# Emergent BioSolutions Inc. (EBS) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Emergent BioSolutions Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1367644/000136764423000046/ebs-20221231.htm
Accession: 0001367644-23-000046
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EBS/
All MD&A years: /company/EBS/mda/
Previous year: /company/EBS/mda/fy2021/ (FY 2021)
Next year: /company/EBS/mda/fy2023/ (FY 2023)

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

Emergent BioSolutions Inc. (“Emergent,” the “Company,” “we,” “us,” and “our”) is a global life sciences company focused on providing innovative preparedness and response solutions addressing accidental, deliberate, and naturally occurring Public Health Threats ("PHTs"). The Company's solutions include a product portfolio, a product development portfolio, and a contract development and manufacturing ("CDMO") services portfolio.

We are currently focused on the following five PHT categories: chemical, biological, radiological, nuclear and explosives ("CBRNE"); emerging infectious diseases ("EID"); travel health, which we have agreed to sell to Barvarian Nordic; public health crises; and acute, emergency and community care. We have a product portfolio of thirteen products that contribute a substantial portion of our revenue and are sold to government and commercial customers. We also have a product candidate, AV7909, which is procured under special circumstances by the United States ("U.S.") Government ("USG"), although it is not approved by the U.S. Food and Drug Administration ("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.

The Company structures the business with a focus on markets and customers. As such, the key components of the business structure include the following three product and service categories: Government - Medical Countermeasures ("MCM") Products, Commercial Products, and CDMO Services. The Company operates as two operating segments: (1) a products segment ("Products") consisting of the Government - MCM and Commercial products and (2) a services segment ("Services") consisting of our CDMO services.

Products Segment:

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

Government - MCM Products

•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;

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

•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;

•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 symptomatic 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;

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•Ebanga™ (ansuvimab-zykl) is a monoclonal antibody with antiviral activity provided through a single IV infusion for the treatment of Ebola. Under the terms of a collaboration with Ridgeback Biotherapeutics ("Ridgeback"). Emergent will be responsible for the manufacturing, sale, and distribution of Ebanga™ in the U.S. and Canada, and Ridgeback will serve as the global access partner for Ebanga™;

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

•RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device cleared by the FDA that is intended to remove or neutralize chemical warfare agents from the skin, including: tabun, sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and T-2 toxin;

•TEMBEXA®, an oral antiviral formulated as 100 mg tablets and 10 mg/mL oral suspension dosed once weekly for two weeks which has been approved by the FDA for the treatment of smallpox disease caused by variola virus in adult and pediatric patients, including neonates; 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 was approved in Belgium in 2021 but has not been approved by the FDA. Trobigard is procured by certain authorized government buyers under special circumstances for potential use as a nerve agent countermeasure outside of the U.S.

Commercial Products

•NARCAN® (naloxone HCl) Nasal Spray, an intranasal 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;

•Vaxchora® (Cholera Vaccine, Live, Oral), the first vaccine approved by the FDA for the prevention of cholera, which we have agreed to sell as part of our travel health business; and

•Vivotif® (Typhoid Vaccine Live Oral Ty21a), a live attenuated vaccine for oral administration for the prevention of typhoid fever, which we have agreed to sell as part of our travel health business.

Services Segment:

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.

Full Year 2022 Executive Highlights

Asset Acquisition

During the year ended December 31, 2022, the Company acquired from Chimerix the exclusive worldwide rights to brincidofovir, including TEMBEXA® and other related assets. TEMBEXA is a medical countermeasure for smallpox approved by the FDA in June 2021.

Other Strategic Activities

2023 Organizational Restructuring Plan

On January 9, 2023, the Company announced an organizational restructuring plan (the “Plan”) intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. The Plan includes a reduction of the Company’s current workforce by approximately five percent. Decisions regarding the elimination of positions are subject to local law and consultation requirements in certain countries, as well as the Company’s business needs.

The Company estimates that it will incur approximately $9.0 million to $11.0 million of charges in connection with the Plan, which it expects to incur in the first quarter of fiscal 2023. These charges consist primarily of charges related to

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employee transition, severance payments, employee benefits, and share-based compensation. These actions, in combination with other cost reduction initiatives, are expected to result in annualized savings of over $60 million when fully implemented.

Agreement to Sell Travel Business

On February 15, 2023, we entered into the Sale Agreement with Bavarian Nordic, under which we agreed to sell our travel health business, including rights to Vaxchora and Vivotif, as well as our development-stage chikungunya vaccine candidate CHIKV VLP, our manufacturing site in Bern, Switzerland and certain of our development facilities in San Diego, California for a cash purchase price of $270.0 million, subject to certain customary adjustments. In addition, we may receive milestone payments of up to $80.0 million related to the development of CHIKV VLP and receipt of marketing approval and authorization in the U.S. and Europe, and sales-based milestones payments of up to $30.0 million based on aggregate net sales of Vaxchora and Vivotif in calendar year 2026. Approximately 280 employees are expected to join Bavarian Nordic as part of the transaction.

The transaction is expected to close in the second quarter of 2023, subject to certain customary closing conditions, including (1) the expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (2) receipt of required clearances and approvals under Spain’s competition laws, (3) receipt of certain Swiss real property approvals, (4) no material adverse effect having occurred with respect to the Business, and (5) certain other customary conditions.

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 opioid overdose treatment product, NARCAN® Nasal Spray, 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 grant 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, which involves providing large scale bundles of products and services as needs arise. We expect continued variability in our quarterly financial results.

Cost of Product Sales and 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 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.

Services - 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

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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 ("R&D")

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 intended for use and used in clinical trials and R&D.

In many cases, we 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, 2022, income tax expense totaled $2.1 million. For every 1% change in the 2022 effective rate, income tax expense would have changed by approximately $2.2 million.

For additional information on our uncertain tax positions and income tax expense, please see Note 13, "Income taxes" to our consolidated financial statements included in this report.

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RESULTS OF OPERATIONS

Consolidated and Segment Operating Results:

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[[/GREPCENT_TABLE]]

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Year Ended December 31, 2022 Compared with Year Ended December 31, 2021

Revenues and gross margin

Total revenues decreased $671.8 million to $1.1 billion in 2022. The decrease was primarily due to a decrease in Services revenue of $521.3 million, coupled with decreases in Contracts and Grants revenue of $92.8 million and Products revenue of $57.7 million.

Consolidated gross margin percentage decreased 19% to 36%. The decrease was primarily due to decreases in the Services segment and Products segment gross margins of $415.4 million and $99.8 million, respectively. Consolidated gross margin percentage excludes contracts and grants revenues because the related costs are R&D expenses.

See "Segment Results" for an expanded discussion of revenues and gross profit.

Unallocated corporate expenses

Research and Development Expenses

R&D expenses decreased $41.0 million to $193.0 million in 2022. The decrease was largely due to the non-cash write-off in 2021 of $38.0 million of the contract asset associated with the completion of the BARDA COVID-19 Development Public Private Partnership, coupled with a decrease in spending for the Company's COVID-19 therapeutic product candidates along with a number of other developmental activities, partially offset by an increase in costs associated with the Company's Phase 3 study of our chikungunya virus-like particle vaccine candidate and pre-launch inventory related to CGRD-001.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $8.1 million to $340.3 million in 2022. The decrease was due to lower professional services and marketing expenses partially offset by increased employee costs, primarily due to increased travel costs. Selling, general and administrative costs as a percentage of total revenue increased 10.9% to 30.4% for the year ended December 31, 2022. The increase was due to a decrease in revenues during the period, partially offset by a decrease in selling, general and administrative expenses during the period.

Amortization of Intangible Assets

Amortization of intangible assets increased $1.4 million to $59.9 million in 2022. Apart from the addition of the intangibles related to the Company's acquisition of the worldwide rights to TEMBEXA in 2022, the composition of intangible assets amortized was largely consistent with 2021.

Goodwill Impairment

Goodwill impairment decreased $35.0 million to $6.7 million in 2022. The decrease was due to a smaller non-cash impairment charge taken in 2022 as compared with 2021. In 2022, as part of its annual goodwill impairment testing, the Company recognized a $6.7 million impairment charge to goodwill in the CDMO- Services reporting unit, reducing the goodwill balance to zero as of December 31, 2022.

There is the risk of future impairments in our reporting units as any further deterioration in their performance compared to forecast, changes in order volumes or delivery schedules for major customers, as well as any changes in economic forecasts and expected recovery in the biopharmaceutical industry, may require the Company to complete additional impairment tests in future quarters and could result in the reporting unit’s fair value falling below carrying value in subsequent quarters. In the event the Company experiences factors that it believes indicate a decline in fair value, including negative changes to long-term growth rates or if discount rates increase, we may be required to record impairments of goodwill and other identified intangible assets. Further, if the composition of the Company’s reporting unit’s assets and liabilities were to change and result in an increase in the reporting unit’s carrying value, it could lead to additional impairment testing and further impairment losses.

Total other income (expense), net

Total other income (expense), net decreased $10.8 million to an expense of $49.0 million in 2022. The decrease was due to a write-off of a tax indemnity receivable, which is offset in income tax provision, and unrealized foreign currency losses recorded related to the remeasurement of certain intercompany balances. Interest expense was largely consistent between periods.

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Income tax provision

Income tax provision decreased $81.4 million to $2.1 million for the year ended December 31, 2022. The decrease was largely due to the decline in income before income taxes. The effective tax rate was (1)% for the year ended December 31, 2022 as compared to 27% in 2021. The effective annual tax rate decreased largely due to an increase in nondeductible expenses, specifically the impact of a valuation allowance charge in the U.S., state and foreign jurisdictions, a charge due the Company’s indefinite reinvestment assertion, GILTI, and other permanent items. This is partially offset by tax credits, favorable rates in foreign jurisdictions, and the release of an indemnified unrecognized tax benefit.

SEGMENT RESULTS

PRODUCTS SEGMENT

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[[/GREPCENT_TABLE]]

Year Ended December 31, 2022 Compared with Year Ended December 31, 2021

Nasal Naloxone Products

Nasal Naloxone Product sales decreased $60.6 million to $373.7 million in 2022. The decrease was primarily driven by a reduction in commercial retail sales and a decrease in the price per unit following the launch of a generic version of NARCAN Nasal Spray 4mg in December 2021, partially offset by an increase in U.S. public interest and Canadian sales.

Anthrax Vaccines

Anthrax vaccine sales increased $14.5 million to $274.3 million in 2022. The increase in anthrax vaccine sales was primarily due to an increase in the number of doses sold as a result of the timing of deliveries to the USG in 2022 as compared with 2021, as well as an increase in sales to non-USG customers at a higher price per unit in 2022. Anthrax vaccine product sales are primarily 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.

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ACAM2000

ACAM2000 sales decreased $143.1 million to $63.4 million in 2022. The decrease was primarily due to a lower number of units sold to the USG, partially offset by an increased number of units sold to non-U.S. customers at a higher price per unit. We are currently negotiating with HHS the terms of a third contract option for ACAM2000. The actual number of ACAM2000 doses to be procured in the future is dependent on certain timing and tiered-pricing terms that are subject to the discretion of HHS.

TEMBEXA

TEMBEXA sales, following the 2022 acquisition of worldwide rights to TEMBEXA, contributed $117.6 million in revenues in 2022.

Other Product Sales

Other product sales increased $13.9 million to $137.2 million in 2022. The increase was primarily due to increased sales of Anthrasil, Vivotif and RSDL products partially offset by decreased sales of VIGIV and BAT products.

Cost of Sales and Gross Margin

Cost of product sales increased $42.1 million, or 11%, to $424.1 million in 2022. The increase was primarily due to cost of sales for TEMBEXA following our 2022 acquisition of the worldwide rights for TEMBEXA. Excluding the acquisition related product costs, cost of product sales decreased $18.1 million, primarily due decreases in royalties paid for NARCAN sales and ACAM2000 product sales which were due to a reduced number of units sold to the USG and decreased expenses at our Bern facility due to higher facility utilization versus prior year. These were partially offset by inventory write-offs, primarily related to AV7909 and ACAM2000 and higher costs due to under-utilized capacity at our facilities.

Product gross margin percentage decreased 7% to 56% in 2022. The decrease was largely due to decreased sales volumes and inventory write-offs combined with a less favorable mix weighted more heavily to lower margin products. Adjusted gross margin percentage decreased 1% to 62% in 2022. Adjusted gross margin excludes the impact of non-cash items related to the changes in the fair value of contingent consideration of $2.6 million and the inventory step-up provision TEMBEXA inventory of $51.4 million.

SERVICES SEGMENT

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[[/GREPCENT_TABLE]]

Year Ended December 31, 2022 Compared with Year Ended December 31, 2021

Services Revenues

CDMO services revenue decreased $226.5 million to $108.4 million in 2022. The decrease was primarily due to $201.4 million less of combined revenue related to reduced production activities at the Company's Bayview facility as a result of a halt in manufacturing under the Janssen contract in first quarter of 2022 and the cessation of manufacturing activities under the AstraZeneca contract which occurred in 2021. Additionally, the decrease also reflects reduced production at the Camden facility. The decreases were slightly offset by an increase in manufacturing activities at the Company's Winnipeg facility.

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CDMO lease revenue decreased $294.8 million to $4.9 million in 2022. The decrease was primarily due to a reduction of $237.6 million associated with the completion of our COVID-19 development public-private partnership with BARDA in November 2021 and reduced lease revenues under the Janssen contract of $58.1 million.

Cost of Services and Gross Margin

Cost of Services decreased $105.9 million, or 28%, to $269.6 million in 2022. The decrease was primarily due to reduced production activities across our CDMO network, as well as a $41.5 million inventory write-off related to the Bayview facility in the second quarter of 2021, partially offset by increased costs at our Camden facility for additional investments in quality enhancement and improvement initiatives.

Services gross margin percentage decreased to (138)% in 2022. The decrease was primarily due to reduced production activities across our CDMO network including the completion of the Company's arrangement with BARDA in November 2021, the halt in manufacturing under the Janssen and AstraZeneca contracts and the decrease in margins at the Company's Camden facility due to additional investments in quality enhancement and improvement initiatives, including an increase in professional services costs.

OTHER REVENUE

Year Ended December 31, 2022 Compared with Year Ended December 31, 2021

Contracts and Grants

Contract and grants revenue decreased $92.8 million, or 69%, to $41.4 million in 2022. The decrease was primarily due to BARDA's completion of the CIADM agreement in November 2021 as well as decreases in development activities associated with various other externally funded research and development projects, most notably the Company's COVID-HIG therapeutic product candidate, as well as decreases in development activities for AV7909. Decreases were partially offset by revenue increases relating to indirect rate adjustments during the period.

Year Ended December 31, 2021 Compared with Year Ended December 31, 2020

Discussion and analysis of the year ended December 31, 2021 compared with the year ended December 31, 2020 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, 2021, as filed with the SEC on February 25, 2022.

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Financial Condition, Liquidity and Capital Resources

Our financial condition is summarized as follows:

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[[/GREPCENT_TABLE]]

Principal Sources of Capital Resources

We have historically financed our operating and capital expenditures through existing cash and cash equivalents, cash from operations, development contracts and grant funding and borrowings under our senior revolving credit facility (the "Revolving Credit Facility") and senior term loan facility (the "Term Loan Facility", and together with the Revolving Credit Facility, the "Senior Secured Credit Facilities") and other lines of credit we have established from time to time. We also obtain financing from the sale of our common stock upon exercise of stock options. As of December 31, 2022, we had unrestricted cash and cash equivalents of $642.6 million and remaining capacity under our Revolving Credit Facility of $0.7 million.

Going Concern

The consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

As of December 31, 2022, there is $598.0 million outstanding on the our Revolving Credit Facility and $362.8 million on our Term Loan Facility that mature in October 2023, which is within one year of the date that the consolidated financial statements for the year ended December 31, 2022 are issued. The Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued as a result of these pending maturities. This evaluation considered the potential mitigating effect of management’s plans that have not been fully implemented. Management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company's plan to alleviate the substantial doubt includes amending its existing Senior Secured Credit Facilities that are due October 2023.

On February 14, 2023, the Company entered into a Consent, Limited Waiver, and Third Amendment to the Amended and Restated Credit Agreement (the "Credit Agreement" and “Third Credit Agreement Amendment”) relating to the Senior Secured Credit Facilities. Pursuant to the Third Credit Agreement Amendment, the requisite lenders consented to our sale of our travel health business to Bavarian Nordic substantially in accordance with the terms of the Sale Agreement. The proceeds from the transaction will be deposited into a cash collateral account with the Administrative Agent and will, unless otherwise agreed to by the Company and the requisite lenders, be used to repay the outstanding Term Loan Facility on the expiration of the Limited Waiver (as described below). We currently expect the transaction to close in the second quarter of 2023, but we can provide no assurance that the transaction will close prior to the October 2023 maturity of the Term Loan Facility, or at all.

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Pursuant to the Third Credit Agreement Amendment the requisite lenders have agreed to a limited waiver of any defaults or events of default that result from (a) any violation of the financial covenants set forth in the Senior Secured Credit Facilities with respect to the fiscal quarters ending December 31, 2022 and March 31, 2023 and (b) the going concern qualification or exception contained in the audited financial statements for the fiscal year ending December 31, 2022. This limited waiver will expire on the earlier to occur of (i) any other event of default and (ii) April 17, 2023. During this period the Company is working with lenders under the Senior Secured Credit Facilities in connection with replacing such facilities before their October 2023 maturity with revised terms and conditions. The Company does not expect to be in compliance with debt covenants in future periods without additional sources of liquidity or future amendments to the Credit Agreement.

While the Company is in the process of replacing and expects to replace the Senior Secured Credit Facilities before they mature, management cannot make the assumption that it is probable that the Company will be able to obtain such debt refinancing on commercially reasonable terms or at all until a new credit facility is in place. The Company is currently working with its lenders to refinance the Senior Secured Credit Facilities with revised terms and conditions. The extent to which the Company will be able to affect such refinancing, replacement or maturity extension on terms that are favorable or at all is dependent on a number of uncertain factors, including then-prevailing credit and other market conditions, economic conditions, particularly in the pharmaceutical and biotechnology industry, disruptions or volatility caused by factors such as COVID-19, regional conflicts, inflation, and supply chain disruptions. In addition, rising interest rates could limit our ability to refinance the Senior Secured Credit Facilities when they mature or cause us to pay higher interest rates upon refinancing.

The Company has $642.6 million of cash on hand at December 31, 2022. On January 9, 2023, the Company announced the 2023 organizational restructuring Plan (the “Plan”) intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. The Plan includes a reduction of the Company’s current workforce by approximately five percent. These actions, in combination with other cost reduction initiatives, are expected to result in annualized savings of over $60.0 million when fully implemented.

Cash Flows

The following table provides information regarding our cash flows for the years ended December 31, 2022 and 2021.

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[[/GREPCENT_TABLE]]

Operating Activities:

Net cash used in operating activities of $34.1 million in 2022 was due to net income excluding non-cash items of $34.6 million offset by positive working capital changes of $0.5 million primarily due an increase in payments for our contingent consideration and other accrued expenses, an increase in prepaid expenses and an accumulation of inventory, partially offset by collections on receivables.

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 (used in) operating activities decreased $355.2 million from 2021 to 2022. The decrease is due to a decrease in net income excluding non-cash items of $512.1 million offset by an increase in working capital changes of $156.9 million.

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Investing Activities:

Net cash used in investing activities of $381.3 million in 2022 relates to payments for asset acquisitions, the purchases of property, plant and equipment and a royalty settlement payment.

Net cash used in investing activities of $225.0 million in 2021 relates to purchases of property, plant and equipment for increased capacity at our Rockville and Bayview facilities.

Net cash used in investing activities increased $156.3 million from 2021 to 2022. The increase is largely due the acquisition of worldwide rights to TEMBEXA® for $238.0 million, which closed in the third quarter of 2022.

Financing Activities:

Net cash provided by financing activities of $481.2 million in 2022 was largely from the $598.0 million of proceeds from our Revolving Credit Facility partially offset by repurchases of stock of $82.1 million and payments on our term loan of $33.8 million.

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 (used in) financing activities increased $622.2 million from 2021 to 2022. The increase is largely due to the proceeds from our Revolving Credit Facility of $598.0 million, partially offset by a decrease in cash payments on our Term Loan Facility.

Debt

As of December 31, 2022, the Company has $1.4 billion of fixed and variable rate debt with varying maturities, with $957.3 million payable within 12 months (see Note 8, "Debt" in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K).

Uncertainties and Trends Affecting Funding Requirements

We expect to continue to fund our anticipated operating expenses, capital expenditures and debt service requirements from the following sources:

•existing cash and cash equivalents;

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

•development contracts and grant funding;

•proceeds from the sale of our travel health business to Bavarian Nordic (see Note 18, "Subsequent events" in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K); and

•our Senior Secured Credit Facilities and any replacement or 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; and

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

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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, collaboration and licensing arrangements, cost reductions, assets sales or a combination of these options.

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 3.875% Senior Unsecured Notes due 2028 (the "Senior Unsecured Notes") 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. Any new debt funding, if available, may be on terms less favorable to us than our Senior Secured Credit Facilities or the Senior Unsecured Notes. 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 as of December 31, 2022 and December 31, 2021 was:

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[[/GREPCENT_TABLE]]

Contractual Obligations

As of December 31, 2022, 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, 2022, the Company had fixed lease payment obligations of $23.5 million, with $6.5 million due within 12 months. The Company has non-cancelable purchase commitments of $132.8 million, with an estimated $125.7 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.

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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 Accounting Standards Codification ("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 11, "Revenue recognition" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K.

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 of contingent consideration on a quarterly basis. Changes in the fair value can result from adjustments to the discount rates and updates in the assumed timing of or achievement of net sales and/or the achievement of development and regulatory milestones.

The Company's acquisitions accounted for as asset acquisitions may also include contingent consideration payments to be made for sales-based royalties, sales-based milestones and development and regulatory milestones. We assess whether such contingent consideration meets the definition of a derivative. Contingent consideration payments in an asset acquisition not required to be accounted for as derivatives are recognized when the contingency is resolved, and the consideration is paid or becomes payable. Contingent consideration payments required to be accounted for as derivatives are recorded at fair value on the date of the acquisition and are subsequently remeasured to fair value at each reporting date. For additional information on the Company's contingent consideration, refer to Note 6, "Fair value measurements" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K.

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 13, "Income taxes" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K.

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