# Emergent BioSolutions Inc. (EBS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Emergent BioSolutions Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1367644/000136764422000024/ebs-20211231.htm
Accession: 0001367644-22-000024
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/EBS/
All MD&A years: /company/EBS/mda/
Next year: /company/EBS/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts and uncertainties of cash flows from operations and from outside resources, so as to allow investors to better view our company from management’s perspective. 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 financing, includes forward-looking statements that involve risks and uncertainties. You should carefully review the "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this annual report on Form 10-K 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.

Business Overview

We are a global life sciences company focused on providing innovative preparedness and response solutions addressing accidental, deliberate, and naturally occurring PHTs. Our solutions include a product portfolio, a product development portfolio and a CDMO services portfolio.

We are currently focused on the following five PHT categories: CBRNE, EID, travel health, emerging health crises, and acute/emergency care. We have a product portfolio of eleven products that contribute a substantial portion of our revenue and are sold to government and commercial customers. We also have a product candidate that is procured under special circumstances by the USG, although it is not approved by the FDA. Additionally, we have a development pipeline consisting of a diversified mix of both pre-clinical and clinical stage product candidates. Finally, we have a fully-integrated portfolio of CDMO services. Our CDMO service offerings cover development services, drug substance manufacturing and drug product manufacturing and packaging.

In October 2021, the Company implemented a new organizational structure organized around markets and customers whereas our historical structure was organized around product/platform and service types. The key components of the new business structure include a Government - MCM business line, Commercial business line, and Services - CDMO business line as well as the centralization of R&D functions and capabilities at the enterprise level.

The majority of our product revenue comes from the following products and procured product candidates:

Government - MCM Products

•Anthrax vaccines, including our AV7909 (Anthrax vaccine adsorbed (AVA), adjuvanted) procured product candidate being developed as a next-generation anthrax vaccine for post-exposure prophylaxis and BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the FDA for the general use prophylaxis and post-exposure prophylaxis of anthrax disease. AV7909 has not been approved by the FDA, but is procured by certain authorized government buyers for their use;

•ACAM2000®, (Smallpox (Vaccinia) Vaccine, Live), the only single-dose smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection;

•BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only heptavalent antitoxin licensed by the FDA and Health Canada for the treatment of botulism;

•CNJ-016® (Vaccinia Immune Globulin Intravenous (Human) (VIGIV)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination;

•Raxibacumab injection, a fully human monoclonal antibody, the first fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax;

•Anthrasil® (Anthrax Immune Globulin Intravenous (human)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada for the treatment of inhalational anthrax;

•RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device cleared by the FDA to remove or neutralize the following chemical warfare agents from the skin: tabun,

57

sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and T-2 toxin; and

•Trobigard® atropine sulfate, obidoxime chloride AUTO-INJECTOR, a combination drug-device auto-injector procured product candidate that contains atropine sulfate and obidoxime chloride. It has not been approved by the FDA, but is procured by certain authorized government buyers under special circumstances for potential use as a nerve agent countermeasure.

Commercial Products

•NARCAN® (naloxone HCl) Nasal Spray, the first needle-free formulation of naloxone approved by the FDA and Health Canada, for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression. Recently, the Company authorized Sandoz Inc. to distribute a generic naloxone nasal spray;

•Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral vaccine licensed by the FDA for the prevention of typhoid fever; and

•Vaxchora® (Cholera Vaccine, Live, Oral), the only single-dose oral vaccine approved by the FDA and EMA for the prevention of cholera.

Services - Contract Development and Manufacturing

Our services revenue consists of distinct but interrelated CDMO services: drug substance manufacturing; drug product manufacturing (also referred to as "fill/finish" services) and packaging; development services including technology transfer, process and analytical development services; and, when necessary, suite reservation obligations. These services, which we refer to as "molecule-to-market" offerings, employ diverse technology platforms (mammalian, microbial, viral and plasma) across a network of nine geographically distinct development and manufacturing sites operated by us for our internal products and pipeline candidates and third party CDMO services. We service both clinical-stage and commercial-stage projects for a variety of third-party customers, including government agencies, innovative pharmaceutical companies, and non-government organizations.

Financial Operations Overview

Revenues

We generate product revenues from the sale of our marketed products and procured product candidates. The USG is the largest purchaser of our Government - MCM products and primarily purchases our products for the SNS, a national repository of

medical countermeasures including critical antibiotics, vaccines, chemical antidotes, antitoxins, and other critical medical supplies. The USG primarily purchases our products under long-term, firm fixed-price procurement contracts, generally with annual options. Our Commercial products, Nasal Naloxone Products, which reverse opioid overdose and our travel health products, Vivotif and Vaxchora, are sold commercially through wholesalers and distributors, physician-directed or standing order prescriptions at retail pharmacies, and to state and local community healthcare agencies, practitioners and hospitals.

We also generate revenue from our CDMO services, which is based on our established development and manufacturing infrastructure, technology platforms and expertise. Our services include a fully integrated molecule-to-market CDMO services business offering across development services, drug substance and drug product for small to large pharmaceutical and biotechnology industry and government agencies/non-governmental organizations. From time to time, clients require suite reservations at our various manufacturing sites, which may be considered leases depending on the facts and circumstances.

We have received contracts and grants funding from the USG and other non-governmental organizations to perform R&D activities, particularly related to programs addressing certain CBRNE threats and EIDs.

Our revenue, operating results and profitability vary quarterly based on the timing of production and deliveries, the timing of manufacturing services performed and the nature of our business to provide large scale bundles of products and services as needs arise. Since early 2020, our revenues from the sale of our vaccine products that target travelers have declined due to the reduction of international travel caused by the COVID-19 pandemic. We expect continued variability in our quarterly financial statements.

Cost of Product Sales and CDMO Services

Products - The primary expenses that we incur to deliver our products consist of fixed and variable costs. We determine the cost of product sales for products sold during a reporting period based on the average manufacturing cost per unit in the period those units were manufactured. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. Variable manufacturing costs primarily consist of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing operations, sales-based royalties, shipping and logistics. In addition to the fixed and variable manufacturing costs

58

described above, the cost of product sales depends on utilization of available manufacturing capacity. For our commercial sales, other associated expenses include sales-based royalties (which include fair value adjustments associated with contingent consideration), shipping, and logistics.

CDMO - The primary expenses that we incur to deliver our CDMO services consist of fixed and variable costs, including personnel, equipment, and facilities costs. Our manufacturing process includes the production of bulk material and performing drug product work for containment and distribution of biological products. For drug product customers, we receive work in process inventory to be prepared for distribution.

Research and Development Expenses

We expense R&D costs as incurred. Our R&D expenses consist primarily of:

•personnel-related expenses;

•fees to professional service providers for, among other things, analytical testing, independent monitoring or other administration of our clinical trials and obtaining and evaluating data from our clinical trials and non-clinical studies;

•costs of CDMO services for our clinical trial material; and

•costs of materials used in clinical trials and R&D.

In many cases, we plan to seek funding for development activities from external sources and third parties, such as governments and non-governmental organizations, or through collaborative partnerships. We expect our R&D spending will be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of R&D spending, the number of product candidates under development, the size, structure and duration of any clinical programs that we may initiate, the costs associated with manufacturing and development of 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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executives, sales and marketing, business development, government affairs, finance, accounting, information technology, legal, human resource functions and other corporate functions. Other costs include facility costs not otherwise included in cost of product sales and CDMO services or R&D expense.

Income Taxes

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.

Management believes that the assumptions and estimates related to the provision for income taxes are critical to the Company’s results of operations. For the year ended December 31, 2021, income tax expense totaled $83.5 million. For every 1% change in the 2021 effective rate, income tax expense would have changed by approximately $3.1 million.

For additional information on our uncertain tax positions and income tax expense, please see Note 11, Income taxes to our consolidated financial statements included in this report.

59

Results of Operations

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in millions)","2021","","2020","","$ Change","","% Change"],["Product sales, net:"],["Nasal Naloxone Products","$","434.3","","","$","311.2","","","$","123.1","","","40","%"],["Anthrax Vaccines","259.8","","","373.8","","","(114.0)","","","(30)","%"],["ACAM2000","206.5","","","200.3","","","6.2","","","3","%"],["Other product sales","123.3","","","104.5","","","18.8","","","18","%"],["Total product sales, net","1,023.9","","","989.8","","","34.1","","","3","%"],["CDMO:"],["Services","334.9","","","166.7","","","168.2","","","NM"],["Leases","299.7","","","283.8","","","15.9","","","6","%"],["Total CDMO","634.6","","","450.5","","","184.1","","","41","%"],["Contracts and grants","134.2","","","115.1","","","19.1","","","17","%"],["Total revenues","1,792.7","","","1,555.4","","","237.3","","","15","%"],["Operating expenses:"],["Cost of product sales","382.0","","","392.0","","","(10.0)","","","(3)","%"],["Cost of CDMO","375.5","","","132.0","","","243.5","","","NM"],["Research and development","234.0","","","234.5","","","(0.5)","","","\u2014","%"],["Selling, general and administrative","348.4","","","303.3","","","45.1","","","15","%"],["Goodwill impairment","41.7","","","\u2014","","","41.7","","","NM"],["Amortization of intangible assets","58.5","","","59.8","","","(1.3)","","","(2)","%"],["Total operating expenses","1,440.1","","","1,121.6","","","318.5","","","28","%"],["Income from operations","352.6","","","433.8","","","(81.2)","","","(19)","%"],["Other income (expense):"],["Interest expense","(34.5)","","","(31.3)","","","(3.2)","","","10","%"],["Other, net","(3.7)","","","4.7","","","(8.4)","","","NM"],["Total other income (expense), net","(38.2)","","","(26.6)","","","(11.6)","","","44","%"],["Income before income taxes","314.4","","","407.2","","","(92.8)","","","(23)","%"],["Income taxes","83.5","","","102.1","","","(18.6)","","","(18)","%"],["Net income","$","230.9","","","$","305.1","","","$","(74.2)","","","(24)","%"],["NM - Not meaningful"]]
[[/GREPCENT_TABLE]]

60

Total Revenues

[[GREPCENT_TABLE]]
[["Legend"],["","Nasal Naloxone Products","","CDMO Leases"],["","ACAM2000","","CDMO Services"],["","Anthrax vaccines","","Contracts and Grants"],["","Other Product Sales"]]
[[/GREPCENT_TABLE]]

Product Sales, net

Nasal Naloxone Products

The increase in Nasal Naloxone Product sales for the year ended December 31, 2021 was primarily driven by growth in unit sales of NARCAN to U.S. public interest customers and to a lesser extent the commercial retail markets. Increases in Canadian sales due to an increase in units sold also contributed to growth between 2021 and 2020. Additionally, the Company recorded limited revenues related to an authorized generic nasal naloxone product for the year ended December 31, 2021.

Anthrax Vaccines

The decrease in anthrax vaccine sales for the year ended December 31, 2021 was primarily due to the timing of deliveries to the USG in 2021 as compared to 2020. During 2020 deliveries were larger than average due to the transition to AV7909 which had resulted in delayed deliveries the previous year. The price per unit of AV7909 was largely consistent year over year. Anthrax vaccine product sales are made under annual purchase options exercised by the USG. Fluctuations in revenues result from the timing of the exercise of annual purchase options and the USG purchases and Company delivery of orders that follow.

ACAM2000

ACAM2000 sales for the year ended December 31, 2021 were consistent with 2020. The price per unit and number of units delivered of ACAM2000 was largely consistent other than standard inflationary price increases between 2021 and 2020. ACAM2000 product sales are made under recurring procurement contracts with the USG and any fluctuation in revenues are generally caused by the timing of delivery of orders.

Other Product Sales

The increase in the Company's other product sales during the year ended December 31, 2021, was primarily due to an increase in the quantity of VIGIV offset by a decline in quantity of BAT. The change between 2021 and 2020 is primarily due to timing of deliveries to the SNS.

Contract Development and Manufacturing Services

Services

The increase in CDMO services revenue for the year ended December 31, 2021 is due to a full year of service to innovator customers whose products address the COVID-19 pandemic. The Company entered into most of these arrangements during the second and third quarters of 2020 and has provided services to them and new innovator customers throughout 2021. Additionally, during the year ended

61

December 31, 2021, the Company recorded out-of-period adjustments of $28.8 million relating to a change in accounting policy (see Note 2).

Leases

The increase in CDMO lease revenue during the year ended December 31, 2021 was primarily due to a full year of service to Johnson & Johnson in 2021 as the arrangement was entered into during the second quarter of 2020. This increase was offset by a decrease from the COVID-19 development public-private partnership with BARDA of $15.7 million. This arrangement was terminated in November 2021.

Contracts and Grants

The increase in contracts and grants revenue for the year ended December 31, 2021 is largely due to the termination of the CIADM contract with BARDA and the recognition of $55.2 million for the release of contract liabilities offset by a decrease in developmental activities associated with the Company's COVID-HIG and AV7909 product candidates.

Cost of Product Sales

[[GREPCENT_TABLE]]
[["","Cost of Product Sales"],["l","Gross profit margin for product sales"]]
[[/GREPCENT_TABLE]]

Cost of product sales decreased for the year ended December 31, 2021 largely due to contingent consideration charges for business combinations, as well as inventory write-offs associated with the Company's travel health vaccines of $44.3 million in 2020 that did not recur in 2021. This decrease was further impacted by declines in sales of Anthrax vaccines and other products that was partially offset

by increased costs as a result of higher volume of certain products, mostly Nasal Naloxone Products.

The increase in gross profit margin for product sales for the year ended December 31, 2021 is largely due to non-recurring charges in 2020 related to contingent consideration and inventory write-offs. Excluding those non-recurring charges, the gross profit margin decreased from 2020 and 2021 largely due to changes in product mix.

Cost of CDMO

[[GREPCENT_TABLE]]
[["","Cost of CDMO"],["l","Gross profit margin for CDMO"]]
[[/GREPCENT_TABLE]]

Cost of CDMO increased for the twelve months ended December 31, 2021 largely due to an increase in CDMO service activities at our Bayview facility. Additionally, the Company wrote-off inventory of $41.5 million and incurred remediation costs during 2021 as a result of the cross-contamination event at the Bayview facility identified during the three months ended June 30, 2021. The increase in costs also includes out-of-period adjustments of $16.2 for an accounting policy change (see Note 2).

The decrease in gross profit margin percentage for CDMO for the year ended December 31, 2021 is largely due to inventory write-offs at our Bayview facility and remediation costs of our COVID-19 manufacturing activities.

62

Research and Development Expenses (Gross and Net)

[[GREPCENT_TABLE]]
[["","Research and Development expense"],["l","Research and Development expense, net of contracts and grants revenue and IPR&D impairment expense"]]
[[/GREPCENT_TABLE]]

R&D expenses during the year ended December 31, 2021 were consistent with the year ended December 31, 2020. The results in 2020 were impacted due to the impairment of the Company's IPR&D intangible asset of $29 million, while the results in 2021 were impacted due to the write-off of the contract asset associated with the CIADM arrangement of $38.0 million. Excluding the impacts of these items R&D expenses decreased for the year ended December 31, 2021. The decrease was due to a decline in spending associated with the Company's COVID-HIG therapeutic product candidate as well as a decline in developmental activities associated with the Company's AV7909 product candidate.

Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","Selling, General and Administrative"],["l","SG&A as a percentage of total revenue"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses increased for the year ended December 31, 2021 primarily due to an increase in headcount and professional services as well as increased costs for defending and supporting the Company's corporate reputation.

Amortization of Intangible Assets

[[GREPCENT_TABLE]]
[["","Amortization expense"]]
[[/GREPCENT_TABLE]]

Amortization of intangible assets and the composition of intangible assets amortized during the year ended December 31, 2021 was consistent with 2020.

63

Goodwill Impairment

[[GREPCENT_TABLE]]
[["","Goodwill impairment"]]
[[/GREPCENT_TABLE]]

As part of the Company's annual impairment testing which reflected the revised reporting unit structure from the Company's reorganization during the fourth quarter of 2021 the Company recognized a $41.7 million impairment of goodwill in the Commercial reporting unit.

Total Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["","Interest expense"],["","Other income (expense)"]]
[[/GREPCENT_TABLE]]

Total other income (expense), net decreased largely due to increases in interest rates during the period and impacts due to changes in foreign currency rates, specifically the Swiss franc.

Income Taxes

[[GREPCENT_TABLE]]
[["","Income tax"],["l","Effective tax rate"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2021, income taxes decreased largely due to the decline in income before income taxes. The effective tax rate was 27% for the year ended December 31, 2021 as compared to 25% in 2020. The effective tax rate increased largely due to an increase in non-deductible expenses, specifically goodwill impairment, as a percent of income before income taxes. Excluding these non-deductible expenses, the effective tax rate was consistent in both 2021 and 2020.

Year Ended December 31, 2020 Comparison to Year Ended December 31, 2019

Discussion and analysis of the year ended December 31, 2020 compared to the year ended December 31, 2019 is included under the heading "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 19, 2021.

64

Financial Condition, Liquidity and Capital Resources

Our financial condition is summarized as follows:

[[GREPCENT_TABLE]]
[["(in millions, except percentages)","December 31, 2021","","December 31, 2020","","Change %"],["Financial assets:"],["Cash and cash equivalents","$","576.1","","","$","621.3","","","(7)","%"],["Borrowings:"],["Debt, current portion","31.6","","","33.8","","","(7)","%"],["Debt, net of current portion","809.4","","","841.0","","","(4)","%"],["Total borrowings","841.0","","874.8","","(4)","%"],["Working capital:"],["Current assets","1,272.1","","","1,195.9","","","6","%"],["Current liabilities","373.8","","","384.5","","","(3)","%"],["Total working capital","898.3","","","811.4","","","11","%"]]
[[/GREPCENT_TABLE]]

Sources of Liquidity

We have historically financed our operating and capital expenditures through cash on hand, cash from operations, debt financing and contracts and grants development funding. We also obtain financing from the sale of our common stock upon exercise of stock options. We have operated profitably for each of the last five fiscal years through the period ended December 31, 2021. As of December 31, 2021, we had unrestricted cash and cash equivalents of $576.1 million and capacity under our revolving credit facility of $597.7 million. As of December 31, 2021, we believe that we have sufficient liquidity to fund our operations over at least the next 12 months.

Cash Flows

The following table provides information regarding our cash flows for the years ended December 31, 2021, 2020 and 2019.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in millions)","2021","","2020","","2019"],["Net cash provided by (used in):"],["Operating activities","$","321.1","","","$","536.0","","","$","188.0"],["Investing activities","(225.0)","","","(151.0)","","","(96.9)"],["Financing activities","(141.0)","","","69.5","","","(35.9)"],["Effect of exchange rate changes","(0.3)","","","(1.0)","","","0.4"],["Net (decrease) increase in cash and cash equivalents","$","(45.2)","","","$","453.5","","","$","55.6"]]
[[/GREPCENT_TABLE]]

Certain significant cash flows were as follows:

Operating Activities:

Net cash provided by operating activities of $321.1 million in 2021 was due to net income excluding non-cash items of $477.5 million offset by negative working capital changes of $156.4 million due to increases in receivables and associated changes in contract liabilities and the accumulation of inventory.

Net cash provided by operating activities of $536.0 million in 2020 was primarily due to net income excluding non-cash items of $527.2 million and working capital changes of $8.8 million.

Net cash provided by operating activities of $188.0 million in 2019 was primarily due to net income excluding non-cash items of $230.4 million offset by negative working capital changes of $42.4 million.

Investing Activities:

Net cash used in investing activities of $225.0 million in 2021 relates to purchases of property, plant and equipment. The cash used in investing activities increased during the year ended December 31, 2021 largely due to continued investments in infrastructure and equipment associated with increased capacity and capabilities at our Rockville and Bayview facilities.

65

Net cash used in investing activities of $151.0 million in 2020 was primarily due to infrastructure and equipment investments.

Net cash used in investing activities of $96.9 million in 2019 was primarily due to infrastructure and equipment investments.

Financing Activities:

Net cash used in financing activities of $141.0 million in 2021 was primarily due to repurchases of stock of $106.0 million and payments on debt of $35.9 million.

Net cash provided by financing activities of $69.5 million in 2020 was primarily due to proceeds from the $450.0 million Senior Unsecured Notes and net employee share-based compensation activity of $17.8 million offset by payments of $387.1 million on the term loan and revolving credit facility and $8.4 million of debt issuance costs.

Net cash used in financing activities of $35.9 million in 2019 was primarily due to contingent consideration payments of $50.4 million mostly in relation to the 2018 acquisition of Adapt offset by $13.7 of net proceeds from debt.

Long-term debt

As of December 31, 2021, the Company has $849.6 million of fixed and variable rate debt with varying maturities, with $31.6 million payable within 12 months (see Note 8).

Funding Requirements

We expect to continue to fund our anticipated operating expenses, capital expenditures, debt service requirements and any future repurchase of our common stock from the following sources:

▪existing cash and cash equivalents;

▪net proceeds from the sale of our products and CDMO services;

▪development contracts and grants funding; and

▪our Senior Secured Credit Facilities and any other lines of credit we may establish from time to time.

There are numerous risks and uncertainties associated with product sales and with the development and commercialization of our product candidates. We may seek additional external financing to provide additional financial flexibility. Our future capital requirements will depend on many factors, including (but not limited to):

▪the level, timing and cost of product sales and CDMO services;

▪the extent to which we acquire or invest in and integrate companies, businesses, products or technologies;

▪the acquisition of new facilities and capital improvements to new or existing facilities;

▪the payment obligations under our indebtedness;

▪the scope, progress, results and costs of our development activities;

▪our ability to obtain funding from collaborative partners, government entities and non-governmental organizations for our development programs;

▪the costs of commercialization activities, including product marketing, sales and distribution.

If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings, bank loans or collaboration and licensing arrangements.

If we raise funds by issuing equity securities, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants, like those contained in our Senior Unsecured Notes due 2028 and the Senior Secured Credit Facilities, which could limit or restrict our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities, buying back shares or declaring dividends. If we raise 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.

Economic conditions, including market volatility and adverse impacts on financial markets as a result of the COVID-19 pandemic, may make it more difficult to obtain financing on attractive terms, or at all. If financing is unavailable or lost, our business, operating results, financial condition and cash flows would be adversely affected, and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.

Unused Credit Capacity

Available room under the revolving credit facility for the years ended December 31, 2021 and 2020 was:

66

[[GREPCENT_TABLE]]
[["(in millions)"],["","December 31, 2021"],["Total Capacity","Outstanding Letters of Credit","Outstanding Indebtedness","Unused Capacity"],["$","600.0","","2.3","","\u2014","","$","597.7"],["","December 31, 2020"],["$","600.0","","2.8","\u2014","$","597.2"]]
[[/GREPCENT_TABLE]]

Contractual Obligations

As of December 31, 2021, the Company has contractual obligations related to lease arrangements and purchase commitments. The lease arrangements are for certain equipment and facilities. As of December 31, 2021, the Company had fixed lease payment obligations of $34.7 million, with $6.9 million due within 12 months. The Company has non-cancelable purchase commitments of $132.0 million, with $124.3 million being due within 12 months.

Critical Accounting Policies and Estimates

Our consolidated financial statements and related disclosures are prepared in accordance with US GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported. Note 2, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management considers an accounting policy to be critical if it is important to reporting our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. Management bases its estimates on historical experience and on various other assumptions it believes 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.

Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, contingent consideration, and income taxes.

Revenue Recognition

The Company's product sales are recognized at a point-in-time generally upon delivery to the customer, depending on the performance obligation which the Company is delivering. The Company's CDMO arrangements are generally recognized on a percentage of completion basis utilizing a cost-to-cost method. Revenues are recognized as a percentage of

the work completed during the period in an amount that reflects the percentage of the consideration which the Company expects to receive in exchange for the product or services.

For contracts with multiple performance obligations, the Company allocates the contract price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. Certain contracts may include lease components which are recognized under ASC 842. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers, however when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price based on the best available information.

Revenues are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with customers. The Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Estimates of variable consideration includes allowances for returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government rebates, chargebacks and rebates under managed care plans. Revenues from sales of products is recognized to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with such variable consideration is subsequently resolved. Provisions for variable consideration revenues from sales of products are recorded at the net sales price. For additional information on our revenues, refer to Note 3, of Item 8. Financial Statements and Supplementary Data.

Contingent Consideration

In connection with the Company's acquisitions accounted for as business combinations, the Company records contingent consideration associated with sales-based royalties, sales-based milestones and development and regulatory milestones at fair value, as applicable. The fair value model used to calculate these obligations is based on the income approach (a discounted cash flow model) that has been risk adjusted based on the probability of achievement of net sales and achievement of the milestones. The inputs the Company uses for determining the fair value of the contingent consideration associated with sales-based royalties, sales-based milestones and development and regulatory milestones are Level 3 fair value measurements. The Company re-evaluates the fair value on a quarterly basis. Changes in the fair value can result from adjustments to the discount rates and

67

updates in the assumed timing of or achievement of net sales and/or the achievement of development and regulatory milestones. For additional information on the Company's contingent consideration, refer to Note 4, of Item 8. Financial Statements and Supplementary Data.

Income Taxes

The Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and R&D tax credit 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. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

The Company’s income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. As tax laws are complex and subject to different interpretations, significant management judgement is required in (1) calculating the Company's income tax expense, deferred tax assets and deferred tax liabilities, (2) determining any valuation allowance recorded against deferred tax assets and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The Company's estimates and assumptions may differ from tax benefits ultimately realized. For additional information on the Company's income taxes, refer to Note 11, of Item 8. Financial Statements and Supplementary Data.