrued
compensation
|
|
|
3,546
|
|
|
|
1,878
|
|
|
|
2,312
|
|
Deferred
revenue
|
|
|
23
|
|
|
|
(3,143
|
)
|
|
|
(1,054
|
)
|
Net
cash provided by operating activities
|
|
|
30,511
|
|
|
|
7,317
|
|
|
|
55,447
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(33,287
|
)
|
|
|
(20,813
|
)
|
|
|
(43,969
|
)
|
Issuance
of note receivable
|
|
|
-
|
|
|
|
(10,000
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(33,287
|
)
|
|
|
(30,813
|
)
|
|
|
(43,969
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash release (deposit)
|
|
|
(7
|
)
|
|
|
4,992
|
|
|
|
(5,008
|
)
|
Proceeds
from borrowings on long-term indebtedness and line of
credit
|
|
|
57,183
|
|
|
|
60,000
|
|
|
|
33,195
|
|
Issuance
of common stock subject to exercise of stock options
|
|
|
4,464
|
|
|
|
3,391
|
|
|
|
2,471
|
|
Principal
payments on long-term indebtedness and line of credit
|
|
|
(48,648
|
)
|
|
|
(60,751
|
)
|
|
|
(18,015
|
)
|
Excess
tax benefits from stock-based compensation
|
|
|
1,852
|
|
|
|
1,336
|
|
|
|
6,003
|
|
Debt
issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(155
|
)
|
Net
cash provided by financing activities
|
|
|
14,844
|
|
|
|
8,968
|
|
|
|
18,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(617
|
)
|
|
|
271
|
|
|
|
(657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
11,451
|
|
|
|
(14,257
|
)
|
|
|
29,312
|
|
Cash
and cash equivalents at beginning of year
|
|
|
91,473
|
|
|
|
105,730
|
|
|
|
76,418
|
|
Cash
and cash equivalents at end of year
|
|
|
102,924
|
|
|
|
91,473
|
|
|
|
105,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
1,627
|
|
|
$
|
3,216
|
|
|
$
|
3,094
|
|
Cash
paid during the year for income taxes
|
|
$
|
15,155
|
|
|
$
|
16,788
|
|
|
$
|
14,329
|
|
Supplemental
information on non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment unpaid at year end
|
|
$
|
2,749
|
|
|
$
|
2,510
|
|
|
$
|
4,056
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
$0.001
Par Value Common Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Noncontrolling
Interest
|
|
|
Retained
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
in
Subsidiary
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
27,596,249
|
|
|
$
|
28
|
|
|
$
|
90,920
|
|
|
$
|
(473
|
)
|
|
$
|
-
|
|
|
$
|
47,997
|
|
|
$
|
138,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
2,153,988
|
|
|
|
2
|
|
|
|
2,469
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,471
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
2,541
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,541
|
|
Cumulative
effect of change in accounting principle (FIN 48)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(607
|
)
|
|
|
(607 )
|
|
Excess
tax benefits from exercises of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
6,003
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,003
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,936
|
|
|
|
22,936
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(657
|
)
|
|
|
|
|
|
|
-
|
|
|
|
(657
|
)
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
29,750,237
|
|
|
$
|
30
|
|
|
$
|
101,933
|
|
|
$
|
(1,130
|
)
|
|
$
|
-
|
|
|
$
|
70,326
|
|
|
$
|
171,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
409,309
|
|
|
|
-
|
|
|
|
3,391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,391
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
2,510
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,510
|
|
Excess
tax benefits from exercises of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,336
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,336
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,682
|
|
|
|
20,682
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271
|
|
|
|
|
|
|
|
-
|
|
|
|
271
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
30,159,546
|
|
|
$
|
30
|
|
|
$
|
109,170
|
|
|
$
|
(859
|
)
|
|
$
|
|
|
|
$
|
91,008
|
|
|
$
|
199,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
671,814
|
|
|
|
1
|
|
|
|
4,463
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,464
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
5,007
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,007
|
|
Excess
tax benefits from exercises of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,852
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,852
|
|
Non-cash
development expenses from joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,215
|
|
|
|
|
|
|
|
7,215
|
|
Net
loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,599
|
)
|
|
|
-
|
|
|
|
(4,599
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
31,144
|
|
|
|
31,144
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(617
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(617
|
)
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
30,831,360
|
|
|
$
|
31
|
|
|
$
|
120,492
|
|
|
$
|
(1,476
|
)
|
|
$
|
2,616
|
|
|
$
|
122,152
|
|
|
$
|
243,815
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Emergent
BioSolutions Inc. and Subsidiaries
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 vaccines and
antibody therapies. The Company is developing products to be offered both to the
biodefense and commercial markets. 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. In December 2001, the U.S. Food and Drug Administration
(“FDA”) approved a supplement to the Company’s manufacturing facility license
for the manufacture of BioThrax at the renovated facilities. In June 2004, the
Company completed a corporate reorganization (“Reorganization”).
As a
result of the Reorganization, BioPort became a wholly owned subsidiary of the
Company. The Company has renamed BioPort as Emergent BioDefense
Operations Lansing Inc. (“Emergent BioDefense Operations”). The Company acquired
a portion of its portfolio of vaccine and therapeutic product candidates through
an acquisition of Microscience Limited (“Microscience”) in a share exchange in
June 2005, and acquisitions of substantially all of the assets, for cash, of
Antex Biologics Inc. (“Antex”) in May 2003 and ViVacs GmbH, Germany (“ViVacs”)
in July 2006. The Company has renamed Microscience as Emergent Product
Development UK Limited. The assets acquired from Antex were incorporated as
Emergent Product Development Gaithersburg Inc., and the assets acquired from
ViVacs were incorporated as Emergent Product Development Germany
GmbH.
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 and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
For investments in variable interest entities, the Company consolidates when it
is determined to be the primary beneficiary.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. 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.
Fair
value of financial instruments
The
carrying amounts of the Company’s 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 fair value of
the Company’s long-term indebtedness is estimated based on the quoted prices for
the same or similar issues or on the current rates offered to the Company for
debt of the same remaining maturities. The carrying value and fair value of
long-term indebtedness were $50.7 million and $50.0 million, respectively, at
December 31, 2009 and $42.2 million and $42.0 million, respectively, at December
31, 2008.
Restricted
cash
Restricted
cash at December 31, 2009 and 2008 includes a certificate of deposit held by a
bank as collateral for a letter of credit acting as a security deposit on a
loan. As of December 31, 2009 and 2008 the Company had restricted cash of
$215,000 and $208,000, respectively.
Significant
customers and accounts receivable
For the
years ended December 31, 2009, 2008 and 2007, the Company’s primary customers
were the U.S. Department of Health and Human Services (“HHS”) and the U.S.
Department of Defense (the “DoD”). For the years ended December 31, 2009 and
2008, revenues from HHS and HHS agencies comprised 99.6% and 95.7%,
respectively, of total revenues. For the year ended December 31, 2007, revenues
from the DoD, HHS and HHS agencies comprised 97.2%, of total revenues. As of
December 31, 2009 and 2008, the Company’s receivable balances were comprised of
99.4% and 97.7%, respectively, from these customers. Unbilled accounts
receivable, included in accounts receivable, totaling $3.1 million and $1.9
million as of December 31, 2009 and 2008, respectively, relate to various
service contracts for which work has been performed, though invoicing has not
yet occurred. Accounts receivable are stated at invoice amounts and consist
primarily of amounts due from HHS and the DoD 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 Company’s prior collection
experience, customer creditworthiness and current economic trends. As of
December 31, 2009 and 2008, an allowance for doubtful account, was not recorded
as the collection history from those customers indicated collection was
probable.
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.
Note
receivable
In 2008,
the Company entered into a loan and security agreement with Protein Sciences
Corporation (“PSC”) to loan PSC up to $10 million in conjunction with an
agreement pursuant to which the Company would acquire substantially all of the
assets of PSC. The loan is secured by substantially all of PSC’s assets,
including PSC’s intellectual property. Under this loan agreement and a related
promissory note, $10 million of principal is outstanding as of December 31,
2009, and the Company has recorded this as a note receivable. By its original
terms, the note accrued interest at an annual rate of 8% and was due and payable
no later than December 31, 2008. Thereafter, the note accrued interest at a
default rate of 11%. In early 2009, the Company entered into a forbearance
agreement with PSC. Under the terms of the forbearance agreement, the note
continued to accrue interest at an annual rate of 11%, and became due and
payable on May 31, 2009. The Company also agreed not to foreclose on the
collateral for the loan prior to May 31, 2009. Since the expiration of the
forbearance agreement, the note has accrued interest at a default rate of 14%.
As of December 31, 2009, the Company has recorded accrued interest on the note
receivable of $1.8 million, included in prepaid expenses and other current
assets.
In 2008,
the Company initiated litigation against PSC and its senior management alleging
fraud and breach of contract, among other claims. In June 2009, after the
expiration of a five-month forbearance period on the loan, the Company initiated
proceedings to acquire possession of its physical assets by foreclosing. In
addition, the Company and several other creditors of PSC filed a federal
involuntary bankruptcy petition against PSC in June 2009 in United States
Bankruptcy Court for the District of Delaware. In September 2009, the bankruptcy
court concluded that PSC was insolvent and that PSC’s debt to the Company was
valid and not subject to a bona fide dispute. However, the bankruptcy court
declined to force PSC into bankruptcy, finding that foreclosure proceedings, not
the bankruptcy action, were the proper mechanism of recovery. The Company
intends to continue to pursue foreclosure on PSC’s assets and to pursue the two
pending lawsuits against PSC and its management. The Company has concluded that
the $10 million note receivable is not impaired as of December 31, 2009,
and therefore has not recorded a reserve against this note. This conclusion is
based on the Company’s belief that it will recover all amounts recorded, either
by repayment from PSC or through foreclosure on PSC’s assets. In the event that
PSC does not voluntarily repay the amounts due, the Company believes that the
value of its collateral as a secured creditor is in excess of the note and
related interest and that a loss is not probable.
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
|
31-39
years
|
Building improvements
|
10-39
years
|
Furniture and equipment
|
3-7
years
|
Software
|
Lesser
of 3-5 years or product life
|
Leasehold improvements
|
Lesser
of the asset life or lease
term
|
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.
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’s ability to realize deferred tax assets depends upon future taxable
income as well as the limitations discussed below. 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. The Company considers future
taxable income and ongoing tax planning strategies in assessing the need for
valuation allowances. In general, if the Company determines that it is more
likely than not to realize more than the recorded amounts of net deferred tax
assets in the future, the Company will reverse all or a portion of the valuation
allowance established against its deferred tax assets, resulting in a decrease
to the provision for income taxes in the period in which the determination is
made. Likewise, if the Company determines that it is not more likely than not to
realize all or part of the net deferred tax asset in the future, the Company
will establish a valuation allowance against deferred tax assets, with an
offsetting increase to the provision for income taxes, in the period in which
the determination is made.
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 and the Company’s initial public
offering, the Company believes the use of the operating losses will be
significantly limited.
Revenue
recognition
The
Company recognizes 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 Company’s
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
previous contracts with HHS, the Company invoiced HHS and recognized the related
revenues upon delivery of the product to the government carrier, at which time
title to the product passed to HHS. Under the Company’s current
contracts with HHS, the Company invoices HHS and recognizes the related revenue
upon acceptance by the government at delivery site, at which time title to the
product passes to HHS.
Under the
Company’s previous contracts with the DoD, title to the product passed to the
DoD upon submission of the first invoice. The earnings process was considered
complete upon FDA release of the product for sale and distribution. Following
FDA release of the product, the product was segregated for later shipment, and
all deferred revenue related to the released product was recognized in
accordance with “bill and hold” requirements.
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 (“SNS”). This interpretation provides for revenue recognition
for specifically identified products purchased for the SNS in the event that all
requirements for revenue recognition are not met. While the Company’s contracts
with HHS are for qualifying sales of vaccine for placement into the SNS, the
Company meets all requirements for revenue recognition upon delivery of product
to HHS, and therefore has not applied this guidance.
Collaborative
research and development agreements can provide for one or more of up-front
license fees, research payments, and milestone payments. Agreements with
multiple components (“deliverables” or “items”) are evaluated to determine if
the deliverables can be divided into more than one unit of accounting. An item
can generally be considered a separate unit of accounting if all of the
following criteria are met: (1) the delivered item(s) has value to the customer
on a stand-alone basis; (2) there is objective and reliable evidence of the fair
value of the undelivered items(s); and (3) if the arrangement includes a general
right of return relative to the delivered item(s), delivery or performance of
the undelivered item(s) is considered probable and substantially in control of
the Company. Items that cannot be divided into separate units are combined with
other units of accounting, as appropriate. Consideration received is allocated
among the separate units based on their respective fair values or based on the
residual value method and is recognized in full when the criteria above are met.
The Company deems service to have been rendered if no continuing obligation
exists on the part of the Company.
Revenue
associated with non-refundable up-front license fees under arrangements where
the license fees and research and development activities cannot be accounted for
as separate units of accounting is deferred and recognized as revenue on a
straight-line basis over the expected term of the Company’s continued
involvement in the research and development process. Revenues from the
achievement of research and development milestones, if deemed substantive, are
recognized as revenue when the milestones are achieved, and the milestone
payments are due and collectible. If not deemed substantive, the Company would
recognize such milestone as revenue on a straight-line basis over the remaining
expected term of continued involvement in the research and development
process.
Milestones
are considered substantive if all of the following conditions are met; (1) the
milestone is non-refundable; (2) achievement of the milestone was not reasonably
assured at the inception of the arrangement; (3) substantive effort is involved
to achieve the milestone; and (4) the amount of the milestone appears reasonable
in relation to the effort expended, the other milestones in the arrangement and
the related risk associated with the achievement of the milestone and any
ongoing research and development or other services are priced at fair value.
Payments received in advance of work performed are recorded as deferred
revenue.
The
Company generates contract and grant revenue from cost-plus-fee contracts.
Revenues are recognized to the extent of costs incurred plus an estimate of the
applicable fees earned. The Company considers fixed fees under
cost-plus-fee contracts to be earned in proportion to the allowable costs
incurred in performance of the contract. The Company analyzes each cost for
contracts and reimbursable grants to ensure reporting of revenues gross versus
net is appropriate based on the guidance in the American Institute of Certified
Public Accountants Federal Government Contractors Guide or Financial Accounting
Standards Board (“FASB”) guidance for accounting revenue recognition, whichever
is most appropriate. For each of the three years in the period ended
December 31, 2009, the costs incurred under the contracts and grants
approximated the revenue earned.
Impairment
of long-lived assets
The
Company assesses the recoverability of its long-lived assets for which an
indicator of impairment exists by determining whether the carrying value of such
assets can be recovered through undiscounted future operating cash flows. If the
Company concludes that the carrying value will not be recovered, the Company
measures the amount of such impairment by comparing the fair value to the
carrying value. The Company recorded an impairment charge of $7.3 million in
2009 related to its two Frederick, Maryland facilities, described more fully in
Note 14 — Assets Held for Sale. The Company recorded no impairment
losses for the years ended December 31, 2008 and 2007.
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.
Comprehensive
income
Comprehensive
income is comprised of net income and other changes in equity that are excluded
from net income. 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.
Foreign
currencies
The local
currency is the functional currency for the Company’s foreign subsidiaries and,
as such, assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at average exchange
rates during the year. Translation adjustments resulting from this process are
charged or credited to other comprehensive income.
Capitalized
interest
The
Company capitalizes interest based on the cost of major ongoing capital projects
which have not yet been placed in service. For the years ended December 31,
2009, 2008 and 2007, the Company incurred interest of $1.8 million, $3.0 million
and $3.2 million, respectively. Of these amounts, the Company capitalized $1.8
million, $3.0 million and $3.1 million, respectively.
Certain
risks and uncertainties
The
Company has derived substantially all of its revenue from sales of BioThrax
under contracts with HHS and the DoD. The Company’s ongoing U.S. government
contract does 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 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 Company’s 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 Company’s product candidates
other than BioThrax have received regulatory approval.
Earnings
per share
Basic net
income per share of common stock excludes dilution for potential common stock
issuances and is computed by dividing net income by the weighted average number
of shares outstanding for the period. Diluted net income 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.
The
following table presents the calculation of basic and diluted net income per
share:
|
|
Year
Ended December 31,
|
|
(in thousands, except share and
per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
31,144
|
|
|
$
|
20,682
|
|
|
$
|
22,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares—basic
|
|
|
30,444,485
|
|
|
|
29,835,134
|
|
|
|
28,995,667
|
|
Dilutive
securities—stock options
|
|
|
930,820
|
|
|
|
622,964
|
|
|
|
667,460
|
|
Weighted-average
number of shares—diluted
|
|
|
31,375,305
|
|
|
|
30,458,098
|
|
|
|
29,663,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share-basic
|
|
$
|
1.02
|
|
|
$
|
0.69
|
|
|
$
|
0.79
|
|
Earnings
per share-diluted
|
|
$
|
0.99
|
|
|
$
|
0.68
|
|
|
$
|
0.77
|
|
For the
years ending December 31, 2009, 2008 and 2007, outstanding stock options to
purchase approximately 1.4 million, 183,000 and 211,000 shares,
respectively, of common stock are not considered in the diluted earnings per
share calculation because the exercise price of these options is greater than
the average per share closing price during the year.
Accounting
for stock-based compensation
As of
December 31, 2009, the Company has two stock-based employee compensation plans,
the Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan
(the “2006 Plan”) and the Emergent BioSolutions Employee Stock Option Plan (the
“2004 Plan”), described more fully in Note 8 — Stockholders’
Equity.
The
Company recognizes stock-based compensation net of an estimated forfeiture
rate. Based on options granted to employees as of December 31, 2009,
total compensation expense not yet recognized related to unvested options is
approximately $4.8 million, after tax. The Company expects to recognize that
expense over a weighted average period of 1.7 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 assumptions used in valuing the
stock options granted and a discussion of the Company’s methodology for
developing each of the assumptions used:
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
55
|
%
|
|
|
65
|
%
|
|
|
50
|
%
|
Risk-free
interest rate
|
|
|
1.32-1.72
|
%
|
|
|
1.63-2.75
|
%
|
|
|
2.99-5.09
|
%
|
Expected
average life of options
|
|
3.3
years
|
|
|
3.0
years
|
|
|
3.0
years
|
|
|
·
|
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 analyzed the volatility used by similar companies at a similar
stage of development to estimate expected volatility. The volatility used
by these similar companies ranged from 40% to 80%, with an average
estimated volatility of 55%. The Company used a rate of 55% for grants
made in 2009, approximately the mid-point of this
range.
|
|
·
|
Risk-free
interest rate — This is the range of U.S. Treasury rates with a term that
most closely resembles the expected life of the option as of the date 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 Company’s expectation of optionee exercise behavior
subsequent to vesting of options.
|
Pursuant
to accounting guidance related to stock compensation, the Company classifies the
cash flows resulting from the tax benefits of deductions in excess of the
compensation cost recognized for options exercised (excess tax benefits from
stock-based compensation) as financing cash flows.
Reclassifications
Certain
amounts classified as inventory in the consolidated balance sheet as of December
31, 2008 have been reclassified as other current assets to conform with current
period presentation.
Subsequent
events
The
Company has evaluated subsequent events through the time of filing these
financial statements.
Recent
accounting pronouncements
In
January 2010, the FASB issued Accounting Standards Update (“ASU”)
No. 2010-06 which amended Accounting Standards Codification (“ASC”) Topic
820 regarding improving disclosures about fair value measurements. The
amendments in ASU No. 2010-06 will provide more robust disclosures about
(1) the different classes of assets and liabilities measured at fair value, (2)
the valuation techniques and inputs used, (3) the activity in Level 3 fair value
measurements, and (4) the transfers between Levels 1, 2, and 3. This amendment
is effective for financial statements issued for interim and annual periods
ending after December 15, 2010. The Company anticipates that the adoption
of this amendment will not have a material impact on its financial
statement.
In
January 2010, the FASB issued Accounting Standards Update ASU No. 2010-02
which amended ASC Topic 810 regarding accounting and reporting for decreases in
ownership of a subsidiary. The amendments in ASU No. 2010-02 clarifies what
type of subsidiaries or asset groups the scope of the decrease in ownership
applies. The amendments in this Update also clarify that the decrease in
ownership guidance does not apply to certain transactions even if they involve
businesses. This amendment is effective for financial statements issued for
interim and annual periods beginning on or after December 15, 2008 for
entities that have not adopted the pending content that links to ASC 10-10-65-1.
This amendment is effective for financial statements issued for interim and
annual periods beginning on or after December 15, 2009 for entities that
have adopted the pending content that links to ASC 10-10-65-1. The Company
anticipates that the adoption of this amendment will not have a material impact
on its financial statement.
In
January 2010, the FASB issued ASU No. 2010-01 which amended ASC Topic 505
regarding distributions to shareholders with components of stock and cash. The
amendments in ASU No. 2010-01 clarify that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock,
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate, is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend for
purposes of applying ASC Topics 505 and ASC Topic 260. This amendment is
effective for financial statements issued for interim and annual periods ending
after December 15, 2009. The Company anticipates that the adoption of this
amendment will not have a material impact on its financial
statement.
In
December 2009, the FASB issued Accounting Standards Update ASU No. 2009-17
which amended ASC Topic 810 regarding variable interest entities. The amendments
in ASU No. 2009-17 replace the quantitative-based risks and rewards
calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which reporting entity has the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. The amendments also require
additional disclosures about a reporting entity’s involvement in variable
interest entities, which will enhance the information provided to users of
financial statements. This amendment is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. The adoption of this amendment
will not have a material impact on the Company’s financial statements. The
Company does not expect the adoption of this amendment to have a material impact
on its financial statements.
In
October 2009, FASB issued ASU No. 2009-13 which amended ASC Topic 605
regarding multiple-deliverable revenue arrangements. The amendments in ASU
No. 2009-13 establish a selling price hierarchy for determining the selling
price of a deliverable. In addition, this amendment replaces the term “fair
value” in the revenue allocation guidance with “selling price”. ASU
No. 2009-13 will eliminate the residual method of allocation and require
that arrangement consideration be allocated at the inception of the arrangement
to all deliverables using the relative selling price method and will require
that an entity determine its best estimate of selling price in a manner that is
consistent with that used to determine the price to sell the deliverable on a
standalone basis. ASU No. 2009-13 will significantly expand the disclosures
related to an entity’s multiple-deliverable revenue arrangements. In the year of
adoption, entities will be required to disclose information that enables the
users of financial statements to understand the effect of adopting ASU
No. 2009-13. This amendment is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. If early adoption is
elected and the period of adoption is not the beginning of the entity’s fiscal
year, the entity will be required to apply the amendments in ASU
No. 2009-13 retrospectively from the beginning of the entity’s fiscal year.
The adoption of this amendment will have an impact on the Company’s financial
statements to the extent the Company is a party to multiple-deliverable revenue
arrangements.
In June
2009, the FASB issued ASU No. 2009-01,
The FASB Accounting
Standards Codification
tm
and the Hierarchy of Generally
Accepted
Accounting
Principles — a replacement of FASB Statement No. 162
, an
amendment to ASC Topic 105,
Generally Accepted
Accounting Principles
. The
ASC will be the source of authoritative U.S. generally accepted accounting
principles (“GAAP”) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The ASC supersedes all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the ASC will become non-authoritative. ASU
No. 2009-01 is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The Company does not expect
the adoption of this amendment to have a material impact on its financial
statements.
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 167,
Amendments to
FASB Interpretation No. 46(R)
("SFAS No.
167")
which was later superseded by the FASB ASC and included in
ASC Topic 810. SFAS No. 167 amends FASB Interpretation 46(R) to
replace the quantitative-based risks and rewards calculation for determining
which enterprise, if any, has a controlling financial interest in a variable
interest entity, with an approach focused on identifying which enterprise has
the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive
benefits from the entity. SFAS No. 167 requires an additional
reconsideration event when determining whether an entity is a variable interest
entity when any changes in facts and circumstances occur such that the holders
of the equity investment at risk, as a group, lose the power from voting rights
or similar rights of those investments to direct the activities of the entity
that most significantly impact the entity’s economic performance. It also
requires ongoing assessments of whether an enterprise is the primary beneficiary
of a variable interest entity. SFAS No. 167 amends FASB Interpretation
46(R) to require additional disclosures about an enterprise’s involvement in
variable interest entities. SFAS No. 167 shall be effective for the
Company as of January 1, 2009. Earlier application is prohibited. The
Company does not expect the adoption of this amendment to have a material impact
on its financial statements.
In May
2009, the FASB issued SFAS No. 165,
Subsequent Events
("SFAS No. 165")
which was later
superseded by the FASB ASC and included in ASC Topic 855. SFAS No. 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In particular, SFAS No. 165 sets forth:
(1) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and
(3) the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. The Company adopted
SFAS No. 165 during the three months ended June 30, 2009. The
provisions of SFAS No. 165 will impact the Company’s financial
statements to the extent that the Company has material subsequent
events.
In April
2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 141(R)-1,
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination
That Arise from Contingencies
(“FSP SFAS No. 141(R)-1”) which was later superseded by the
FASB ASC and included in ASC Topic 805. FSP SFAS No. 141(R)-1 amends
the initial recognition and measurement, subsequent measurement and accounting,
and disclosure of assets and liabilities arising from contingencies in a
business combination. FSP SFAS No. 141(R)-1 was adopted by the Company
effective January 1, 2009, and will impact the Company’s financial
statements to the extent that the Company is party to a business
combination.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 141 (revised 2007),
Business Combinations
(“SFAS
No. 141(R)”). SFAS 141(R) was subsequently codified into ASC Topic 805,
Business Combinations
(“ASC
805”). ASC 805 requires the expensing of acquisition-related costs as incurred.
In accordance with the provisions of ASC 805, in January 2009 the Company
expensed $1.4 million in previously capitalized acquisition-related costs
associated with acquisitions that were in progress but not complete as of
December 31, 2008.
3. Accounts
receivable
Accounts receivable consist of the following:
|
|
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Billed
|
|
$
|
51,782
|
|
|
$
|
23,005
|
|
Unbilled
|
|
|
3,090
|
|
|
|
1,850
|
|
Total
|
|
$
|
54,872
|
|
|
$
|
24,855
|
|
4. Inventories
Inventories
consist of the following:
|
|
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Raw
materials and supplies
|
|
$
|
1,565
|
|
|
$
|
1,352
|
|
Work-in-process
|
|
|
9,870
|
|
|
|
14,459
|
|
Finished
goods
|
|
|
2,086
|
|
|
|
2,514
|
|
Total
inventories
|
|
$
|
13,521
|
|
|
$
|
18,325
|
|
5. Property,
plant and equipment
Property,
plant and equipment consist of the following:
|
|
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Land
and improvements
|
|
$
|
2,932
|
|
|
$
|
5,050
|
|
Buildings,
building improvements and leasehold improvements
|
|
|
18,661
|
|
|
|
28,119
|
|
Furniture
and equipment
|
|
|
27,086
|
|
|
|
22,657
|
|
Software
|
|
|
6,833
|
|
|
|
6,423
|
|
Construction-in-progress
|
|
|
98,178
|
|
|
|
82,518
|
|
|
|
|
153,690
|
|
|
|
144,767
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(21,856
|
)
|
|
|
(20,111
|
)
|
Total
Property, plant and equipment, net
|
|
$
|
131,834
|
|
|
$
|
124,656
|
|
Depreciation
and amortization expense was $5.0 million, $5.0 million and $4.8 million for the
years ended December 31, 2009, 2008 and 2007, respectively. For the years ended
December 31, 2009, 2008 and 2007, depreciation and amortization expense included
approximately $0, $0, and $1.0 million, respectively, related to the
amortization of internal-use software. As of December 31, 2009 and 2008, there
was no unamortized internal use software-cost.
6. Long-term
debt
The
components of long-term debt are as follows:
|
|
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Term
loan dated December 2009; three month LIBOR plus 3.25%, due December
2014
|
|
$
|
22,750
|
|
|
$
|
25,500
|
|
Term
loan dated November 2009; three month LIBOR plus 3.25%, due November
2014
|
|
|
6,981
|
|
|
|
-
|
|
Term
loan dated November 2009; three month LIBOR plus 3.25%, due November
2014
|
|
|
5,134
|
|
|
|
-
|
|
Term
loan dated April 2006; three month LIBOR plus 3.0%, due April
2011
|
|
|
7,308
|
|
|
|
7,809
|
|
Loan
dated October 2004; 3.0%, due September 2010
|
|
|
2,500
|
|
|
|
2,500
|
|
Term
loan dated October 2004; 6.625%, due October 2011
|
|
|
6,045
|
|
|
|
6,369
|
|
Other
|
|
|
-
|
|
|
|
5
|
|
Total
long-term indebtedness
|
|
|
50,718
|
|
|
|
42,183
|
|
Less
current portion of long-term indebtedness
|
|
|
(5,791
|
)
|
|
|
(6,248
|
)
|
Noncurrent
portion of long-term indebtedness
|
|
$
|
44,927
|
|
|
$
|
35,935
|
|
In
December 2009, the Company entered into a loan agreement with HSBC, under which
HSBC provided the Company with a term loan of $22.8 million. This loan replaced
a prior loan arrangement with HSBC under which HSBC agreed to loan the Company
$30.0 million. Under the new loan agreement, the Company is required to make
monthly payments in the amount of $126,000 in principal plus accrued interest,
with a residual principal payment due upon maturity in December 2014. Payment of
the loan is secured by substantially all of the assets of Emergent BioDefense
Operations, other than accounts receivable under BioThrax supply contracts with
HHS and the DoD that are pledged as collateral to secure a $15 million revolving
line of credit with Fifth Third Bank. The assets that secure this loan total
approximately $150 million at December 31, 2009. The annual interest
rate is based on the three month LIBOR plus 3.25% (3.50% as of December 31,
2009).
In
November 2009, the Company completed the acquisition of a development and
manufacturing facility in Baltimore, Maryland for $8.2 million. The Company paid
approximately $1.2 million in cash and financed the remaining balance with a
term loan from HSBC in the amount of $7.0 million. This loan requires monthly
principal payments of $39,000 plus accrued interest from November 2009 through
November 2014 with a balloon payment for the remaining unpaid principal and
interest due in November 2014. The loan is collateralized by the facility. The
annual interest rate is based on the three month LIBOR plus 3.25% (3.50% as of
December 31, 2009).
In
October 2009, the Company completed the acquisition of a research and
development facility in Gaithersburg, Maryland for $6.4 million. The Company
paid $1.2 million in cash and financed the remaining balance with a term loan
from HSBC in the amount of $5.2 million. This loan requires monthly principal
payments of $29,000 plus accrued interest from November 2009 through November
2014 with a balloon payment for the remaining unpaid principal and interest due
in November 2014. The loan is collateralized by the facility. The
annual interest rate is based on the three month LIBOR plus 3.25% (3.50% as of
December 31, 2009).
In April
2006, the Company completed the acquisition of a 145,000 square foot facility in
Frederick, Maryland for $9.8 million. This facility was previously under a lease
which contained an option to purchase the facility. The Company paid $1.3
million in cash and financed the remaining balance with a bank loan with HSBC in
the amount of $8.5 million. This loan requires monthly principal and interest
payments from May 2006 through April 2011 of $72,000 with a balloon payment for
the remaining unpaid principal and interest due in April 2011. The loan is
collateralized by the facility. The annual interest rate is based on
the three month LIBOR plus 3.0% (3.25% as of December 31, 2009).
Under the
terms of the four loans we have with HSBC, the Company is required to maintain a
book leverage ratio of less than 1.00. This ratio is calculated by dividing
total liabilities, excluding deferred revenues specific to contracts with the
U.S. government, by total net worth. In addition, the Company is required to
maintain a debt coverage ratio of not less than 1.25 to 1.00. This ratio is
calculated by dividing earnings before interest, taxes, depreciation and
amortization for the most recent four quarters by 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.
The Company is in compliance with these covenants as of December 31,
2009.
In
October 2004, the Company entered into a Secured Conditional Loan with the
Maryland Economic Development Assistance Fund (“MEDAF”) 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
$1.3 million letter of credit and a security interest in the building. The
Company is required to pay an annual fee of 1.0% to maintain the letter of
credit. The borrowing bears interest at 3.0% per annum, and the term of the loan
ends March 31, 2013. The terms of the loan call for principal and related
accrued interest to be forgiven if specified employment levels are achieved and
maintained through December 2012, at least $42.9 million in project costs are
expended prior to December 2009, and the Company occupies the building through
December 2012. As of December 31, 2009 the Company has not met the requirements
for the loan to be forgivable, and in February 2010 reached an agreement with
MEDAF to repay the loan in full by September 30, 2010, with an earlier repayment
due upon sale of the building. The full $2.5 million outstanding under this loan
is included in current portion of long-term indebtedness at December 31, 2009,
and the accrued interest is included in accrued expenses and other current
liabilities.
In
connection with the 2004 purchase of the building in Frederick, Maryland
discussed above, the Company entered into a loan agreement for $7.0 million with
a bank to finance the remaining portion of the purchase price. The borrowing
accrued interest at 6.625% per annum through October 2006. The Company was
required to make interest only payments through that date. Beginning in November
2006, the Company began to make monthly payments of $62,000, based upon a 15
year amortization schedule. In November 2009, the monthly payments will be
adjusted based upon a 12 year amortization schedule. Beginning in November 2009,
the loan will bear interest at a fixed rate equal to 3.2% over the yield on
actively traded U.S. Government securities issues adjusted to a constant
maturity of two years, rounded up to the nearest one-eighth of one percent (1/8
of 1%). 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 $5.0 million and a debt
coverage ratio of not less than 1.1 to 1. The Company is in compliance with
these covenants as of December 31, 2009.
Scheduled
principal repayments and maturities on long-term debt as of December 31, 2009
are as follows:
(in
thousands)
|
|
|
|
2010
|
|
$
|
5,791
|
|
2011
|
|
|
14,724
|
|
2012
|
|
|
2,331
|
|
2013
|
|
|
2,331
|
|
2014
|
|
|
25,541
|
|
2015
and beyond
|
|
|
-
|
|
|
|
$
|
50,718
|
|
7.
Line of
credit
In June
2007, the Company entered into a loan agreement with Fifth Third Bank, whereby
Fifth Third Bank agreed to extend to the Company a revolving line of credit up
to $15 million. The Company can borrow under this line of credit through June
2010, at which time the agreement expires. The line of credit is secured by
accounts receivable under the Company’s HHS contract and bears interest at a
rate equal to the one month LIBOR plus 2% (2.23% as of December 31, 2009). The
Company is subject to certain covenants, including maintenance of specified
equity levels on a quarterly basis, and is currently in compliance with those
covenants. For each of the years ended December 31, 2009 and 2008, $15.0 million
was outstanding under the line of credit. These amounts were repaid in January
2010 and February 2009, respectively.
8.
Stockholders’
equity
Preferred stock
The
Company is authorized to issue up to 15,000,000 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 Company’s
board of directors. As of December 31, 2009 and 2008, no preferred stock has
been issued.
Common
stock
The
Company currently has one class of $0.001 par value per share common stock
(“Common Stock”) authorized and outstanding. The Company is authorized to issue
up to 100,000,000 shares of the Common Stock. Holders of Common Stock are
entitled to one vote for each share of Common Stock held on all matters as may
be provided by law.
Stock
options
As of
December 31, 2009, the Company has two stock-based employee compensation plans,
the 2006 Plan and the 2004 Plan (together, the “Emergent Plans”), under which
the Company has granted options to purchase shares of Common Stock. The Emergent
Plans have both incentive and non-qualified stock option features.
The 2006
Plan was amended and restated on May 21, 2009 at the Company’s 2009 Annual
Meeting of Stockholders to provide for, among other things, an increase in the
number of shares of Common Stock authorized for issuance by 3.9 million
shares. The amendment to the 2006 Plan also allowed for an additional
450,000 shares of Common Stock to be reserved for issuance effective
July 1, 2009, as previously approved under the provisions of the 2006 Plan.
Additionally, the amendment eliminates an “evergreen provision” contained in the
original 2006 Plan that allowed for periodic increases in the number of shares
authorized for issuance. As of December 31, 2009, an aggregate of
8,678,826 shares of Common Stock are authorized for issuance under the 2006
Plan, and a total of 4,586,304 shares of Common Stock remain available for
future awards to be made to plan participants. The maximum number of shares
subject to awards which that may be granted per year under the 2006 Plan to a
single participant is 287,700. 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. Options granted under the 2006 Plan have a vesting period of no more than
5 years and a contractual life of no more than 10 years. The terms and
conditions of stock options (including price, vesting schedule, term and number
of shares) under the Emergent Plans are determined by the Company’s compensation
committee, which administers the Emergent Plans. Following the closing of the
Company’s initial public offering in November 2006, the Company no longer
granted options pursuant to the 2004 Plan.
Each
option granted under the Emergent Plans becomes exercisable as specified in the
relevant option agreement, and no option can be exercised after ten years from
the date of grant. The following is a summary of stock option plan
activity:
|
|
2006
Plan
|
|
|
2004
Plan
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Number
of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2008
|
|
|
2,466,519
|
|
|
$
|
8.76
|
|
|
|
438,628
|
|
|
$
|
5.52
|
|
|
|
51,826,012
|
|
Exercisable
at December 31, 2008
|
|
|
487,148
|
|
|
$
|
10.00
|
|
|
|
383,486
|
|
|
$
|
4.68
|
|
|
|
16,063,651
|
|
Granted
|
|
|
1,514,437
|
|
|
|
18.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(406,424
|
)
|
|
|
8.53
|
|
|
|
(265,390
|
)
|
|
|
3.76
|
|
|
|
|
|
Forfeited
|
|
|
(89,033
|
)
|
|
|
11.76
|
|
|
|
(43,156
|
)
|
|
|
10.28
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
3,485,499
|
|
|
|
12.72
|
|
|
|
130,082
|
|
|
|
7.52
|
|
|
|
11,178,792
|
|
Exercisable
at December 31, 2009
|
|
|
936,933
|
|
|
|
9.56
|
|
|
|
130,082
|
|
|
|
7.52
|
|
|
|
4,768,507
|
|
The
weighted average remaining contractual term of options outstanding as of
December 31, 2009 and 2008 was 5.6 and 5.7 years, respectively. The weighted
average remaining contractual term of options exercisable as of December 31,
2009 and 2008 was 4.8 and 4.5 years, respectively.
The
weighted average grant date fair value of options granted during the years ended
December 31, 2009, 2008 and 2007 was $7.16, $3.53 and $3.58, respectively. The
total intrinsic value of options exercised during the years ended December 31,
2009, 2008 and 2007 was $7.1 million, $4.0 million and $20.5 million,
respectively. The total fair value of options vested during 2009, 2008 and 2007
was $3.3 million, $1.9 million and $1.9 million, respectively.
Stock-based
compensation expense was recorded in the following financial statement line
items:
|
Years
Ended
|
|
|
December
31,
|
|
(in
thousands)
|
2009
|
|
|
2008
|
|
Cost
of sales
|
|
$
|
200
|
|
|
$
|
100
|
|
Research
and development
|
|
|
1,103
|
|
|
|
520
|
|
General
and administrative
|
|
|
3,704
|
|
|
|
1,890
|
|
Total
stock-based compensation expense
|
|
$
|
5,007
|
|
|
$
|
2,510
|
|
A summary
of the status of the Company’s nonvested stock options at December 31, 2009 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Plan
|
|
|
2004
Plan
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Nonvested
at December 31, 2008
|
|
|
1,979,371
|
|
|
$
|
3.57
|
|
|
|
55,142
|
|
|
$
|
4.24
|
|
Granted
|
|
|
1,514,437
|
|
|
|
18.00
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(856,209
|
)
|
|
|
3.62
|
|
|
|
(40,757
|
)
|
|
|
4.33
|
|
Forfeited
|
|
|
(89,033
|
)
|
|
|
11.76
|
|
|
|
(14,385
|
)
|
|
|
3.98
|
|
Nonvested
at December 31, 2009
|
|
|
2,548,566
|
|
|
$
|
3.57
|
|
|
|
-
|
|
|
$
|
-
|
|
Options
expected to vest at December 31, 2009
|
|
|
1,703,399
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
During
the years ended December 31, 2009, 2008 and 2007, the Company received a tax
benefit from stock options exercised of approximately $1.9 million, $1.3 million
and $6.0 million, respectively.
9.
Income
taxes
Significant components of the provision for income taxes attributable to
operations consist of the following:
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,254
|
|
|
$
|
11,186
|
|
|
$
|
11,189
|
|
State
|
|
|
902
|
|
|
|
98
|
|
|
|
2,275
|
|
International
|
|
|
58
|
|
|
|
101
|
|
|
|
-
|
|
Total
current
|
|
|
9,214
|
|
|
|
11,385
|
|
|
|
13,464
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,799
|
|
|
|
(1,174
|
)
|
|
|
2,832
|
|
State
|
|
|
(47
|
)
|
|
|
1,844
|
|
|
|
(3,245
|
)
|
Total
deferred
|
|
|
5,752
|
|
|
|
670
|
|
|
|
(413
|
)
|
Total
provision for income taxes
|
|
$
|
14,966
|
|
|
$
|
12,055
|
|
|
$
|
13,051
|
|
The
Company’s net deferred tax asset consists of the following:
|
|
December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Net
operating loss carryforward
|
|
$
|
10,304
|
|
|
$
|
8,458
|
|
Research
and development carryforward
|
|
|
1,578
|
|
|
|
1,714
|
|
Stock
compensation
|
|
|
1,358
|
|
|
|
730
|
|
Foreign
deferrals
|
|
|
52,059
|
|
|
|
46,151
|
|
Other
|
|
|
(452
|
)
|
|
|
1,902
|
|
Deferred
tax asset
|
|
|
64,847
|
|
|
|
58,955
|
|
Fixed
assets
|
|
|
(3,104
|
)
|
|
|
(851
|
)
|
Other
|
|
|
(2,783
|
)
|
|
|
(2,051
|
)
|
Deferred
tax liability
|
|
|
(5,887
|
)
|
|
|
(2,902
|
)
|
Valuation
allowance
|
|
|
(53,196
|
)
|
|
|
(44,537
|
)
|
Net
deferred tax asset
|
|
$
|
5,764
|
|
|
$
|
11,516
|
|
Net
operating loss carryforwards consist of approximately $191.7 million for state
jurisdictions and $157.0 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 Company’s net operating
loss carryforwards may be restricted due to changes in Company
ownership.
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,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
US
|
|
$
|
74,758
|
|
|
$
|
66,326
|
|
|
$
|
62,016
|
|
International
|
|
|
(28,648
|
)
|
|
|
(33,589
|
)
|
|
|
(26,029
|
)
|
Earnings
before taxes on income
|
|
|
46,110
|
|
|
|
32,737
|
|
|
|
35,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
tax at statutory rates
|
|
$
|
16,138
|
|
|
$
|
11,458
|
|
|
$
|
12,595
|
|
State
taxes, net of federal benefit
|
|
|
(1,172
|
)
|
|
|
(2,118
|
)
|
|
|
701
|
|
Impact
of foreign operations
|
|
|
(7,156
|
)
|
|
|
(8,384
|
)
|
|
|
(7,106
|
)
|
Change
in valuation allowance
|
|
|
9,025
|
|
|
|
10,835
|
|
|
|
6,419
|
|
Effect
of change in rates
|
|
|
-
|
|
|
|
-
|
|
|
|
493
|
|
Effect
of foreign rates
|
|
|
(17
|
)
|
|
|
(11
|
)
|
|
|
154
|
|
Tax
credits
|
|
|
(835
|
)
|
|
|
(819
|
)
|
|
|
(880
|
)
|
Other
differences
|
|
|
(2,056
|
)
|
|
|
185
|
|
|
|
(617
|
)
|
Permanent
differences
|
|
|
1,039
|
|
|
|
909
|
|
|
|
1,292
|
|
Provision
for income taxes
|
|
$
|
14,966
|
|
|
$
|
12,055
|
|
|
$
|
13,051
|
|
The
effective annual tax rate for the years ended December 31, 2009, 2008 and 2007
was 32%, 37% and 36%, respectively. The decrease in the effective rate in 2009
from 2008 is due primarily to the benefit of certain costs capitalized for book
purposes that are deductible for tax purposes.
In
September 2006, the FASB issued guidance for accounting for uncertainty in
income taxes. This guidance
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. In addition, this guidance requires that the Company recognize in
its financial statements the impact of a tax position if that position is more
likely than not to be sustained on audit based on the technical merits of the
position and also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods and disclosure.
The
Company recognizes interest in interest expense and recognizes potential
penalties related to unrecognized tax benefits in selling, general and
administrative expense. The Company accrued approximately $23,000 and $44,000,
respectively, for the payment of interest and penalties as of December 31, 2009
and 2008. Of the total unrecognized tax benefits recorded at December 31, 2009
and 2008, $175,000 and $160,000, respectively is classified as a current
liability and $85,000 and $110,000, respectively, is classified as a non-current
liability on the balance sheet. As of December 31, 2009 and 2008, $126,000 and
$0, respectively, of unrecognized tax benefits will reverse within the next
twelve months.
The table
below presents the gross unrecognized tax benefits activity for 2009, 2008 and
2007:
(in
thousands)
|
|
|
|
Gross
unrecognized tax benefits at January 1, 2007
|
|
$
|
607
|
|
Increases
for tax positions for prior years
|
|
|
262
|
|
Decreases
for tax positions for prior years
|
|
|
(65
|
)
|
Increases
for tax positions for current year
|
|
|
100
|
|
Settlements
|
|
|
(201
|
)
|
Lapse
of statue of limitations
|
|
|
(426
|
)
|
Gross
unrecognized tax benefits at December 31, 2007
|
|
|
277
|
|
Increases
for tax positions for prior years
|
|
|
28
|
|
Decreases
for tax positions for prior years
|
|
|
-
|
|
Increases
for tax positions for current year
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
Lapse
of statue of limitations
|
|
|
(35
|
)
|
Gross
unrecognized tax benefits at December 31, 2008
|
|
|
270
|
|
Increases
for tax positions for prior years
|
|
|
15
|
|
Decreases
for tax positions for prior years
|
|
|
(80
|
)
|
Increases
for tax positions for current year
|
|
|
55
|
|
Settlements
|
|
|
-
|
|
Lapse
of statue of limitations
|
|
|
-
|
|
Gross
unrecognized tax benefits at December 31, 2009
|
|
$
|
260
|
|
Substantially
all of these reserves would impact the effective tax rate if released into
income.
The
Company’s federal and state income tax returns for the tax years 2008 to 2006
remain open to examination. The Company’s tax returns in the United Kingdom
remain open to examination for the tax years 2008 to 2001, and tax returns in
Germany remain open indefinitely.
A limited
scope federal income tax audit of the Company’s tax return for the 2006 tax year
was completed in May 2009, without adjustment. A federal income tax audit of the
Company's tax return for the 2005 tax year was completed in March 2008. As a
result of that audit, the Company paid an assessment of $450,000, including
$55,000 of interest. A federal income tax audit of the Company's tax return for
the 2004 tax year was completed in March 2007. As a result of this audit, the
Company paid an assessment of $722,000, including $96,000 of
interest.
10.
401(k)
savings plan
The Company has 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 currently provides for matching of qualified deferrals up to 50% of
the first 6% of the employee’s salary. During the years ended December 31, 2009,
2008 and 2007, the Company made matching contributions of approximately $1.1
million, $827,000 and $682,000, respectively.
11.
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 Munich, Germany under a non-cancelable operating lease that
expires in June 2015. The Company leases office and laboratory space
in Wokingham, England under two coterminous non-cancelable operating leases that
expire in November 2016. The Company leases office space in Rockville, Maryland
under a non-cancelable operating lease that contains a 3% annual escalation
clause over the ten year term of the lease, which expires in December 2016 and
the Company has a five year renewal option at the end of the initial term. Prior
to purchasing the building in October 2009, we also leased office and laboratory
space in Gaithersburg, Maryland. For the years ended December 31, 2009, 2008 and
2007, total rent expense was $3.2 million, $3.7 million and $3.4 million,
respectively.
Future
minimum lease payments under operating lease obligations as of December 31, 2009
are as follows:
(in
thousands)
|
|
|
|
2010
|
|
$
|
1,817
|
|
2011
|
|
|
1,800
|
|
2012
|
|
|
1,767
|
|
2013
|
|
|
1,786
|
|
2014
|
|
|
1,806
|
|
2015
and beyond
|
|
|
2,974
|
|
Total
minimum lease payments
|
|
$
|
11,950
|
|
12. Litigation
Litigation against Protein Sciences
Corporation
. The Company is currently pursuing three legal
actions against PSC and its senior management arising out of a letter of intent,
a loan and security agreement and related promissory note, and an asset purchase
agreement between the Company and PSC that were entered into in 2008. Under
those agreements, the Company agreed to acquire substantially all of PSC’s
assets and to provide funding to PSC to enable it to continue operations through
the anticipated closing date of the asset purchase transaction. Between March
2008 and June 2008, the Company provided PSC with $10 million in funding under
the loan and security agreement and related promissory note. PSC’s obligations
to the Company under these agreements are secured by substantially all of PSC’s
assets, including PSC’s intellectual property. The note accrued interest at an
annual rate of 8% through December 31, 2008, a default rate of 11% through May
31, 2009, and a default rate of 14% since June 1, 2009. PSC has not repaid any
portion of the loan. As of December 31, 2009, $10 million of principal was
outstanding and $1.8 million of interest was accrued and unpaid.
On June
8, 2009, after the expiration of a five-month forbearance period on the loan,
the Company initiated legal proceedings in the Superior Court of the State of
Connecticut, Judicial District of New Haven, to acquire possession of the
physical assets by foreclosing on PSC’s physical assets that secure the loan. In
addition, the Company and several other creditors of PSC filed a federal
involuntary bankruptcy petition against PSC on June 22, 2009 in the United
States Bankruptcy Court for the District of Delaware. In September 2009, the
bankruptcy court concluded that PSC was insolvent and that PSC’s debt to the
Company was valid and not subject to a bona fide dispute, but the bankruptcy
court declined to force PSC into involuntary bankruptcy, finding that the
foreclosure proceeding, not the bankruptcy action, was the proper mechanism of
recovery. The Company intends to continue to pursue the Connecticut action for
possession of its physical assets in an effort to recover amounts due to the
Company. PSC has filed a motion to stay the Connecticut action for possession
pending a decision in the New York litigation against PSC, which is described
below. Such motion has been briefed and argued and the Company is
awaiting a decision from the Connecticut state court.
In
addition to the action seeking possession of the collateral, the Company
continues to pursue two separate lawsuits filed regarding this matter: one
against PSC on July 9, 2008 and the other PSC’s executive management team, which
consists of Daniel D. Adams, PSC’s Chief Executive Chairman, and Manon M.J. Cox,
PSC’s President and Chief Executive Officer, on October 3, 2008. The lawsuit
against PSC is pending in the Supreme Court of the State of New York and
includes, among other things, claims for fraud, breach of contract, breach of
the duty of good faith and fair dealing, unjust enrichment and unfair business
practices. The lawsuit against Mr. Adams and Ms. Cox is pending in the United
States District Court for the District of Connecticut and alleges, among other
things, that these individuals engaged in fraudulent conduct in connection with
their efforts to obtain $10 million in bridge financing from us. PSC has moved
to dismiss the New York action, and that motion remains pending. Mr. Adams and
Ms. Cox moved to dismiss the Connecticut action, and the court denied that
motion with respect to the fraud claims and granted it with respect to unfair
business practice claims. In the Company’s lawsuits against PSC and PSC’s
executive management team, the Company is seeking monetary damages of no less
than $13 million, punitive damages, declaratory judgment, injunctive relief to
protect the collateral for the loan, and other appropriate relief. PSC, Mr.
Adams, and Ms. Cox have not yet asserted any counterclaims in either lawsuit,
but PSC has stated that it may assert counterclaims for “among other things,
breach of contract, intentional misrepresentations, tortious interference with
business relations and unfair trade practices.”
The
Company intends to pursue full repayment of the loan, as well as other relief as
described in pleadings in the pending lawsuits against PSC and PSC’s executive
management.
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.
13. Oxford
collaboration
In July
2008, the Company entered into a collaboration with the University of Oxford
(“Oxford”) and certain University of Oxford researchers to conduct clinical
trials in the advancement of a vaccine product candidate for tuberculosis,
resulting in the formation of the Oxford-Emergent Tuberculosis Consortium
(“OETC”). The Company has a 51% equity interest in OETC and controls
the OETC Board of Directors. In addition, the Company has certain funding and
services obligations of up to $20.3 million related to its investment. In
accordance with accounting provisions related to the accounting for variable
interest entities, the Company has evaluated its variable interests in OETC and
has determined that it is the primary beneficiary as it will absorb the majority
of expected losses. Accordingly, the Company consolidates the entity. As of
December 31, 2009, assets of $379,000 and liabilities of $83,000 related to this
entity are included within the Company’s consolidated balance
sheet. During the year ended December 31, 2009, the entity incurred a
net loss of $9.4 million, of which $4.8 million is included in the Company’s
consolidated statement of operations.
In
conjunction with the establishment of OETC, the Company granted a put option to
Oxford and the Oxford researchers whereby the Company may be required to acquire
all of the OETC shares held by Oxford and the Oxford researchers at fair market
value of the underlying shares. This put option is contingent upon the
satisfaction of a number of conditions that must exist or occur subsequent to
the grant of a marketing authorization for a tuberculosis vaccine by the
European Commission. The Company accounts for the put option in accordance with
the accounting provision related to derivatives and distinguishing liabilities
from equity. In accordance with this guidance, the Company has determined that
the put option has a de minimus fair value as of December 31,
2009.
14. Assets held for sale
The Company currently owns two buildings in Frederick, Maryland that it is
actively seeking to sell. In June 2009, the Company determined that these
two buildings, along with associated improvements, would not be placed into
service and committed to a plan to sell the facilities. Therefore, these
buildings are classified on the Company’s balance sheet as assets held for sale.
Assets held for sale are recorded at the lower of the carrying amount or fair
market value less costs to sell, and are no longer depreciated once classified
as held for sale. The Company recorded the assets held for sale at fair market
value, based on factors that include recent purchase offers less estimated
selling costs, and recorded an impairment charge of $7.3 million in 2009.
This impairment charge is classified in the Company’s statement of operations as
selling, general and administrative expense, within the Company’s commercial
segment. The Company is continuing efforts to sell these buildings.
15. Related party
transactions
The Company entered into an agreement in February 2009 with an entity controlled
by family members of the Company’s Chief Executive Officer. The agreement, to
market and sell BioThrax, was effective as of November 2008 and requires
payment based on a percentage of net sales of biodefense products of 17.5% in
Saudi Arabia and 15% in Qatar and United Arab Emirates, and reimbursement of
certain expenses. No payments under this agreement have been
triggered for the years ended December 31, 2009 and 2008.
The
Company has entered into a consulting arrangement with a member of the Company’s
Board of Directors. At December 31, 2009 and 2008, $15,000 and $0, respectively,
remained in accounts payable for these services. For each of the years ended
December 31, 2009 and 2008, the Company paid approximately $180,000, under this
agreement for strategic consultation and project support for the Company’s
marketing and communications group.
The
Company has entered into a transportation arrangement with an entity owned by
Company’s Chief Executive Officer. At December 31, 2009 and 2008, $3,000
remained in accounts payable for these services. During the years ended December
31, 2009 and 2008, the Company paid approximately $32,000 and $31,000,
respectively, under this arrangement for transportation and logistical
support.
16. Segment information
For financial reporting purposes, the Company reports financial information for
two business segments: biodefense and commercial. In the biodefense segment, the
Company develops, manufactures and commercializes vaccine and antibody therapies
for use against biological agents that are potential weapons of bioterrorism or
biowarfare. Revenues in this segment relate primarily to the Company’s
FDA-licensed product, BioThrax. In the commercial segment, the Company develops
vaccines and antibody therapies for use against infectious diseases and other
medical conditions that have resulted in significant unmet or underserved public
health needs. Revenues in this segment consist predominantly of milestone
payments and development and grant revenues received under collaboration,
development contracts and grant arrangements. The “All Other” segment relates to
the general operating costs of the Company and includes costs of the centralized
services departments, which are not allocated to the other segments, as well as
spending on product candidates or activities that are not classified as
biodefense or commercial. The assets in this segment consist primarily of cash
and fixed assets.
|
|
Reportable
Segments
|
|
(in
thousands)
|
|
Biodefense
|
|
|
Commercial
|
|
|
All
Other
|
|
|
Total
|
|
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenue
|
|
$
|
234,574
|
|
|
$
|
212
|
|
|
$
|
-
|
|
|
$
|
234,786
|
|
Intersegment
revenue (expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Research
and development
|
|
|
42,874
|
|
|
|
24,064
|
|
|
|
7,650
|
|
|
|
74,588
|
|
Interest
revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
1,418
|
|
|
|
1,418
|
|
Interest
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Depreciation
and amortization
|
|
|
3,867
|
|
|
|
852
|
|
|
|
280
|
|
|
|
4,999
|
|
Net
income (loss)
|
|
|
87,850
|
|
|
|
(43,770
|
)
|
|
|
(12,936
|
)
|
|
|
31,144
|
|
Assets
|
|
|
215,786
|
|
|
|
25,350
|
|
|
|
103,553
|
|
|
|
344,689
|
|
Expenditures
for long-lived assets
|
|
|
26,583
|
|
|
|
5,933
|
|
|
|
771
|
|
|
|
33,287
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenue
|
|
$
|
174,061
|
|
|
$
|
4,346
|
|
|
$
|
147
|
|
|
$
|
178,554
|
|
Intersegment
revenue (expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Research
and development
|
|
|
26,321
|
|
|
|
31,169
|
|
|
|
1,980
|
|
|
|
59,470
|
|
Interest
revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
1,999
|
|
|
|
1,999
|
|
Interest
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
(47
|
)
|
Depreciation
and amortization
|
|
|
3,438
|
|
|
|
1,114
|
|
|
|
412
|
|
|
|
4,964
|
|
Net
income (loss)
|
|
|
69,770
|
|
|
|
(41,313
|
)
|
|
|
(7,775
|
)
|
|
|
20,682
|
|
Assets
|
|
|
161,091
|
|
|
|
23,450
|
|
|
|
106,247
|
|
|
|
290,788
|
|
Expenditures
for long-lived assets
|
|
|
20,014
|
|
|
|
64
|
|
|
|
735
|
|
|
|
20,813
|
|
17. Quarterly
financial data (unaudited)
Quarterly
financial information for the years ended December 31, 2009 and 2008 is
presented in the following tables:
|
|
Three
months ended
|
|
(in
thousands)
|
|
March
31,
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
Fiscal
year 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
64,519
|
|
|
$
|
73,191
|
|
|
$
|
43,272
|
|
|
$
|
53,804
|
|
Income
(loss) from operations
|
|
|
17,266
|
|
|
|
22,710
|
|
|
|
(3,951
|
)
|
|
|
4,125
|
|
Net
income
|
|
|
11,119
|
|
|
|
14,842
|
|
|
|
949
|
|
|
|
4,234
|
|
Net
income per share, basic
|
|
|
0.37
|
|
|
|
0.49
|
|
|
|
0.03
|
|
|
|
0.14
|
|
Net
income per share, diluted
|
|
|
0.35
|
|
|
|
0.48
|
|
|
|
0.03
|
|
|
|
0.13
|
|
Fiscal
year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
42,720
|
|
|
$
|
43,485
|
|
|
$
|
56,599
|
|
|
$
|
35,750
|
|
Income
from operations
|
|
|
11,175
|
|
|
|
2,558
|
|
|
|
15,338
|
|
|
|
856
|
|
Net
income
|
|
|
7,024
|
|
|
|
1,815
|
|
|
|
10,386
|
|
|
|
1,457
|
|
Net
income per share, basic
|
|
|
0.24
|
|
|
|
0.06
|
|
|
|
0.35
|
|
|
|
0.05
|
|
Net
income per share, diluted
|
|
|
0.24
|
|
|
|
0.06
|
|
|
|
0.34
|
|
|
|
0.05
|
|
Not
applicable.
Evaluation of Disclosure
Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2009. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2009, our chief executive officer and
chief financial officer concluded that, as of such date, our disclosure controls
and procedures were effective at the reasonable assurance level.
Management’s Report on
Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in
Internal Control-Integrated
Framework
.
Based on
this assessment, our management concluded that, as of December 31, 2009, our
internal control over financial reporting is effective based on those
criteria.
Ernst
& Young LLP, the independent registered public accounting firm that has
audited our consolidated financial statements included herein, has issued an
attestation report on the effectiveness of our internal control over financial
reporting as of December 31, 2009, a copy of which is included in this annual
report on Form 10-K.
Changes in Internal Control
Over Financial Reporting
No change
in our internal control over financial reporting, as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act, occurred during the fiscal quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of
Directors and Stockholders of Emergent BioSolutions Inc. and
Subsidiaries
We have
audited Emergent BioSolutions Inc. and Subsidiaries’ internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Emergent
BioSolutions Inc. and Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying “Management's Report on Internal Control over Financial Reporting.”
Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Emergent BioSolutions Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2009 consolidated financial statements of
Emergent BioSolutions Inc. and Subsidiaries, and our report dated March 5, 2010,
expressed an unqualified opinion thereon.
/s/Ernst & Young
LLP
McLean,
Virginia
March 5,
2010
Executive
Compensation
On March
4, 2010, the Compensation Committee awarded cash bonuses to the following
executives in the following amounts: Fuad El-Hibri, $485,900; Daniel J.
Abdun-Nabi, $231,169; R. Don Elsey, $142,057; Stephen Lockhart, £67,650; and
Kyle W. Keese, $143,312. Also on March 4, 2010, the Compensation Committee
approved the following base salaries and target bonus percentages for the
following executives, all effective as of January 1, 2010: Fuad El-Hibri,
$625,600 and 65%; Daniel J. Abdun-Nabi, $444,475 and 50%; R. Don Elsey, $357,698
and 45%; Stephen Lockhart, £173,352 and 40%; and Kyle W. Keese, $325,000 and
40%.
Manufacturing
In
November 2009, we amended our Product Supply Agreement with Talecris
Biotherapeutics, Inc. to delay commencement of commercial manufacturing for our
anthrax immune globulin therapeutic product candidate from January 1, 2010 to
March 1, 2010 in order to accommodate negotiations for a long-term resolution
regarding commercial production of this product candidate. We
recently modified this amendment to further extend the commencement date to
April 1, 2010, and are currently continuing to negotiate with
Talecris.
PART
III
Directors
and Executive Officers
Information
regarding our directors may be found under the caption "Election of Directors''
in the Proxy Statement for our 2010 Annual Meeting of Stockholders. Information
regarding our executive officers may be found under the caption “Executive
Officers of the Registrant'' in the Proxy Statement for our 2010 Annual Meeting
of Stockholders. Such information is incorporated herein by
reference.
Compliance
with Section 16(a) of the Exchange Act
Information
regarding compliance with Section 16(a) of the Exchange Act by our directors,
officers and beneficial owners of more than 10% of our common stock may be found
under the caption "Stock Ownership Information—Section 16 (a) Beneficial
Ownership Reporting Compliance'' in the Proxy Statement for our 2010 Annual
Meeting of Stockholders. Such information is incorporated herein by
reference.
Code
of Ethics
We have
adopted a code of business conduct and ethics that applies to our directors,
officers (including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions), as well as our other employees. A copy of our code of
business conduct and ethics is available on our website at
www.emergentbiosolutions.com
.
We intend to post on our website all disclosures that are required by applicable
law, the rules of the Securities and Exchange Commission or the New York Stock
Exchange concerning any amendment to, or waiver of our code of business conduct
and ethics.
Director
Nominees
Information
regarding procedures for recommending nominees to the board of directors may be
found under the caption “Corporate Governance—Director Nomination Process” in
the Proxy Statement for our 2010 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.
Audit
Committee
We have
separately designated a standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. Additional information regarding the
Audit Committee may be found under the captions “Corporate Governance—Board
Committees—Audit Committee” and “Corporate Governance—Audit Committee Report” in
the Proxy Statement for our 2010 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.
Audit
Committee Financial Expert
Our board
of directors has determined that Zsolt Harsanyi, Ph.D. is an “audit committee
financial expert'” as defined by Item 407(d)(5) of Regulation S-K of the
Exchange Act and is “independent” under the rules of the New York Stock
Exchange.
Information
with respect to this item may be found under the caption “Information About
Executive and Director Compensation” in the Proxy Statement for our 2010 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
The Compensation Committee Report contained in the Proxy Statement for our 2010
Annual Meeting of Stockholders shall be deemed furnished in this annual report
on Form 10-K and shall not be deemed “soliciting material” or “filed” with the
Securities and Exchange Commission or otherwise subject to the liabilities of
Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference
into any filing under the Securities Act or the Exchange Act, except to the
extent that we specifically request that such information be treated as
soliciting material or specifically incorporate such information by reference
into a document filed under the Securities Act or the Exchange Act.
Information
with respect to this item may be found under the captions “Stock Ownership
Information” and “Information About Executive and Director
Compensation—Securities Authorized for Issuance Under Equity Compensation Plans”
in the Proxy Statement for our 2010 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.
Information
with respect to this item may be found under the captions “Corporate
Governance—Transactions with Related Persons” and “Corporate Governance—Board
Determination of Independence” in the Proxy Statement for our 2010 Annual
Meeting of Stockholders. Such information is incorporated herein by
reference.
ITEM
14.
|
PRINCIPAL ACCOUNTANT FEES AND
SERVICES
|
Information with respect to this item may be found under the captions “Corporate
Governance—Registered Public Accounting Firm's Fees” and “Corporate
Governance—Pre-Approval Policy and Procedures” in the Proxy Statement for our
2010 Annual Meeting of Stockholders. Such information is incorporated herein by
reference.
PART
IV
ITEM
15.
|
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
|
Financial
Statements
The
following financial statements and supplementary data are filed as a part of
this annual report on Form 10-K.
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at December 31, 2009 and 2008
Consolidated
Statements of Operations for the years ended December 31, 2009, 2008 and
2007
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
Consolidated
Statement of Changes in Stockholders’ Equity for the years ended December 31,
2009, 2008 and 2007
Notes to
Consolidated Financial Statements
Financial
Statement Schedules
All
financial statement schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
Exhibits
Those
exhibits required to be filed by Item 601 of Regulation S-K are listed in the
Exhibit Index immediately preceding the exhibits hereto and such listing is
incorporated herein by reference.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EMERGENT
BIOSOLUTIONS INC.
By:
/s/Fuad
El-Hibri
Fuad
El-Hibri
Chief
Executive Officer and
Chairman
of the Board of Directors
Date:
March 5, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/Fuad El-Hibri
Fuad
El-Hibri
|
|
Chief
Executive Officer and Chairman of the Board of Directors
(Principal
Executive Officer)
|
|
March
5, 2010
|
|
|
|
|
|
/s/R. Don Elsey
R.
Don Elsey
|
|
Senior
Vice President Finance, Chief Financial Officer and Treasurer
(Principal
Financial and Accounting Officer)
|
|
March
5, 2010
|
|
|
|
|
|
/s/Daniel Abdun-Nabi
Daniel
Abdun-Nabi
|
|
Director
|
|
March
5, 2010
|
|
|
|
|
|
/s/Zsolt Harsanyi, Ph.D.
Zsolt
Harsanyi, Ph.D.
|
|
Director
|
|
March
5, 2010
|
|
|
|
|
|
/s/Jerome M. Hauer
Jerome
M. Hauer
|
|
Director
|
|
March
5, 2010
|
|
|
|
|
|
/s/Ronald B. Richard
Ronald
B. Richard
|
|
Director
|
|
March
5, 2010
|
|
|
|
|
|
/s/Louis W. Sullivan, M.D.
Louis
W. Sullivan, M.D.
|
|
Director
|
|
March
5, 2010
|
|
|
|
|
|
/s/Dr. Sue Bailey
Dr.
Sue Bailey
|
|
Director
|
|
March
5, 2010
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
3.1
|
|
Restated
Certificate of Incorporation of the Registrant (Incorporated by reference
to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8
(File No. 333-139190 filed on December 8, 2006)
|
3.2
|
|
Amended
and Restated By-laws of the Registrant, as amended (Incorporated by
reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2007 (File No.
001-33137))
|
4.1
|
|
Specimen
Certificate Evidencing Shares of Common Stock (Incorporated by reference
to Exhibit 4.1 to Amendment No. 3 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-136622) filed on October 20,
2006)
|
4.2
|
|
Registration
Rights Agreement, dated September 22, 2006, among the Registrant and the
entities listed on Schedule 1 thereto (Incorporated by reference to
Exhibit 4.3 to Amendment No. 1 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-136622) filed on September 25,
2006)
|
4.3
|
|
Rights
Agreement, dated November 14, 2006, between the Registrant and American
Stock Transfer & Trust Company (Incorporated by reference to Exhibit
4.3 to the Registrant’s Registration Statement on Form S-8 (File No.
333-139190) filed on December 8, 2006)
|
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
(Incorporated by reference to Exhibit 9.1 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-136622) filed on August 14,
2006)
|
10.1*
|
|
Employee
Stock Option Plan, as amended and restated (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-136622) filed on August 14, 2006)
|
10.2*
|
|
Form
of Director Stock Option Agreement (Incorporated by reference to Exhibit
10.2 to the Registrant’s Registration Statement on Form S-1 (File No.
333-136622) filed on August 14, 2006)
|
10.3*
|
|
Amended
and Restated 2006 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009 (File No. 001-33137))
|
10.4*
|
|
Form
of Incentive Stock Option Agreement under 2006 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.4 to Amendment No. 5 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-136622)
filed on October 30, 2006)
|
10.5*
|
|
Form
of Nonstatutory Stock Option Agreement under 2006 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.5 to Amendment No. 5 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-136622)
filed on October 30, 2006)
|
10.6#
|
|
Form
of Restricted Stock Unit Agreement under Amended and Restated 2006 Stock
Incentive Plan
|
10.7#
|
|
Annual
Bonus Plan for Executive Officers
|
10.8*
|
|
Director
Compensation Program (Incorporated by reference to Exhibit 10.6 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2007 (File No. 001-33137))
|
10.9†
*
|
|
Severance
Plan and Termination Protection Program (Incorporated by reference to
Exhibit 10.6 to Amendment No. 3 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-136622) filed on October 20,
2006)
|
10.10*
|
|
Election
of Fuad El-Hibri to Participate in the Severance Plan and Termination
Protection Program (Incorporated by reference to Exhibit 10.35 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
(File No. 333-136622) filed on September 25, 2006)
|
10.11
|
|
Form
of Indemnity Agreement (Incorporated by reference to Exhibit 10.7 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-136622)
filed on August 14, 2006)
|
10.12†
|
|
Contract
No. HHSO100200700037C, dated September 25, 2007, between Emergent
BioDefense Operations Lansing Inc., and the Department of Health and Human
Services (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007
(File No. 001-33137))
|
10.13†
|
|
Contract
No. HHS0100200800091C between the Department of Health and Human Services
and Emergent BioDefense Operations Lansing Inc. dated September 30, 2008
(Incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008 (File No.
001-33137))
|
10.14†
|
|
Filling
Services Agreement, dated March 18, 2002, between Emergent BioDefense
Operations Lansing Inc., formerly BioPort Corporation, and Hollister-Stier
Laboratories LLC, as amended (Incorporated by reference to Exhibit 10.10
to the Registrant’s Registration Statement on Form S-1 (File No.
333-136622) filed on August 14, 2006)
|
10.15
|
|
Amendment
No. 5 to the Filling Services Agreement, effective May 14, 2007 between
Emergent BioDefense Operations Lansing Inc., formerly BioPort Corporation,
and Hollister-Stier Laboratories LLC (Incorporated by reference to Exhibit
10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007 (File No. 001-33137))
|
10.16†
|
|
Exclusive
Commercial License of Technology by and among Oxford-Emergent Tuberculosis
Consortium Limited, Emergent Product Development UK Limited, Emergent
BioSolutions Inc. and Isis Innovation Limited dated July 18, 2008
(Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008 (File No.
001-33137))
|
10.17†
|
|
Product
Supply Agreement, dated June 12, 2006, between Emergent Product
Development Gaithersburg Inc. and Talecris Biotherapeutics, Inc.
(Incorporated by reference to Exhibit 10.34 to Amendment No. 3 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-136622)
filed on October 20, 2006)
|
Exhibit
|
|
|
Number
|
|
Description
|
10.18#††
|
|
Amendment
No. 1 to Product Supply Agreement, effective December 19, 2006, between
Emergent Product Development Gaithersburg Inc. and Talecris
Biotherapeutics Inc.
|
10.19#
|
|
Amendment
No. 2 to Product Supply Agreement, effective June 25, 2007, between
Emergent Product Development Gaithersburg Inc. and Talecris
Biotherapeutics Inc.
|
10.20#††
|
|
Amendment
No. 3 to Product Supply Agreement, effective August 29, 2007, between
Emergent Product Development Gaithersburg Inc. and Talecris
Biotherapeutics Inc.
|
10.21#
|
|
Amendment
No. 4 to Product Supply Agreement, effective November 17, 2009, between
Emergent Product Development Gaithersburg Inc. and Talecris
Biotherapeutics Inc.
|
10.22#††
|
|
First
Addendum to Product Supply Agreement, effective September 1, 2009, between
Emergent Product Development Gaithersburg Inc. and Talecris
Biotherapeutics Inc.
|
10.23†
|
|
Agreement,
dated June 16, 2005, between the Free State of Bavaria and Emergent
Product Development UK, formerly ViVacs GmbH (Incorporated by reference to
Exhibit 10.43 to Amendment No. 3 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-136622) filed on October 20,
2006)
|
10.24†
|
|
License
Agreement between U.S. Army Medical Research Institute of Infectious
Diseases and the Registrant dated October 7, 2003 (Incorporated by
reference to Exhibit 10.21 of the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2008 (File No. 001-33137), filed on March
6, 2009)
|
10.25
|
|
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 (Incorporated by reference to
Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-136622) filed on August 14, 2006)
|
10.26#
|
|
Consulting
Services Agreement, effective April 1, 2009, between the Registrant and
The Hauer Group
|
10.27
|
|
Services
Agreement, dated August 1, 2006, between East West Resources Corporation
and the Registrant (Incorporated by reference to Exhibit 10.36 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
(File No. 333-136622) filed on September 25, 2006)
|
10.28
|
|
Amended
and Restated Marketing Agreement entered into on February 10, 2009 between
Emergent BioDefense Operations Lansing Inc.and Intergen N.V. (Incorporated
by reference to Exhibit 10.27 to the Registrant's Annual Report on Form
10-K for the year ended December 31,2008 (File No. 001-33137), filed on
March 6, 2009)
|
10.29
|
|
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 (Incorporated by reference to
Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-136622) filed on August 14, 2006)
|
10.30
|
|
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 (Incorporated by reference to
Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-136622) filed on August 14, 2006)
|
10.31
|
|
Lease
Agreement, dated May 10, 2007, among Slough Estates (Winnerish) Limited,
Emergent Product Development UK Limited and the Registrant (Incorporated
by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2007 (File No.
001-33137))
|
10.32
|
|
Lease
Agreement, dated June 27, 2006, between Brandywine Research LLC and the
Registrant (Incorporated by reference to Exhibit 10.24 to Amendment No. 1
to the Registrant’s Registration Statement on Form S-1 (File No.
333-136622) filed on September 25, 2006)
|
10.33
|
|
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
(Incorporated by reference to Exhibit 10.26 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-136622) filed on August
14, 2006)
|
10.34
|
|
Promissory
Note, dated October 14, 2004, from Emergent Commercial Operations
Frederick Inc., formerly Advanced BioSolutions, Inc., to Mercantile
Potomac Bank (Incorporated by reference to Exhibit 10.27 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-136622)
filed on August 14, 2006)
|
10.35
|
|
Loan
Agreement, dated October 15, 2004, between Emergent Commercial Operations
Frederick Inc., formerly Advanced BioSolutions, Inc., and the Department
of Business and Economic Development (Incorporated by reference to Exhibit
10.28 to the Registrant’s Registration Statement on Form S-1 (File No.
333-136622) filed on August 14, 2006)
|
10.36
|
|
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 (Incorporated by reference
to Exhibit 10.29 to the Registrant’s Registration Statement on Form S-1
(File No. 333-136622) filed on August 14, 2006)
|
10.37
|
|
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
(Incorporated by reference to Exhibit 10.32 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-136622) filed on August
14, 2006)
|
10.38
|
|
Loan
Agreement, dated April 25, 2006, among the Registrant, Emergent Frederick
LLC and HSBC Realty Credit Corporation (USA) (Incorporated by reference to
Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-136622) filed on August 14, 2006)
|
10.39
|
|
Promissory
Note, dated April 25, 2006, from Emergent Frederick LLC to HSBC Realty
Credit Corporation (USA) (Incorporated by reference to Exhibit 10.39 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
(File No. 333-136622) filed on September 25, 2006)
|
10.40#
|
|
Loan
Agreement, dated December 30, 2009, among the Registrant, Emergent
BioDefense Operations Lansing Inc., and HSBC Realty Credit Corporation
(USA)
|
10.41#
|
|
Promissory
Note, dated December 30, 2009, from Emergent BioDefense Operations Lansing
Inc. to HSBC Realty Credit Corporation
(USA)
|
Exhibit
|
|
|
Number
|
|
Description
|
10.42
|
|
Loan
Agreement, dated June 8, 2007, between Emergent BioDefense Operations
Lansing Inc., formerly BioPort Corporation, and Fifth Third Bank
(Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007 (File No.
001-33137))
|
10.43
|
|
Amendment
to Loan Agreement between Emergent BioDefense Operations Lansing, Inc. and
Fifth Third Bank dated August 15, 2008 (Incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008 (File No. 001-33137))
|
10.44
|
|
Revolving
Credit Note made by Emergent BioDefense Operations Lansing, Inc. in favor
of Fifth Third Bank dated August 15, 2008 (Incorporated by reference to
Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008 (File No. 001-33137))
|
10.45*
|
|
Employment
Agreement dated September 21, 2007, between Emergent Product
Development UK Ltd and Dr. Stephen Lockhart (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December
10, 2009 (File No. 001-33137))
|
21.1#
|
|
Subsidiaries
of the Registrant
|
23.1#
|
|
Consent
of Independent Registered Public Accounting Firm
|
31.1#
|
|
Certification
of the Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a)
|
31.2#
|
|
Certification
of the Chief Financial Officer pursuant to Exchange Act
Rule 13a-14(a)
|
32.1
#
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
#
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
# Filed
herewith
†
|
Confidential
treatment granted by the Securities and Exchange Commission as to certain
portions. Confidential materials omitted and filed separately with the
Securities and Exchange Commission.
|
††
|
Confidential
treatment requested by the Securities and Exchange Commission as to
certain portions. Confidential materials omitted and filed separately with
the Securities and Exchange
Commission.
|
*
|
Management
contract or compensatory plan or arrangement filed herewith in response to
Item 15(a) of Form 10-K.
|