Emergent BioSolutions Inc. Annual Report 2006

FY2006 Annual Report · Emergent BioSolutions Inc.

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Our mission is simple:

to protect life.

2006 Annual Report

FUAD EL-HIBrI
Chairman and Chief Executive Officer

Dear Stockholders:

2006 was a record year for total revenues and
represented our fifth consecutive year of
profitable operations. It was also a record year
in terms of our accomplishments in the areas
of corporate development as well as product
development and manufacturing of immunobi-
otics in our two business segments — biodefense
and commercial. These accomplishments
were driven by our five core strategies for
growth, which are:

Pursue two attractive business segments.

Focus on development versus research.

Leverage manufacturing core competency.

Mitigate costs with non-dilutive relationships.

Grow through acquisition.

Corporate Developments
We made significant progress on a number of
corporate initiatives, including:

• We completed an initial public offering raising

approximately $58 million, and listed our
common stock on the New York Stock Exchange.

• We acquired ViVacs GmbH, a German-based
biotechnology company with a promising
technology platform.

• We leveraged our assets by securing

approximately $32 million in additional
debt financing.

• We completed the required deliveries of

BioThrax® (Anthrax Vaccine Adsorbed) to the
U.S. Department of Health and Human Services
(HHS) under our initial 5 million dose contract
seven months ahead of schedule.

• We completed a contract modification with

HHS for the delivery of an additional 5 million
doses of BioThrax, with over 4 million doses
delivered by December 2006.

• We signed a contract amendment with the
U.S. Department of Defense (DoD) for the
delivery of approximately 1 million additional
doses of BioThrax, with final delivery scheduled
by September 2007.

• We positioned the sale of BioThrax to additional
domestic and international customers, including
first responders at the state and local levels,
and signed agreements with marketing
representatives to develop regional international
markets where we see sales opportunities.

• We received certification and designation
of BioThrax as a “qualified anti-terrorism
technology” by the U.S. Department of
Homeland Security, making BioThrax the
first vaccine to receive this recognition.

Commercial Business Segment
We further advanced our commercial product
development initiatives in the fight against
global infectious diseases, including:

Biodefense Business Segment
We continued to lead the way in the expanding
biodefense market, including:

• We completed a Phase I clinical trial for

our single dose, drinkable typhoid vaccine
candidate in adults in Vietnam, where typhoid

Selected 2006 Accomplishments

• Completed an initial public offering raising approximately $58 million, and listed our common stock on the New York Stock Exchange.

• Acquired ViVacs GmbH, a German-based biotechnology company, and gained access to a MVA technology platform.

• Completed a contract modification with HHS for the delivery of an additional 5 million doses of BioThrax, with over 4 million doses

delivered by December 2006.

• Signed a contract amendment with the DoD for the delivery of approximately 1 million additional doses of BioThrax, with final delivery

scheduled by September 2007.

• Initiated a Phase II clinical development program for our typhoid vaccine candidate in adolescents and children in Vietnam, and initiated

a Phase II clinical trial for our hepatitis B therapeutic vaccine candidate in chronic carriers in the U.K.

• Signed a clinical trial agreement with the NIAID under which the NIAID will conduct a follow-on Phase I clinical trial for our advanced

group B streptococcus vaccine candidate.

• Finalized a license and development agreement with Sanofi Pasteur for the continued development of our meningitis B vaccine.

• Completed the construction phase of our new large-scale manufacturing facility in Lansing, Michigan.

is endemic, and we initiated a Phase II
clinical development program for a trial in
adolescents and children, also in Vietnam.

been designed for flexibility and will allow us
to manufacture multiple vaccine products in
addition to BioThrax.

• We initiated a Phase II clinical trial for our

hepatitis B therapeutic vaccine candidate in
chronic carriers in the U.K., and we expanded
the clinical sites for this trial to accelerate
recruitment.

• We completed a Phase I clinical trial for our
group B streptococcus vaccine candidate
that uses a single novel recombinant protein
and, building on the promising results of that
study, the National Institute of Allergy and
Infectious Diseases (NIAID) agreed to conduct
a follow-on Phase I clinical trial for our advanced
vaccine candidate.

• We finalized a license and development

agreement with Sanofi Pasteur for the continued
development of our meningitis B vaccine.

• We continued to develop our two technology
platforms — spi-VECTM and MVA (modified
vaccinia Ankara) — as vectors for the
development of potential new candidates
against other life threatening diseases.

Manufacturing Operations
We completed the construction phase of our
new large-scale manufacturing facility in
Lansing, Michigan. This facility is designed to
manufacture up to 40 million doses of BioThrax
per year on a single line, and it is potentially
expandable to up to 80 million doses with the
introduction of a second line. This facility has

Positioned For Growth
Our 2006 accomplishments position us well for
future growth. Vaccines and therapeutics remain
a critically important component of global
public health. With our talent, our focus on
product development and manufacturing, our
balanced approach between vaccines and
therapeutics across two attractive markets,
and our measurable financial performance, we
are well positioned to continue our progress
and growth. We believe there are significant
opportunities in both markets, and we look
forward to capturing them.

In closing, I would like to thank all of our
employees around the world for their tireless
effort and sustained commitment, and to our
Board of Directors for their continued counsel
and guidance. I would also like to acknowledge
the continued support of our key customers and
the contributions of our collaborators and
vendors. Finally, thank you to our stockholders
for your confidence in and support of our company.

Sincerely yours,

Fuad El-Hibri
Chairman and Chief Executive Officer

April 2007

Financial Highlights

rEVENUE
(dollars in thousands)

NET INCoME
(dollars in thousands)

EArNINGS PEr SHArE
(dollars)

ToTAL ASSETS
(dollars in thousands)

SToCKHoLDErS’ EqUITY
(dollars in thousands)

152,732

130,688

83,494

55,769

22,793

0.99

238,255

138,472

15,784

11,472

0.77

0.61

4,454

0.24

100,332

59,737

69,056

37,127

22,949

8,448

2006 Annual report

Emergent BioSolutions Inc. is a biopharmaceutical company focused on the

development, manufacture and commercialization of immunobiotics, consisting

of vaccines and therapeutics that induce or assist the body’s immune system

to prevent or treat disease.

Our accomplishments are measurable: we deliver results.

We are focused.
Our strategy is to
focus on product
development, from
proof-of-concept to
commercialization.

We are balanced.
Our approach is to
achieve balance in the
markets that we serve
and the products that
we develop.

We are profitable.
Our model is to reinvest
our profits to generate
long-term growth.

We seek to avoid the time,
risk and cost of early stage
research by concentrating
instead on development. We
acquire product candidates
that are at the proof-of-
concept stage and take
them from the lab into the
real world.

We employ a balanced
approach to business. We
operate in the biodefense
and commercial business
segments, both of which are
attractive markets providing
opportunity for growth. We
maintain a product portfolio
comprised of both vaccines
and therapeutics. We
use multiple established
technologies to develop
and manufacture our
product candidates.

We have achieved five
consecutive years of
profitability as a result of
both growth in revenues
and disciplined financial
operations. Our fundamental
approach to managing our
business includes operating
within our means and
balancing growth with
financial responsibility.

2
2

Emergent BioSolutions Inc.
Emergent BioSolutions Inc.

We deliver results.
Our approach has enabled us
to reliably manufacture and
deliver our biodefense product,
significantly enhance our
portfolio of product candidates
and steadily grow our financial
performance.

We take pride in what we have
accomplished over the past
nine years. We delivered
19 million doses of BioThrax
and helped protect over
1.5 million military personnel.
We were first to supply a
vaccine into the strategic
national stockpile under
Project BioShield. We have
acquired three product
development companies
and established and further
developed a portfolio of
promising product candidates
that address global public
health needs.

The future is ours to create.
Why not create one free of disease?

2006 Annual report

Driving corporate performance through five
key strategies for growth.

Our goal is to improve the health and protect the lives of people around the globe by becoming
a worldwide leader in developing, manufacturing and commercializing immunobiotics. Core to
achieving this goal are our five key strategies for growth.

Mitigate costs with
non-dilutive relationships.
We continuously pursue grants, clinical
trial support and other non-dilutive
arrangements with governmental and
non-governmental agencies to advance
the development of both our biodefense
and commercial product candidates.

Grow through acquisition.
We seek to opportunistically obtain
products and product candidates through
acquisitions and licensing arrangements
with third parties. We believe that we
have secured — and will be able to
continue to secure — rights to a diverse
product pipeline focused on immunobiot-
ics for use against biological agents that
are potential weapons of bioterrorism or
biowarfare or that address significant
unmet or undeserved public health
needs. We also believe that this approach
may enable us to accelerate product
development timelines.

Operate in two attractive
business segments.
We operate in two business segments —
biodefense and commercial — both of
which provide attractive opportunities for
growth. We seek to maintain a balanced
product portfolio consisting of vaccines
and therapeutics to diversify product
development and commercialization risk.
We use multiple established technologies
to develop and manufacture our product
candidates, which further reduces our risk.

Focus on development,
not research.
We focus our efforts on our core capabilities
of immunobiotic product development
and manufacturing. This approach enables
us to avoid the expense and time entailed
in early stage research activities while
reducing product development and
commercialization risk.

Leverage core competency
in manufacturing.
We are constructing a new 50,000
square-foot manufacturing facility on our
Lansing, Michigan campus to augment
our existing manufacturing capabilities.
We are constructing our new facility as a
large-scale commercial manufacturing
plant that we can use to produce multiple
vaccine products.

Emergent BioSolutions Inc.

FrEDErICK, MD

GAITHErSBUrG, MD

roCKVILLE, MD
HEADqUArTErS

rEADING, U.K.

MUNICH, GErMANY

LANSING, MI

SINGAPorE

Creating a global footprint.

Because our products address worldwide needs, we are expanding our
presence around the globe. That includes manufacturing facilities in the
United States, product development operations in the United States and
Europe, and marketing and sales offices in the United States, Singapore
and Germany. We also work with third-party marketing representatives in
the Middle East, Turkey, India, Australia and several Scandinavian countries.

2006 Annual report

Leading the way in the expanding biodefense market.

Our product portfolio is focused on countering biological agents that are potential weapons of
bioterrorism and biowarfare.

BIoDEFENSE ProDUCTS

PrECLINICAL

PHASE 1

PHASE 2 PHASE 3 APPrOVED

BioThrax®(Anthrax Vaccine Adsorbed)

Next Generation Anthrax Vaccine

Anthrax Immune Globulin

recombinant Botulinum Vaccine

Botulinum Immune Globulin

6
6

Emergent BioSolutions Inc.
Emergent BioSolutions Inc.

PrECLINICAL

PHASE 1

PHASE 2 PHASE 3 APPrOVED

BioThrax®(Anthrax Vaccine Adsorbed)

Since 1998, we have supplied a total of 19 million
doses of BioThrax® (Anthrax Vaccine Adsorbed)
to the U.S. Department of Defense for active
immunization of military personnel and to the
U.S. Department of Health and Human Services for
placement into the nation’s strategic national stockpile.

The biodefense market for immunobiotics
has grown dramatically as a result of
the increased awareness of the threat of
global terror activity in the wake of the
September 11, 2001 terrorist attacks
and the October 2001 anthrax letter
attacks. At Emergent BioSolutions, we
take seriously the role we play to help
combat bioterrorism.

Our biodefense product portfolio focuses
on two category A biological agents, which
are the class of biological agents that the
Centers for Disease Control and Prevention
has identified as the greatest possible
threat to public health.

We market and sell BioThrax to the DoD
and HHS with a small, targeted marketing
and sales group, and since 1998, we have
delivered 19 million doses of BioThrax
under our contracts with the DoD and HHS.

In our effort to expand the domestic
customer base for BioThrax, we are
approaching first responders, which include
fire, police and emergency medical
personnel, at the state and local levels.

Internationally, we have opened offices in
Munich and Singapore, hired personnel
to develop international market opportu-
nities and signed agreements with
marketing representatives to develop
regional markets.

We are also evaluating several potential

product candidates in connection with

the development of a next generation

anthrax vaccine featuring attributes such

as use with antibiotics as a post-exposure

treatment for anthrax infection, an extended

shelf life, new routes of administration, a

reduced number of required doses and

stability at room temperature.

In addition, our biodefense product

portfolio includes our anthrax immune

globulin (AIG), which we are developing

as a therapeutic treatment for patients

with symptoms of anthrax disease. We

received a development grant from NIAID

of up to $3.7 million to support pivotal

animal studies and assay development

related to our AIG product candidate. We

also entered into an exclusive agreement

with Talecris to use its FDA-licensed

manufacturing process to produce our AIG

product candidate, and they have already

manufactured our first consistency lot.

More recently, we filed an Investigational

New Drug Application (IND) with the

United States Food and Drug Administration

(FDA) to conduct a Phase I clinical trial

of our AIG product candidate.

Helping the helpers.

Our biodefense product portfolio focuses on two
category A biological agents, the class identified by
the Centers for Disease Control and Prevention as
having the greatest potential for adversely impacting
public health.

2006 Annual report

Advancing the fight against global infectious diseases.

Our product candidates are intended to improve and protect the lives of millions around the world.

CoMMErCIAL ProDUCTS

Typhoid Vaccine

PrECLINICAL

PHASE 1

PHASE 2 PHASE 3

Hepatitis B Therapeutic Vaccine

Group B Streptococcus Vaccine

Meningitis B Vaccine

Chlamydia Vaccine

Emergent BioSolutions Inc.

PrECLINICAL

PHASE 1

PHASE 2 PHASE 3

Vaccines have long been recognized
as a safe and cost-effective method for
preventing infection caused by various
bacteria and viruses. Because of an
increased emphasis on preventative
medicine in industrialized countries,
vaccines are now well recognized as an
important part of public health manage-
ment strategies. According to Frost &
Sullivan, a market research organization,
from 2002 to 2005 annual worldwide
vaccine sales increased from $6.7 billion
to $9.9 billion, a compound annual growth
rate of approximately 14%. Frost & Sullivan
estimates that the worldwide sales of
vaccines will grow at a compound annual
rate of approximately 10.5% from 2005
through 2012.

In our commercial business, we are
developing a range of immunobiotic
product candidates that are designed
to address significant unmet or
underserved public health needs
caused by infectious diseases.

With a typhoid vaccine, hepatitis B
therapeutic vaccine and a group B
streptococcus vaccine in clinical
development, and a chlamydia vaccine
and a meningitis B vaccine in preclinical
development, we are seeking to establish
Emergent BioSolutions as an important
global vaccine developer.

We continue to seek ways to mitigate the
financial hurdles inherent in the develop-
ment of commercial vaccines. For example,
The Wellcome Trust provided funding for
the Phase I clinical trial of our typhoid
vaccine candidate in Vietnam and has
agreed to provide funding for the Phase II
clinical trial of this vaccine candidate
in Vietnam.

Additionally, in 2006 we entered into a
clinical trial agreement with NIAID under
which NIAID has agreed to fund, manage
and conduct an additional clinical trial
of our group B streptococcus vaccine
product candidate.

Working to help
conquer typhoid.

Each year some 22 million cases of typhoid
occur worldwide, killing approximately
200,000 people. We are developing a single
dose, drinkable typhoid vaccine that, if
approved, would provide an enhanced course
of treatment compared to the currently
approved typhoid vaccines.

2006 Annual report

Leveraging our expertise in manufacturing.

Our core competence in manufacturing is a cornerstone of our competitive advantage
and a source of tangible corporate differentiation.

Independently manufacturing our
product and expanding our ability to
manufacture product candidates gives
us a number of important advantages.
It saves money, gives us greater control
over the manufacturing and regulatory
approval process, and can accelerate
product development.

We manufacture BioThrax at our 12.5-acre
campus located in Lansing, Michigan
using cGMP manufacturing procedures.
In order to enhance our ability to address
our expanding product development
requirements, we recently commissioned
a pilot plant facility on our Lansing campus.
In addition, we are constructing a new
50,000 square-foot manufacturing facility
on our Lansing campus to expand our
manufacturing capacity and to meet the
needs of both current and future customers.
We completed construction of this facility
in 2006 and expect to conduct installation,
validation and qualification activities required
for regulatory approval during 2007 and
2008. This high tech, state-of-the-art
facility is designed for flexibility in both
upstream and down-stream manufacturing.

We are constructing this new facility as
a large-scale manufacturing plant that
will enable us to manufacture multiple
vaccine products in addition to BioThrax.

We anticipate that we will begin large-
scale manufacturing of BioThrax for
commercial sale at the new facility in 2008.
This facility is designed to manufacture
up to 40 million doses of BioThrax per
year on a single production line and can
produce up to 80 million doses with the
introduction of a second production line.
By comparison, our current facility has
a current maximum production capacity
of approximately 9 million doses of BioThrax
per year.

In addition to the Lansing campus, we
own two buildings of approximately
145,000 square feet each, on a 15-acre
site in Frederick, Maryland. We are
establishing plans to build out this
site to provide laboratory space, product
development and pilot plant production
capabilities, full-scale commercial
manufacturing operations, warehouse
and storage facilities, fill and finish
operations and administrative office space.

These manufacturing initiatives
provide us with greater flexibility and
independence in addressing our future
requirements for process development,
the manufacture of clinical supplies
of our product candidates and,
ultimately, commercial production
of approved products.

Emergent BioSolutions Inc.

Expanding manufacturing capacity.

Our multi-building campus in Lansing, Michigan consists of facilities for
bulk manufacturing (including fermentation, filtration and formulation) of
BioThrax. The campus also provides raw material storage and in-process and
final product warehousing.

Our Lansing expansion includes a new 50,000 square-foot manufacturing facility.
This high-tech, state-of-the-art facility is designed for flexibility and will provide
manufacturing capability of multiple vaccine products in addition to BioThrax.

Our Frederick, Maryland site consists of two facilities that are available for future
product development, pilot plant production, full-scale commercial manufacturing
operations, warehouse and storage, fill and finish operations and administrative
office space.

2006 Annual report

Delivering results for nearly a decade.

Our history shows a track record of delivering financial results, manufacturing consistency,

product advancement and improvement, and an unwavering commitment to protecting

lives through the delivery of 19 million doses of BioThrax.

Company
Milestones

Michigan Biologic
Products Institute
assets acquired

Lansing facility
renovation
approved by FDA

Antex Biologics
(U.S.) acquired

1998

2001

2003

Business
Achievements

$83M, 2-year cost
reimbursement
contract signed
with DoD
CoMPLETED

$129M, 5.5M dose,
3-year (extended to
6-year) BioThrax
contract signed
with DoD
DELIVErED

Our story

Even though we just became a public company in 2006, our roots go back to 1998
when we were incorporated as BioPort Corporation and acquired the assets of the
Michigan Biologic Products Institute. In this acquisition, we secured rights to BioThrax,
vaccine manufacturing facilities, and vaccine development and production technology.
We acquired our pipeline of commercial product candidates through our acquisition
of Antex Biologics, Inc. in 2003, Microscience Limited in 2005, and ViVacs GmbH in 2006.

Emergent BioSolutions Inc.

E B S

L I S T E D

NYSE

Emergent BioSolutions’ common
stock began trading on November
15, 2006 on the New York Stock
Exchange under the symbol EBS.

Antex Biologics

(U.S.) acquired

Future
manufacturing
facility (U.S.)
acquired

Microscience Ltd.
(U.K.) acquired

ViVacs GmbH
(Germany)
acquired

Initial Public
Offering and
NYSE listing
completed

2004

2005

2006

2007

$124M, 5M dose,
3-year BioThrax
contract signed
with DoD
DELIVErY IN
ProGrESS

$123M, 5M dose
BioThrax contract
signed with HHS
DELIVErED

Meningitis B vaccine
collaboration signed
with Sanofi Pasteur
providing payments
of up to €73M
DEVELoPMENT
UNDErWAY

$120M, 5M dose
BioThrax amended
contract signed
with HHS
DELIVErED

2006 Annual report

Building an executive management team for future success.

Our leadership team comprises senior level executives with experience and relationships in both
the biodefense and commercial business segments.

Senior Executive Team

Thomas K. Zink, M.D.
Chief Medical Officer

Edward J. Arcuri, Ph.D.
Chief Operating Officer

Fuad El-Hibri
Chief Executive Officer
and Chairman of the
Board of Directors

Emergent BioSolutions Inc.

r. Don Elsey
Chief Financial Officer

robert G. Kramer, Sr.
Executive Vice President,
Worldwide Manufacturing

Daniel J. Abdun-Nabi
President

Steven N. Chatfield, Ph.D.
Chief Scientific Officer

2006 Annual report

Board of Directors

Fuad El-Hibri
Chairman and
Chief Executive Officer,
Emergent BioSolutions Inc.

Zsolt Harsanyi, Ph.D.(1*, 2, 3*,4)
Chairman and
Chief Executive Officer,
Exponential Biotherapies, Inc.

ronald B. richard (1, 2*, 3)
President and
Chief Executive Officer,
The Cleveland Foundation

Jerome M. Hauer
Chief Executive Officer,
The Hauer Group, LLC;
Former Director,
City of New York Office of
Emergency Management

1 Audit Committee

2 Compensation Committee

3 Nominating & Corporate

Governance Committee

4 Lead Independent Director

* Chairman of Committee

Shahzad Malik, M.D. (1, 2)
General Partner,
Advent Venture
Partners LLP

Louis W. Sullivan, M.D.
President Emeritus,
Morehouse School of Medicine;
Former Secretary, Department
of Health and Human Services

Joseph M. Allbaugh
President and Chief Executive Officer,
The Allbaugh Company, LLC;
Former Director, Federal Emergency
Management Agency

Corporate Executive Officers

Fuad El-Hibri
Chairman of the Board of Directors
and Chief Executive Officer

Robert G. Kramer, Sr.
Executive Vice President,
Worldwide Manufacturing

Kyle W. Keese
Senior Vice President,
Marketing and Communications

Daniel J. Abdun-Nabi
President and Secretary

Edward J. Arcuri, Ph.D.
Chief Operating Officer

R. Don Elsey
Vice President, Finance,
Chief Financial Officer and Treasurer

Steven N. Chatfield, Ph.D.
Senior Vice President
and Chief Scientific Officer

Thomas K. Zink, M.D.
Senior Vice President
and Chief Medical Officer

Denise Esposito
Senior Vice President,
Legal Affairs, and General Counsel

Mauro Gibellini
Senior Vice President,
Corporate Development

Heads of Operating Subsidiaries

Robert G. Kramer, Sr.
President and Chief Executive Officer,
Emergent Biodefense Operations
Lansing Inc.

Michael J. Langford, DVM, Ph.D.
President, Emergent Product
Development Gaithersburg Inc.

Steven N. Chatfield, Ph.D.
President, Emergent Product
Development U.K. Limited

Andreas Hartmann, Ph.D.
Managing Director, Emergent
Product Development
Germany GmbH

Emergent BioSolutions Inc.

2006 FINANCIAl REPORt

Selected Consolidated Financial Data

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Cash Flows

Consolidated Statements of Changes in Stockholders’ Equity

Notes to Consolidated Financial Statements

Common Stock Information

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data together with our consolidated financial statements and
the related notes included in this annual report 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, 2004, 2005 and 2006 and
the consolidated balance sheet data as of December 31, 2005 and 2006 from our audited consolidated financial statements,
which are included in this annual report. We have derived the consolidated statements of operations data for the years
ended December 31, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002, 2003 and 2004 from
our audited consolidated financial statements, which are not included in this annual report. Our historical results for any
prior period are not necessarily indicative of results to be expected in any future period.

2002

Year Ended December 31,
2004

2005

2003

2006

(in thousands, except share and per share data)

Statements of operations data:
Revenues:

Product sales
Contracts and grants
total revenues
Operating expenses (income):
Cost of product sales
Research and development
Selling, general & administrative
Purchased in-process research
and development
Settlement of State of
Michigan obligation
litigation settlement
total operating expenses
Income (loss) from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net
total other income (expense)
Income before provision
for income taxes
Provision for income taxes
Net income
Earnings per share—basic
Earnings per share—diluted
Weighted average number
of shares—basic
Weighted average number
of shares—diluted

(in thousands)

Balance sheet data:

Cash and cash equivalents
Working capital
total assets
total long-term liabilities
total stockholders’ equity

61,253
17,288
78,541

55,536
233
55,769

81,014
2,480
83,494

127,271
3,417
130,688

147,995
4,737
152,732

24,569
2,808
13,397

—

—
—
40,774
37,767

80
(451)
(271)
(642)

22,342
6,327
19,547

1,824

—
—
50,040
5,729

100
(293)
168
(25)

30,102
10,117
30,323

—

(3,819)
—
66,723
16,771

65
(241)
6
(170)

31,603
18,381
42,793

26,575

—
(10,000)
109,352
21,336

485
(767)
55
(227)

24,125
45,501
44,601

477

—
—
114,704
38,028

846
(1,152)
293
(13)

37,125
733
36,392
1.97
1.75

$
$
$

5,704
1,250
4,454
0.24
0.22

$
$
$

16,601
5,129
11,472
0.61
0.56

$
$
$

21,109
5,325
15,784
0.77
0.69

$
$
$

38,015
15,222
22,793
0.99
0.93

$
$
$

18,441,235

18,904,992

18,919,850

20,533,471

23,039,794

20,752,243

20,316,752

20,439,252

22,751,733

24,567,302

2002

2003

As of December 31,
2004

2005

2006

$ 4,891
1,130
22,790
4,592
4,155

$ 7,119
(3,147)
37,127
1,228
8,448

$ 6,821
7,509
69,056
11,921
22,949

$ 36,294
29,023
100,332
10,502
59,737

$ 76,418
82,990
238,255
35,436
138,472

Emergent BioSolutions Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND rESULTS OF OPErATIONS

You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and the related notes and other financial
information included elsewhere in this annual report. Some
of the information contained in this discussion and analysis or
set forth elsewhere in this annual report, including informa-
tion 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” sec-
tion 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 state-
ments contained in the following discussion and analysis.

OvErvIEw
We are a biopharmaceutical company focused on the devel-
opment, manufacture and commercialization of immuno-
biotics. We operate in two business segments: biodefense
and commercial. We commenced operations as BioPort
Corporation in September 1998 through an acquisition
from the Michigan Biologic Products Institute of rights
to our marketed product, Biothrax, vaccine manufactur-
ing facilities at a multi-building campus on approximately
12.5 acres in lansing, Michigan and vaccine development
and production know-how. Following this acquisition, we
completed renovations at the lansing facilities that had
been initiated by the State of Michigan. In December 2001,
the U.S. Food and Drug Administration (FDA) approved a
supplement to our manufacturing facility license for the
manufacture of Biothrax at the renovated facilities.

In June 2004, we completed a corporate reorganization in
which we:

• issued 18,666,479 shares of class A common stock
in exchange for 18,017,994 shares of BioPort class A
common stock and 648,485 shares of BioPort class B
common stock;

• repurchased and retired all other issued and outstand-
ing shares of BioPort class B common stock; and

• assumed all outstanding stock options to purchase
BioPort class B common stock and granted option
holders replacement stock options to purchase an
equal number of shares of our class B common stock.

As a result of the reorganization, BioPort became a wholly
owned subsidiary of Emergent. We subsequently renamed
BioPort as Emergent BioDefense Operations lansing Inc.
We acquired our portfolio of commercial vaccine candi-
dates through our acquisition of Microscience limited
in a share exchange in June 2005 and our acquisition for
cash of substantially all of the assets of Antex Biologics
Inc. in May 2003 and ViVacs GmbH in July 2006. We sub-
sequently renamed Microscience as Emergent Product

Development UK limited, Antex as Emergent Product
Development Gaithersburg Inc., and ViVacs as Emergent
Product Development Germany GmbH. We expect to con-
tinue to seek to obtain marketed products and develop-
ment stage product candidates through acquisitions and
licensing arrangements with third parties.

Our biodefense business has generated net income for
each of the last three fiscal years. However, in our com-
mercial business, we have not received approval to market
any of our product candidates and, to date, have received
no product sales revenues. Our only sources of revenue in
our commercial business are development grant funding
and an upfront license fee and additional payments for
development work under a collaboration agreement with
Sanofi Pasteur. As a result, our commercial business has
incurred a net loss for each of the last three fiscal years.

Biodefense
In our biodefense business, we develop and commercial-
ize immunobiotics for use against biological agents that
are potential weapons of bioterrorism or biowarfare. Our
marketed product, Biothrax, is the only vaccine approved
by the FDA for the prevention of anthrax infection. the U.S.
Department of Defense (DoD) and the U.S. Department of
Health and Human Services (HHS) have been the princi-
pal customers for Biothrax. In addition, we have supplied
small amounts of Biothrax directly to several foreign gov-
ernments. Since 1998, we have been a party to two sup-
ply agreements for Biothrax with the DoD. Pursuant to
these contracts, we have supplied over nine million doses
of Biothrax through December 2006 for immunization of
military personnel. Our most recent contract with the DoD,
which was amended in October 2006, provides for the sup-
ply of a minimum of approximately 1.5 million doses of
Biothrax to the DoD through September 2007. We deliv-
ered to the DoD approximately 480,000 of these doses
in December 2006, and we expect to deliver the balance
by September 2007. the DoD’s right to order additional
doses of Biothrax under this contract expired in February
2007. Since May 2005, we have supplied 10 million doses
of Biothrax to HHS for inclusion in the Strategic National
Stockpile (SNS). In May 2005, we entered into an agree-
ment to supply five million doses of Biothrax for the stra-
tegic national stockpile, or SNS, for a fixed price of $123
million. We completed delivery of all five million doses by
February 2006, seven months earlier than required. In May
2006, we entered into a contract modification with HHS for
the delivery of an additional five million doses of Biothrax
for the SNS by May 2007 for a fixed price of $120 million.
We delivered approximately four million of those doses
in 2006 and the balance in February 2007, more than two
months earlier than required.

2006 Annual Report

We have derived and expect for the foreseeable future to
continue to derive substantially all of our revenue from
sales of Biothrax. Our total revenues from Biothrax sales
were $81.0 million in 2004, $127.3 million in 2005 and
$148.0 million in 2006. We are focused on increasing sales
of Biothrax to U.S. government customers, expanding the
market for Biothrax to other customers and pursuing label
expansions and improvements for Biothrax.

In addition to Biothrax, our biodefense product portfolio
includes three biodefense product candidates in preclinical
development. We are independently developing an anthrax
immune globulin candidate, in part with funding from the
National Institute of Allergy and Infectious Disease (NIAID).
We are collaborating with the U.K. Health Protection
Agency (HPA) in the development of a recombinant bivalent
botulinum vaccine candidate and a new botulinum toxoid
vaccine that we plan to use as the basis for a botulinum
immune globulin candidate. We are actively pursuing addi-
tional government sponsored development grants and
working with various government agencies to encourage
them to conduct studies relating to Biothrax and our other
biodefense product candidates.

Commercial
In our commercial business, we are developing a range
of immunobiotic product candidates that are designed to
address significant unmet or underserved public health
needs caused by infectious diseases. Our commercial
product portfolio includes a typhoid vaccine candidate and
a hepatitis B therapeutic vaccine candidate, both of which
are in Phase II clinical development, a group B streptococ-
cus vaccine candidate in Phase I clinical development and
a chlamydia vaccine candidate and a meningitis B vaccine
candidate, both of which are in preclinical development. In
May 2006, we entered into a license and co-development
agreement with Sanofi Pasteur under which we granted
Sanofi Pasteur an exclusive, worldwide license under our
proprietary technology to develop and commercialize a
meningitis B vaccine candidate.

We plan to encourage government entities and non-
government and philanthropic organizations to provide
development funding for, or to conduct clinical studies
of, one or more of our commercial product candidates.
For example, the Wellcome trust provided funding for our
Phase I clinical trial of our typhoid vaccine candidate in
Vietnam and is providing funding for our Phase II clinical
trial of this vaccine candidate in Vietnam. In addition, the
NIAID agreed to sponsor Phase I clinical development of
our group B streptococcus vaccine candidate.

Manufacturing Infrastructure
to augment our existing manufacturing capabilities, we are
constructing a new 50,000 square foot manufacturing facil-
ity on our lansing, Michigan campus. We expect the con-
struction of the facility to cost approximately $75 million,
including approximately $55 million for the building and
associated capital equipment, with the balance related to
validation and qualification activities required for regulatory
approval and initiation of manufacturing. We incurred costs
of approximately $37 million for these purposes through
2006. We substantially completed construction of this facil-
ity in 2006, and expect to conduct installation, validation and
qualification activities required for regulatory approval dur-
ing 2007 and 2008. We are constructing this new facility as
a large scale manufacturing plant that we can use to pro-
duce multiple vaccine products, subject to complying with
appropriate change-over procedures. We anticipate that we
will initiate large scale manufacturing of Biothrax for com-
mercial sale at the new facility in 2008. Our plans assume
that the FDA will not require us to complete a human bridg-
ing trial demonstrating that Biothrax manufactured at our
new facility is bioequivalent to Biothrax manufactured at
our existing facility. We currently expect to rely on non-
clinical studies for these purposes. However, the FDA has
not approved our plan to rely on non-clinical studies with-
out conducting a human bridging trial and may not do so.
If the FDA requires us to conduct a human bridging trial,
the initiation of large scale manufacturing of Biothrax for
commercial sale at our new facility will be delayed and we
will incur additional unanticipated costs.

We also own two buildings in Frederick, Maryland that are
available to support our future manufacturing requirements.
We incurred costs of approximately $1 million related to
initial engineering design and preliminary utility build out
of these facilities during 2006. Because we are in the pre-
liminary planning stages of our Frederick build out, we can-
not reasonably estimate the timing and costs that will be
necessary to complete this project. If we proceed with this
project, we expect the costs to be substantial and to likely
require external sources of funds to finance the project. We
may elect to lease all or a substantial portion of one of these
facilities to third parties.

CrITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and
results of operations are based on our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. the prep-
aration of these financial statements requires us to make
estimates and judgments that affect the reported amounts

Emergent BioSolutions Inc.

of assets, liabilities and expenses. On an ongoing basis,
we evaluate our estimates and judgments, including those
related to accrued expenses, fair valuation of stock related
to stock-based compensation and income taxes. We based
our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the cir-
cumstances, 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 assump-
tions or conditions.

We believe the following critical accounting policies affect
our more significant judgments and estimates used in the
preparation of our financial statements.

revenue recognition
We recognize revenues from product sales in accordance
with Staff Accounting Bulletin No. 104, Revenue Recognition,
or SAB 104. SAB 104 requires recognition of revenues from
product sales that require no continuing performance on
our part if four basic criteria have been met:

• there is persuasive evidence of an arrangement;
• delivery has occurred or title has passed to our cus-

tomer based on contract terms;

• the fee is fixed and determinable and no further obliga-

tion exists; and

• collectibility is reasonably assured.

We cannot sell Biothrax to our customers without written
FDA approval for each lot that we manufacture. As part of
the FDA review process, we submit a detailed lot protocol
for each Biothrax lot that we produce for sale. We also are
required to submit product samples to the FDA for testing.
Although we generally submit lot protocols and product
samples promptly following the satisfactory completion
of internal testing, we are permitted to submit product
samples in advance of the lot protocols. the length of the
FDA review process is approximately four to six weeks.
However, individual lots may be released sooner or later
depending on factors such as reviewer questions, license
supplement approval, reviewer availability and whether our
internal testing of product samples is completed before or
concurrently with FDA testing. During the period covered
by our financial statements included in this annual report,
the FDA has not denied the sale of any Biothrax lots that
we have submitted for approval.

We have generated Biothrax sales revenues under U.S.
government contracts with the DoD and HHS. Under our
DoD contract, we invoice the DoD for progress payments
upon reaching contractually specified stages in the manu-

facture of Biothrax. We record as deferred revenue the full
amount of each progress payment invoice that we submit
to the DoD. title to the product passes to the DoD upon
submission of the first invoice. the earnings process is
complete upon FDA release of the product for sale and
distribution. Following FDA release of the product, we seg-
regate the product for later shipment and recognize as
period revenue all deferred revenue related to the released
product in accordance with the “bill and hold” sale require-
ments under SAB 104. At that time, we also invoice the DoD
for the final progress payment and recognize the amount of
that invoice as period revenue. Our contract with HHS does
not provide for progress payments. We invoice HHS and
recognize the related revenue upon delivery of the product
to the government carrier, at which time title to the prod-
uct passes to HHS. We do not record allowances for sales
returns, rebates or special promotional programs for sales
of Biothrax or provisions for sales made in prior periods.

Under the collaboration agreement that we entered into
with Sanofi Pasteur in May 2006 for our meningitis B vac-
cine candidate, we received an upfront license fee and
are entitled to additional payments for development work
under the collaboration and upon achieving contractually
defined development and commercialization milestones.
We evaluate the various components of a collaboration
in accordance with Emerging Issues task Force, or EItF,
Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables, or EItF No. 00-21, which addresses
whether, for revenue recognition purposes, there is one
or several elements in an arrangement. We concluded
that under EItF No. 00-21, the upfront license fee, the
development work and the milestone payments under
our agreement with Sanofi Pasteur should be accounted
for as a single unit of accounting. We recognize amounts
received under this agreement over the estimated devel-
opment period as we perform services. We recorded the
amount of the upfront license fee as deferred revenue. We
are recognizing this revenue over the estimated develop-
ment period under the contract, currently estimated at
seven years, as adjusted from time to time for any delays
or acceleration in the development of the product candi-
date. Under the collaboration agreement, we are entitled
to payments up to specified levels for development work
we perform for Sanofi Pasteur. We invoice Sanofi Pasteur
in advance of each quarter for the estimated work to occur
in the upcoming quarter. We record the invoice amount as
deferred revenue. As services are completed, we recognize
the amount of the related deferred revenue as period rev-
enue. Under the collaboration agreement, we also will be
entitled to royalty payments on any future net sales of this
product candidate.

2006 Annual Report

From time to time, we are awarded reimbursement con-
tracts for services and development grant contracts with
government entities and non-government and philan-
thropic organizations. Under these contracts, we typically
are reimbursed for our costs in connection with specific
development activities and may also be entitled to addi-
tional fees. We record the reimbursement of our costs and
any associated fees as contract and grant revenue and the
associated costs as research and development expense.
We issue invoices under these contracts after we incur the
reimbursable costs. We recognize revenue upon invoicing
the sponsoring organization.

Accounts receivable
Accounts receivable are stated at invoice amounts and
consist primarily of amounts due from the DoD and HHS
as well as amounts due under reimbursement contracts
with other government entities and non-government and
philanthropic organizations. Because the prior collection
history for receivables from these entities indicate that col-
lection 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 manufac-
turing process through the completion of manufacturing,
labeling and packaging.

Accrued Expenses
As part of the process of preparing financial statements, we
are required to estimate accrued expenses. this process
involves identifying services that have been performed on
our behalf and estimating the level of service performed
and the associated cost incurred for such service where we
have not yet been invoiced or otherwise notified of actual
cost. We make these estimates as of each balance sheet
date in our financial statements. Examples of estimated
accrued expenses include:

• fees payable to contract research organizations in con-

junction with clinical trials;

• fees payable to third party manufacturers in conjunc-
tion with the production of clinical trial materials; and

• professional service fees.

In accruing service fees, we estimate the time period over
which services were provided and the level of effort in each
period. If the actual timing of the provision of services or
the level of effort varies from the estimate, we will adjust
the accrual accordingly. the majority of our service provid-
ers invoice us monthly in arrears for services performed. In
the event that we do not identify costs that have begun to
be incurred or we underestimate or overestimate the level of
services performed or the costs of such services, our actual
expenses could differ from such estimates. the date on which
some services commence, the level of services performed on
or before a given date and the cost of such services are often
subjective determinations. We make judgments based upon
the facts and circumstances known to us.

Purchased In-process research and Development
We account for purchased in-process research and develop-
ment in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 2, Accounting for Research and
Development Costs along with Financial Accounting Standards
Board, or FASB, Interpretation No. 4, Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by
the Purchase Method.

Under these standards, we are required to determine
whether the technology relating to a particular research
and development project we acquire has an alterna-
tive future use. If we determine that the technology has
no alternative future use, we expense the value of the
research and development project not directly attributed
to fixed assets. Otherwise, we capitalize the value of the
research and development project not attributable to fixed
assets as an intangible asset and conduct an impairment
analysis at least annually. In connection with our acquisi-
tion of Microscience and our acquisition of substantially all
of the assets of Antex and ViVacs, we allocated the value
of the purchase consideration to current assets, cur-
rent liabilities, fixed assets and development programs.
Because we determined that the development programs
at Microscience, Antex and ViVacs had no future alternative
use, we charged the value attributable to the development
programs as in-process research and development. For the
Microscience acquisition, which was a share exchange, our
board of directors determined the fair value of our shares
issued in the exchange for financial statement purposes.
For the Antex and ViVacs acquisitions, which were cash
transactions, no fair value determination was necessary.

Emergent BioSolutions Inc.

Stock-based Compensation
through December 31, 2005, in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation, we
elected to account for our employee stock-based com-
pensation using the intrinsic value method in accordance
with Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, and related inter-
pretations, or APB No. 25, rather than the alternative fair
value accounting method provided for under SFAS No.
123. Accordingly, we did not record compensation expense
on employee stock options granted in fixed amounts and
with fixed exercise prices when the exercise prices of
the options were equal to the fair value of the underly-
ing common stock on the date of grant. Pro forma infor-
mation regarding net loss and loss per share is required
by SFAS No. 123 and has been determined as if we had
accounted for employee stock option grants under the fair
value method prescribed by that statement. We provide
this pro forma disclosure in our financial statements. We
account for transactions in which services are received in
exchange for equity instruments based on the fair value of
the services received from non-employees or of the equity
instruments issued, whichever is more reliably measured,
in accordance with SFAS No. 123 and EItF Issue No. 96-18,
Accounting for Equity Instruments that Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, or EItF No. 96-18. In accordance with
EItF No. 96-18, we periodically remeasure stock-based
compensation for options granted to non-employees as
the underlying options vest. As of December 31, 2006, we
had no outstanding options that had been granted to non-
employees other than our directors.

We adopted SFAS No. 123 (revised 2004), Share-Based
Payment, or SFAS No. 123(R), on January 1, 2006 using the
modified prospective method. SFAS No. 123(R) requires
all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their estimated fair values. Pro forma
disclosure is no longer an alternative. We will continue to
value our share-based payment transactions using a Black-
Scholes valuation model. Under the modified prospective
method, we recognize compensation cost in our financial
statements for all awards granted after January 1, 2006 and
for all awards outstanding as of January 1, 2006 for which
the requisite service had not been rendered as of the date
of adoption. Prior period operating results have not been
restated. We measure the amount of compensation cost
based on the fair value of the underlying common stock on
the date of grant. We recognize compensation cost over the
period that an employee provides service in exchange for
the award.

As a result of our adoption of SFAS No. 123(R) effective
January 1, 2006, we recorded stock-based compensa-
tion expense of $513,000 in 2006 related to stock options
that were outstanding and had not completely vested as of
January 1, 2006. During 2006, we granted 1,289,433 stock
options. We recorded additional stock-based compensation
expense of $210,000 related to these options in 2006. Both
basic and diluted net income per share for 2006 are $0.02
less than if we had continued to account for stock-based
compensation under APB No. 25. the effect of adopting
SFAS No. 123(R) on net loss and net loss per share is not
necessarily representative of the effects in future years
due to, among other things, the vesting period of the stock
options and the fair value of additional stock option grants
in future years. Based on options granted to employees as
of December 31, 2006, total compensation expense not yet
recognized related to unvested options is approximately
$3.1 million, after tax. We expect to recognize that expense
over a weighted average period of 2.9 years. Based on
options granted to employees as of December 31, 2006, we
expect to recognize amortization of stock-based compen-
sation, after tax, of $1.3 million in 2007, $1.0 million in 2008
and $815,000 in 2009.

Income Taxes
We account for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes. Under the asset and lia-
bility method of SFAS No. 109, deferred tax assets and lia-
bilities are determined based on the differences between
the financial reporting and the tax bases 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 in the balance sheet. Our deferred tax assets
include the unamortized portion of in-process research
and development expenses, the anticipated future ben-
efit of the net operating losses that we have incurred and
other timing differences between the financial report-
ing basis of assets and liabilities. We have historically
incurred net operating losses for income tax purposes in
some states and in some foreign jurisdictions, primar-
ily 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 operat-
ing losses as a result of ownership changes. In particular,
we believe that these rules will significantly limit our abil-
ity to use net operating losses generated by Microscience
and Antex prior to our acquisition of Microscience in June
2005 and our acquisition of substantially all of the assets
of Antex in May 2003.

2006 Annual Report

We review our deferred tax assets on a quarterly basis to
assess our ability to realize the benefit from these deferred
tax assets. If we determine that it is more likely than not
that the amount of our expected future taxable income will
not be sufficient to allow us to fully utilize our deferred tax
assets, we increase our valuation allowance against deferred
tax assets by recording a provision for income taxes on our
income statement, which reduces net income, or increases
net loss, for that period and reduces our deferred tax assets
on our balance sheet. If we determine that the amount of our
expected future taxable income will allow us to utilize net
operating losses in excess of our net deferred tax assets, we
reduce our valuation allowance by recording a benefit from
income taxes on our income statement, which increases net
income, or reduces net loss, for that period and increases
our deferred tax assets on our balance sheet.

FINANCIAL OPErATIONS OvErvIEw

revenues
We have generated substantially all of our revenues from
sales of Biothrax. We delivered approximately 5.2 mil-
lion and 6.1 million total doses of Biothrax in 2005 and
2006, respectively, representing 97% of our total revenues
in both years. the DoD and HHS have been the principal
customers for Biothrax. We also have had limited sales
of Biothrax to foreign governments and private industry.
In addition, we periodically realize revenues from grants
from government entities and non-government and phil-
anthropic organizations and from licensing fees, milestone
payments and development reimbursement payments.
these items accounted for 3% of our total revenues in
each of 2005 and 2006. If our ongoing development efforts
are successful, we would expect to generate revenues
from sales of additional products and milestone payments,
development payments and royalties on sales of products
that we license to third parties.

In May 2005, we entered into an agreement to supply five
million doses of Biothrax to HHS for the SNS for a fixed
price of $123 million. We completed delivery of all five mil-
lion doses by February 2006, seven months earlier than
required. In May 2006, we entered into a contract modifica-
tion with HHS for the delivery of an additional five million
doses of Biothrax for the SNS by May 2007 for a fixed price
of $120 million. We delivered approximately four million
of these doses in December 2006 and the balance in February
2007, more than two months earlier than required.

In January 2004, we entered into our current contract
with the DoD for the delivery of a minimum number of
doses of Biothrax over one base contract year plus two

option periods for a minimum fixed price of approximately
$91 million. Under the original terms of this contract,
we were required to deliver a minimum of approximately
3.8 million total doses through September 2006. We deliv-
ered approximately 4.9 million total doses under this con-
tract from 2004 through September 30, 2006 pursuant to
DoD purchase orders. Our current contract with the DoD
was amended to provide for the supply of a minimum of
approximately 1.5 million additional doses of Biothrax
to the DoD through September 2007. We delivered to the
DoD approximately 480,000 of these doses in December
2006, and we expect to deliver the balance by September
2007. We have invoiced the DoD, as contemplated under
this contract, for progress payments as doses of Biothrax
are manufactured for sale to the DoD. In accordance with
our revenue recognition policy, we record deferred revenue
for invoiced amounts until the FDA releases the product
for sale and delivery. As of December 31, 2006, we had
no deferred revenue for DoD sales. In April 2006, the DoD
issued a notice that it intends to negotiate a sole source
fixed price contract for the purchase of up to an additional
11 million doses of Biothrax over one base year plus four
option years. the DoD has not issued a formal request for
proposals for such a contract and we have not yet entered
into an agreement with the DoD for this procurement.

In May 2006, we entered into a collaboration agreement
with Sanofi Pasteur relating to the development and com-
mercialization of our meningitis B vaccine candidate and
received a $3.8 million upfront license fee. this agreement
also provides for a series of milestone payments upon the
achievement of specified development and commercializa-
tion objectives, payments for development work under the
collaboration and royalties on net sales of this product. We
deferred the upfront license fee, milestone payments and
development reimbursement payments under this agree-
ment, and will record revenue in accordance with our reve-
nue recognition policies.

Our revenue, operating results and profitability have varied,
and we expect that they will continue to vary, on a quar-
terly basis primarily because of the timing of our fulfilling
orders for Biothrax. We expect contracts and grant reve-
nues to increase in 2007 compared to 2006 as we receive
reimbursement for development expenses under our men-
ingitis B collaboration with Sanofi Pasteur, funding from the
Wellcome trust for costs associated with our completed
Phase I clinical trial and initiated Phase II clinical trial of
our typhoid vaccine candidate in Vietnam and funding from
NIAID for costs associated with our animal efficacy studies
for our anthrax immune globulin candidate.

Emergent BioSolutions Inc.

Cost of Product Sales
the primary expense that we incur to deliver Biothrax to
our customers is manufacturing costs, which are primar-
ily fixed costs. these fixed manufacturing costs consist of
attributable facilities, utilities and salaries and personnel
related expenses for indirect manufacturing support staff.
Variable manufacturing costs for Biothrax consist primar-
ily of costs for materials, direct labor and contract filling
operations. In 2005, we improved manufacturing efficien-
cies for Biothrax. As a result, the cost of product sales per
dose of Biothrax decreased in 2006 compared to 2005, as
well as in 2005 compared to 2004. We do not expect further
significant improvements in manufacturing efficiencies for
Biothrax until we complete our new manufacturing facility
in lansing, Michigan. We expect our manufacturing costs to
remain relatively stable during 2007.

We determine the cost of product sales for doses sold for a
period based on the average manufacturing cost per dose
for that period. We calculate the average manufacturing
cost per dose by dividing the actual costs of manufacturing
in the applicable period by the number of units produced in
that period. In addition to the fixed and variable manufac-
turing costs described above, the average manufacturing
cost per dose depends on the efficiency of the manufactur-
ing process, utilization of available manufacturing capacity
and the production yield for any period.

research and Development Expenses
We expense research and development costs as incurred.
Our research and development expenses consist primar-
ily 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 evalu-
ating data from our clinical trials;

• costs of contract manufacturing services;
• 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 cost of facilities
and the legal costs of pursuing patent protection of our
intellectual property.

the successful development of our product candidates is
highly uncertain. We believe that significant investment in
product development is a competitive necessity and plan to
continue these investments in order to be in a position to
realize the potential of our product candidates. We cannot
reasonably estimate or know the nature, timing and pro-
jected costs of the efforts that will be necessary to com-
plete the remainder of the development for our product

candidates, or the period, if any, in which material net cash
inflows may commence from any of our product candidates.
this is due to the numerous risks and uncertainties associ-
ated with developing drugs, including the uncertainty of:

• the scope, rate of progress and expense of our clinical
trials and other research and development activities;
• our ability to obtain adequate supplies of our prod-
uct candidates required for later stage clinical trials,
including from third party manufacturers;

• the potential benefits of our product candidates over

other products;

• our ability to market, commercialize and achieve mar-
ket acceptance for any of our product candidates that
we are developing or may develop in the future;

• future clinical trial results;
• the terms and timing of regulatory approvals; and
• the expense of filing, prosecuting, defending and
enforcing any patent claims and other intellectual
property rights.

A change in the outcome of any of these variables with
respect to the development of a product candidate could
mean a significant change in the costs and timing associ-
ated with the development of that product candidate.

We expect that development spending will increase for all
of our biodefense product candidates as our product devel-
opment activities continue and we prepare for regulatory
submissions and other regulatory activities. We expect
our development expenses in our commercial business to
increase in connection with our ongoing activities, particu-
larly as we conduct additional and later stage clinical trials
for our product candidates.

We expect that the magnitude of any increase in our research
and development spending will be dependent upon such fac-
tors as the results from our ongoing preclinical studies and
clinical trials, the size, structure and duration of any follow
on clinical program that we may initiate, cost associated with
manufacturing our product candidates on a large scale basis
for later stage clinical trials, our ability to use data generated
by government agencies, such as the ongoing Centers for
Disease Control and Prevention (CDC) studies with Biothrax,
and our ability to rely upon and utilize clinical and non-clini-
cal data, such as the data generated by CDC from use of
the pentavalent botulinum toxoid vaccine previously manu-
factured by the State of Michigan. Furthermore, if the FDA
or other regulatory authority were to require us to conduct
clinical trials beyond those which we currently anticipate will
be required for the completion of clinical development of a
product candidate or if we experience significant delays in
enrollment in any of our clinical trials, we could be required
to expend significant additional financial resources and time
on the completion of clinical development.

2006 Annual Report

Selling, General and Administrative Expenses
Selling, general and administrative expenses consist pri-
marily of salaries and other related costs for personnel
serving the executive, sales and marketing, business devel-
opment, finance, accounting, information technology, legal
and human resource functions. Other costs include facil-
ity costs not otherwise included in cost of product sales or
research and development expense and professional fees
for legal and accounting services. We expect that our gen-
eral and administrative expenses will increase as we add
personnel to support the increased scale of our operations
and become subject to the reporting obligations applica-
ble to public companies. Our general and administrative
expenses have increased as a result of preparing for our
initial public offering and subsequently operating as a pub-
lic company and supporting the overall growth of the com-
pany. We currently market and sell Biothrax directly to the
DoD and 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 principally of inter-
est income and interest expense. We earn interest on our
cash, cash equivalents and short-term investments, and
we incur interest expense on our indebtedness. Our inter-
est income may increase in future periods as a result of the
investment of the net proceeds from our initial public offer-
ing. Our net interest expense will increase in future periods
as compared to prior periods as a result of the mortgage
loan that we entered into in April 2006 and the term loan
that we entered into in August 2006, as well as any borrow-
ings under our revolving lines of credit. In addition, some
of our existing debt arrangements provide for increasing
amortization of principal payments in future periods. See
“liquidity and Capital Resources—Debt Financing” for
additional information.

rESULTS OF OPErATIONS

YEAr ENDED DECEMBEr 31, 2006 COMPArED TO
YEAr ENDED DECEMBEr 31, 2005

revenues
Product sales revenues increased by $20.7 million, or 16%,
to $148.0 million for 2006 from $127.3 million for 2005. this
increase in product sales revenues was primarily due to a
18% increase in the number of doses of Biothrax delivered.
Product sales revenues in 2006 consisted of Biothrax sales
to HHS of $109.8 million, sales to the DoD of $37.4 million
and aggregate international and other sales of $763,000.
Product sales revenues in 2005 consisted of Biothrax sales

to HHS of $111.2 million, sales to the DoD of $14.5 million
and aggregate international and other sales of $1.6 million.

Contracts and grant revenues increased by $1.3 mil-
lion, or 39%, to $4.7 million in 2006 from $3.4 million in
2005. Contracts and grant revenues for 2006 consisted of
$3.2 million in upfront and development program revenue
from the Sanofi Pasteur collaboration and $1.5 million in
grant revenue from the Wellcome trust. Contracts and
grant revenues for 2005 resulted from reimbursement
from the DoD for expenses related to production devel-
opment and supply chain management improvements for
Biothrax incurred in prior periods, and for additional work
that we performed on a project basis for the DoD’s Defense
Advanced Research Projects Agency, or DARPA, to evaluate
a new vaccine adjuvant for Biothrax.

Cost of Product Sales
Cost of product sales decreased by $7.5 million, or 24%,
to $24.1 million for 2006 from $31.6 million for 2005. this
decrease was attributable to improved utilization of our
manufacturing capacity for Biothrax, partially offset by an
increase of approximately 900,000 Biothrax doses deliv-
ered. Manufacturing efficiencies resulted in a cost savings
of approximately $13.1 million. the increase in the num-
ber of doses delivered resulted in an increase in costs of
approximately $5.6 million.

research and Development Expenses
Research and development expenses increased by $27.1 mil-
lion to $45.5 million for 2006 from $18.4 million for 2005.
this increase reflects increased expenses of $11.9 million
in the biodefense segment and $15.9 million in the com-
mercial segment, offset by a reduction of $633,000 in other
research and development expense.

the increase in biodefense spending was attributable to
increased efforts on all our biodefense programs as we
completed various studies and began subsequent studies
and trials. this increase primarily reflects additional per-
sonnel and contract service costs. the increase in spending
for Biothrax enhancements is related to preparing for ani-
mal efficacy studies to support applications for marketing
approval of these enhancements, which we expect to sub-
mit to the FDA in late 2008 or early 2009. the increase in
spending for immune globulin development related primar-
ily to costs associated with our plasma donor stimulation
program for our anthrax immune globulin candidate. the
increase in spending for the recombinant botulinum vac-
cine program, which is in preclinical development, resulted
from advancing this program to the process development
stage and the manufacture of clinical trial material. the
increase in spending for the next generation anthrax vaccine
program, which has product candidates in preclinical and

Emergent BioSolutions Inc.

Phase I clinical development, resulted from feasibility stud-
ies and formulation development of product candidates.

Our principal research and development expenses for 2005
and 2006 are shown in the following table:

the increase in commercial spending was mainly attrib-
utable to spending on the commercial products listed in
the table below following our acquisition of Microscience
in June 2005. this increase primarily reflects additional
personnel and contract service costs. Research and devel-
opment spending by Microscience prior to our acquisition
of Microscience in June 2005 is not included in our results
for 2005. the spending for our typhoid vaccine candidate
resulted from ongoing work for the Phase I clinical trial
in Vietnam that we recently completed and preparing for
our Phase II clinical trial in Vietnam that we initiated in
the fourth quarter of 2006. the spending in 2006 for our
hepatitis B therapeutic vaccine candidate resulted from
preparing for our Phase II clinical trial, which we received
regulatory clearance to commence in the fourth quarter of
2006. the spending in 2006 for our group B streptococcus
vaccine candidate resulted from costs associated with our
analysis of results from the Phase I clinical trial that we
recently completed for one of the protein components of
the vaccine candidate and preparation for Phase I clinical
trials for two of the protein components of the vaccine can-
didate. In December 2006, we signed an agreement with
the NIAID under which the NIAID has agreed to sponsor
a Phase I clinical trial of a each of the two components
seperately and the two-proteins in combination in healthy
human volunteers. Both our chlamydia vaccine and menin-
gitis B vaccine candidates are in preclinical development.

the decrease in other research and development expenses
was primarily attributable to our discontinuation of preclini-
cal programs that we acquired from Antex and determined
not to pursue at that time.

(in thousands)

Biodefense:

Biothrax enhancements
Immune globulin development
Recombinant bivalent
botulinum vaccine
Next generation anthrax vaccine
total biodefense

Commercial:

typhoid vaccine
Hepatitis B therapeutic vaccine
Group B streptococcus vaccine
Chlamydia vaccine
Meningitis B vaccine
total commercial
Other
Total

Year ended
December 31,

2005

2006

$ 2,883
5,309

$ 7,232
11,289

1,708
427
10,327

1,477
1,884
1,032
837
1,334
6,564
1,490
$18,381

2,610
1,088
22,219

9,642
4,058
3,759
1,991
2,975
22,425
857
$45,501

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
$1.8 million, or 4%, to $44.6 million for 2006 from $42.8 mil-
lion for 2005. Selling, general and administrative expenses
related to our biodefense segment decreased by $508,000,
or 1%, to $35.0 million for 2006 from $35.5 million for
2005. Selling, general and administrative expenses related
to our commercial segment increased by $2.3 million, or
32%, to $9.6 million for 2006 from $7.3 million for 2005.
the increase in the commercial segment was primarily
attributable to an increase in general and administrative
expenses of approximately $1.0 million resulting from the
addition of personnel and increased legal and other pro-
fessional services for our headquarters organization, and
an increase of $937,000 related to the addition of person-
nel for Emergent Product Development UK.

2006 Annual Report

Purchased In-process research and Development
In June 2005, we recorded a non-cash charge for purchased
in-process research and development of $26.6 million asso-
ciated with our acquisition of Microscience. We valued the
3,636,801 shares of class A common stock that we issued in
the acquisition at $28.2 million after the inclusion of acqui-
sition costs. Of this amount, we identified $1.4 million as
current assets, $0.9 million as fixed assets, $0.7 million as
current liabilities and $26.6 million as the value attribut-
able to development programs. Because we determined
that the development programs had no future alternative
use, we charged the value attributable to the development
programs as purchased in-process research and develop-
ment. We are amortizing this charge for tax purposes over
15 years.

In July 2006, we recorded a non-cash charge for purchased
in-process research and development of $477,000 associ-
ated with our acquisition of ViVacs. We paid total purchase
consideration of $250,000 and assumed a net deficit of lia-
bilities in excess of assets of $47,000. We valued the acqui-
sition at $430,000 after the inclusion of acquisition costs.
Of this amount, we identified $153,000 as current assets,
$97,000 as fixed assets, $297,000 as current liabilities and
$477,000 as the value attributable to development pro-
grams and technology. Because we determined that the
development programs and technology had no future alter-
native use, we charged the value attributable to the devel-
opment programs and technology as purchased in-process
research and development. We are amortizing this charge
for tax purposes over 15 years.

Litigation Settlement
In June 2005, we recorded a gain of $10.0 million relating
to a settlement of a litigation matter that we initiated to
resolve a contract and intellectual property dispute. there
were no material settlements during 2006.

Total Other Income (Expense)
total other expense decreased by $214,000 to $13,000 for
2006 from $227,000 for 2005. this decrease resulted pri-
marily from an increase in interest income of $361,000 as
a result of higher investment return on increased aver-
age cash balances, including the net proceeds of our
initial public offering, and an increase in other income
of $238,000, offset by an increase in interest expense
of $385,000 related primarily to the mortgage loan we
entered into in April 2006 and the term loan we entered
into in August 2006.

Income Taxes
Provision for income taxes increased by $9.9 to $15.2 mil-
lion for 2006 from $5.3 million for 2005. the provision for
income taxes for 2006 resulted primarily from our income
before provision for income taxes of $38.0 million and an
effective annual tax rate of 40%. the provision for income
taxes for 2005 resulted primarily from our income before
provision for income taxes of $21.1 million and an effective
annual tax rate of 25%. the increase in the effective annual
tax rate is due primarily to the impact of foreign and state
net operating losses and an increase in permanent differ-
ences, including incentive stock options. the provision for
income taxes also reflects research and development tax
credits of $759,000 for 2006 and $474,000 for 2005.

YEAr ENDED DECEMBEr 31, 2005 COMPArED TO
YEAr ENDED DECEMBEr 31, 2004

revenues
Product sales revenues increased by $46.3 million, or 57%,
to $127.3 million for 2005 from $81.0 million for 2004. this
increase in product sales revenues was primarily due to a
52% increase in the number of doses delivered. Product
sales revenues in 2005 consisted of Biothrax sales to HHS
of $111.2 million, sales to the DoD of $14.5 million and
aggregate international sales of $1.6 million. Product sales
revenues in 2004 consisted of Biothrax sales to the DoD of
$80.6 million and international sales of $360,000.

Contracts and grant revenues increased by $937,000, or
38%, to $3.4 million in 2005 from $2.5 million in 2004 pri-
marily as a result of additional work that we performed on a
project basis for DARPA to evaluate a new vaccine adjuvant
for Biothrax.

Cost of Product Sales
Cost of product sales increased by $1.5 million, or 5%, to
$31.6 million for 2005 from $30.1 million for 2004. this
increase was attributable to the delivery of 1.8 million addi-
tional doses of Biothrax in 2005 and a decrease in produc-
tion yield, resulting in a higher average manufacturing cost
per dose in 2005, offset by improved utilization of our man-
ufacturing capacity for Biothrax as a result of extending
the hours of operation for our manufacturing facility. the
increase in the number of doses delivered combined with
the decrease in production yield resulted in additional costs
of $6.6 million. Manufacturing efficiencies resulted in a cost
savings of $5.1 million.

Emergent BioSolutions Inc.

research and Development Expenses
Research and development expenses increased by $8.3 mil-
lion, or 82%, to $18.4 million for 2005 from $10.1 million
for 2004. this increase reflects increased expenses of
$4.0 million in the biodefense segment and $5.8 million in
the commercial segment, offset by a reduction of $1.6 mil-
lion in other research and development expenses.

the increase in spending in the biodefense segment resulted
from costs associated with our plasma collection program
for our anthrax immune globulin candidate, process devel-
opment related to our recombinant botulinum vaccine can-
didate and evaluation of third party technology related to
our next generation anthrax vaccine program for potential
acquisition or in license, offset by decreased spending on
Biothrax enhancements. In 2004, the immune globulin pro-
gram was in initial development and we had not yet begun
work on the recombinant botulinum vaccine and next gen-
eration anthrax vaccine candidates. the decrease in spend-
ing on Biothrax enhancements resulted from substantial
completion during 2004 of research regarding manufactur-
ing process development for Biothrax to improve the stabil-
ity and consistency of production lots.

the increase in spending in the commercial segment was
attributable to spending on the commercial programs listed
in the table below following our acquisition of Microscience
in June 2005. Research and development spending by
Microscience is not included in our results prior to the
acquisition date. the commercial spending in 2005 resulted
from the Phase I clinical trial in Vietnam for our typhoid
vaccine candidate, preparation for a planned Phase II clini-
cal trial for our hepatitis B therapeutic vaccine candidate,
including the manufacture of clinical trial material, prepa-
ration for one of three planned Phase I clinical trials related
to one of the protein components of our group B strepto-
coccus vaccine candidate and preclinical work for our chla-
mydia vaccine and meningitis B vaccine candidates.

the decrease in spending on other research and devel-
opment expenses was attributable to our discontinuation
of preclinical programs that we acquired from Antex and
determined not to pursue at that time.

Our principal research and development expenses for 2004
and 2005 are shown in the following table:

(in thousands)

Biodefense:

Biothrax enhancements
Immune globulin development
Recombinant bivalent
botulinum vaccine
Next generation anthrax vaccine
total biodefense

Commercial:

typhoid vaccine
Hepatitis B therapeutic vaccine
Group B streptococcus vaccine
Chlamydia vaccine
Meningitis B vaccine
total commercial
Other
Total

Year ended
December 31,

2004

2005

$ 5,929
350

$ 2,883
5,309

—
—
6,279

—
—
—
1,136
—
1,136
2,702
$10,117

1,708
427
10,327

1,477
1,884
1,032
837
1,334
6,564
1,490
$18,381

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
by $12.5 million, or 41%, to $42.8 million for 2005 from
$30.3 million for 2004. Selling, general and administrative
expenses related to our biodefense segment increased by
$6.4 million to $35.5 million for 2005 from $29.0 million
for 2004. Selling, general and administrative expenses
related to our commercial segment increased by $6.0 mil-
lion to $7.3 million for 2005 from $1.3 million for 2004.
the increase in the biodefense segment was attributable
to an increase in general and administrative expenses of
$5.5 million resulting from additional personnel and pro-
fessional service providers for our headquarters organiza-
tion who devoted time to the biodefense segment and an
increase in sales and marketing expenses of $1.0 million
resulting from the addition of sales personnel to investi-
gate potential other markets for Biothrax. the increase in
the commercial segment was attributable to an increase in
general and administrative expenses of $5.3 million result-
ing from the addition of personnel for Emergent Product
Development UK and legal expenses associated with reor-
ganizing our corporate structure following our acquisition
of Microscience in June 2005.

2006 Annual Report

Purchased In-process research and Development
In 2005, as described above, we recorded a non-cash charge
of $26.6 million for purchased in-process research and devel-
opment associated with our acquisition of Microscience.

Cash Flows
the following table provides information regarding our
cash flows for the years ended December 31, 2004, 2005
and 2006.

Year ended December 31,
2005

2004

2006

(in thousands)
Net cash provided by
(used in):
Operating activities(1)
Investing activities
Financing activities
Total net cash
provided (used)

$ 9,196
(18,175)
8,681

$41,974
(5,841)
(6,660)

$ (4,258)
(41,638)
86,020

(298)

$29,473

$ 40,124

(1) Includes the effect of exchange rate changes on cash and cash

equivalents.

Net cash used in operating activities of $4.3 million in 2006
resulted principally from our net income of $22.8 million,
an increase in income taxes payable of $11.5 million due
to the timing of payment of the 2006 income tax liability,
an increase in accounts payable of $5.8 million related to
increased research and development and selling, general
and administrative expenses, and depreciation and amor-
tization expense of $4.7 million, offset by an increase in
accounts receivable of $40.8 million due from the DoD and
HHS reflecting amounts billed in December 2006 that were
still outstanding at year end, and a reduction in inventory of
$8.3 million reflecting product sales in December 2006.

Net cash provided by operating activities of $42.0 million in
2005 resulted principally from our net income of $15.8 mil-
lion, a non-cash charge for purchased in-process research
and development related to the Microscience acquisition,
which reduced net income by $26.6 million, and a reduc-
tion of accounts receivable of $16.1 million as a result of
the collection of amounts due from the DoD during 2005
for invoices outstanding at the end of 2004 for progress in
the manufacture of Biothrax lots, offset by a reduction of
deferred revenue of $10.9 million, reflecting the delivery
to the DoD in the first quarter of 2005 of Biothrax lots for
which we had previously invoiced the DoD for progress pay-
ments and been paid, and an increase in deferred tax assets
of $11.0 million, reflecting a deferred tax asset recorded to
reflect the timing differences between the book charge and
the tax deferral of expense related to the purchased in-
process research and development expense related to the
Microscience acquisition.

Litigation Settlement
In 2005, we recorded a gain of $10.0 million relating to a
settlement of a litigation matter that we initiated to resolve
a contract and intellectual property dispute. there were no
material settlements in 2004.

Total Other Income (Expense)
total other expense increased by $57,000 to $227,000 for
2005 from $170,000 for 2004. this increase resulted pri-
marily from an increase in interest expense associated with
our financing of the acquisition costs for one building at our
Frederick facility.

Income Taxes
Provision for income taxes increased by $196,000, or 4%, to
$5.3 million for 2005 from $5.1 million for 2004. the provi-
sion for income taxes for 2005 resulted primarily from our
income before provision for income taxes of $21.1 million
and an effective annual tax rate of 25%. the provision for
income taxes for 2004 resulted primarily from our income
before provision for income taxes of $16.6 million and an
effective annual tax rate of 31%. the provision for income
taxes also reflects research and development tax credits of
$474,000 for 2005 and $492,000 for 2004 and small amounts
of permanent tax differences in each year.

LIqUIDITY AND CAPITAL rESOUrCES

Sources of Liquidity
We require cash to meet our operating expenses and
for capital expenditures, acquisitions and principal and
interest payments on our debt. We have funded our cash
requirements from inception through December 31, 2006
principally with a combination of revenues from Biothrax
product sales, debt financings and facilities and equipment
leases, revenues under our collaboration agreement with
Sanofi Pasteur, development funding from government
entities and non-government and philanthropic organiza-
tions and, to a lesser extent, from the sale of our common
stock upon exercise of stock options. We have operated
profitably for each of the years in the three year period
ended December 31, 2006.

As of December 31, 2006, we had cash and cash equivalents
of $76.4 million. On November 20, 2006, we completed our
initial public offering, in which we raised $54.2 million, net
of issuance costs.

Emergent BioSolutions Inc.

Net cash provided by operating activities of $9.2 million in
2004 resulted principally from our net income of $11.5 mil-
lion, a non-cash stock-based compensation charge that we
incurred as a result of our issuance of new stock options in
our corporate reorganization in June 2004, which reduced
net income by $4.3 million, an increase in income taxes
payable of $5.8 million related to the timing of payment of
taxes and related deferred tax assets, and an increase in
deferred revenue of $3.9 million, reflecting invoices to and
payments from the DoD for progress in the manufacture of
Biothrax lots, offset by an increase in accounts receivable
of $15.7 million, reflecting invoices for amounts due from
the DoD for progress in the manufacture of Biothrax lots,
and a one-time non-cash gain of $3.8 million resulting from
the satisfaction of an obligation to the State of Michigan for
less than originally estimated.

Net cash used in investing activities for the years ended
December 31, 2004, 2005 and 2006 resulted principally
from the purchase of property, plant and equipment.
Capital expenditures in 2004 include infrastructure invest-
ments of $4.7 million, $3.8 million for an enterprise
resource planning system and $8.5 million for the pur-
chase of our first facility in Frederick, Maryland. Capital
expenditures in 2005 were primarily attributable to invest-
ments in information technology upgrades and miscella-
neous facility enhancements. Capital expenditures in 2006
relate primarily to $25.7 million for construction of our new

building in lansing, Michigan, $10.2 million related to the
acquisition of our second facility in Frederick, Maryland,
and approximately $5.0 million in infrastructure invest-
ments and other equipment.

Net cash provided by financing activities of $86.0 million
in 2006 resulted primarily from $54.2 million in proceeds
from our initial public offering, $15.0 million in proceeds
related to financing a portion of the costs related to the
construction of our new building in lansing, $8.5 million
in proceeds from notes payable related to the financing
of the purchase of our Frederick facility in April 2006, and
$8.9 million in proceeds from our revolving line of credit
with Fifth third Bank.

Net cash used in financing activities of $6.7 million in
2005 resulted principally from the payment of a special
dividend of $5.4 million from a portion of the proceeds of a
litigation settlement and the repayment of notes payable
to employees.

Net cash provided by financing activities of $8.7 million in
2004 resulted principally from an increase in notes payable
as a result of $11.0 million of total debt incurred to finance
the purchase of our first facility in Frederick, Maryland and
to finance the purchase of an enterprise resource planning
system, offset by the repayment of non-recurring royalty
and product supply obligations to the State of Michigan of
$2.4 million.

Contractual Obligations
the following table summarizes our contractual obligations at December 31, 2006.

(in thousands)

Contractual obligations:

Total

2007

Payments due by period
2009

2008

2010

2011

After 2011

Short and long-term debt(1)
Operating lease obligations
Contractual settlement liabilities
Total contractual obligations

$52,413
9,178
200
$61,791

$13,956
1,726
150
$15,832

$5,049
1,866
50
$6,965

$4,831
634
—
$5,465

$4,626
651
—
$5,277

$21,451
669
—
$22,120

$2,500
3,632
—
$6,132

(1) Includes scheduled interest payments.

the preceding table excludes contingent contractual payments that we may become obligated to make upon achievement
of specified research, development and commercialization milestones and contingent contractual royalty payments. the
amount of contingent contractual milestone payments that we may become obligated to make is variable based on the
actual achievement and timing of the applicable milestones and the characteristics of any products or product candidates
that are developed, including factors such as number of products or product candidates developed, type and number
of components of each product or product candidate, ownership of the various components and the specific markets
affected. Based on our current development plans, we estimate that the maximum amount of these contingent contrac-
tual milestone payments under our existing contracts would be approximately $11 million. We are not obligated to pay any
minimum royalties under our existing contracts.

2006 Annual Report

Debt Financing
As of December 31, 2006, we had $42.8 million princi-
pal amount of debt outstanding, comprised primarily of
the following:

• $2.5 million outstanding under a forgivable loan
from the Department of Business and Economic
Development of the State of Maryland used to finance
eligible costs incurred to purchase the first facility in
Frederick, Maryland;

• $7.0 million outstanding under a mortgage loan from
Mercantile Potomac Bank used to finance the remaining
portion of the purchase price for the Frederick facility;
• $8.4 million outstanding under a mortgage loan from
HSBC Realty Credit Corporation used to finance
the purchase price for the second facility on the
Frederick site;

• $1.0 million outstanding under a term loan from Fifth
third Bank used to finance the purchase of an enter-
prise resource planning system;

• $8.9 million outstanding under a $10.0 million revolv-

ing line of credit with Fifth third Bank;

• $10.0 million outstanding under a term loan from
HSBC Realty Credit Corporation used to finance a por-
tion of the costs of our facility expansion in lansing,
Michigan; and

• $5.0 million outstanding under a $5.0 million revolving
line of credit with HSBC Realty Credit Corporation.

We can borrow under the line of credit with Fifth third Bank
through May 2007 and under the line of credit with HSBC
Realty Credit Corporation through October 2007.

Some of these debt instruments contain financial and oper-
ating covenants. In particular:

• Under our forgivable loan from the State of Maryland,
we are not required to repay the principal amount of
the loan if beginning December 31, 2009 and through
2012 we maintain a specified number of employees
at the Frederick site, by December 31, 2009 we have
invested at least $42.9 million in total funds toward
financing the purchase of the buildings on the site and
for related improvements and operation of the facility,
and we occupy the facility through 2012.

• Under our mortgage loan from Mercantile Potomac
Bank for our Frederick facility, we are required to
maintain at all times a minimum tangible net worth of
not less than $5.0 million. In addition, we are required
to maintain at all times a ratio of earnings before inter-
est, 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 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.

• Under our term loan and revolving credit loan with HSBC
Realty Credit Corporation, we are required to maintain
on an annual basis a minimum tangible net worth of
not less than the sum of 85% of our tangible net worth
for the most recently completed fiscal year plus 25% of
current net operating profit after taxes. In addition, we
are required to maintain on a quarterly basis a ratio of
earnings before interest, taxes, depreciation and amor-
tization for the most recent four quarters to the sum of
current obligations under capital leases and principal
obligations and interest expenses for borrowed money,
in each case due and payable for the following four
quarters, of not less than 1.25 to 1.00.

Our debt instruments also contain negative covenants
restricting our activities. Our term loan and revolving line of
credit with HSBC Realty Credit Corporation limit the ability
of Emergent BioDefense Operations to incur indebtedness
and liens, sell assets, make loans, advances or guaran-
tees, enter into mergers or similar transactions and enter
into transactions with affiliates. Our term loan and revolv-
ing line of credit with HSBC Realty Credit Corporation has
various limitations on our ability to incur indebtedness
and liens and enter into mergers or similar transactions
among others. Our line of credit with Fifth third Bank lim-
its 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 pur-
chased with the proceeds of our loans from Mercantile
Potomac Bank, the State of Maryland, HSBC Realty Credit
Corporation and Fifth third Bank serve as collateral for
these loans. Our line of credit with Fifth third Bank is
secured by accounts receivable under our DoD and HHS
contracts. Our term loan and revolving line of credit with
HSBC Realty Credit Corporation are secured by substan-
tially all of Emergent BioDefense Operations’ assets, other
than accounts receivable under our DoD and HHS contracts.
the covenants under our existing debt instruments and the
pledge of our existing assets as collateral limit our ability to
obtain additional debt financing.

Under our mortgage loan from Mercantile Potomac Bank,
we began to make monthly principal payments beginning in
November 2006. A residual principal repayment of approxi-
mately $5.0 million is due upon maturity in October 2011.

Emergent BioSolutions Inc.

Interest is payable monthly and accrues at an annual rate
of 6.625% through October 2009. In October 2009, the inter-
est rate is scheduled to be adjusted to a fixed annual rate
equal to 3.20% over the yield on U.S. government securities
adjusted to a constant maturity of two years.

Under our mortgage loan from HSBC Realty Credit
Corporation, we are required to make monthly principal
payments. A residual principal repayment of approximately
$7.5 million is due upon maturity in April 2011. Interest is
payable monthly and accrues at an annual rate equal to
lIBOR plus 3.00%.

Under our term loan from Fifth third Bank, we make
monthly principal payments through maturity in September
2007. Interest is payable monthly and accrues at an annual
rate equal to 0.375% less than the prime rate of interest
established from time to time by Fifth third Bank.

Under our revolving line of credit with Fifth third Bank, any
outstanding principal is due upon maturity in May 2007. the
principal amount outstanding at any time under the line of
credit may not exceed 75% of total eligible accounts receiv-
able under the DoD and HHS contracts. Consistent with
the terms of this agreement, we repaid $8.9 million of out-
standing principal under the line of credit in January 2007.
Interest is payable monthly and accrues at an annual rate
equal to 0.375% less than the prime rate of interest estab-
lished from time to time by Fifth third Bank.

Under our term loan with HSBC Realty Credit Corporation,
we are required to make monthly principal payments begin-
ning in April 2007. A residual principal payment of approxi-
mately $5.6 million is due upon maturity in August 2011.
Upon our request, the term loan is subject to an exten-
sion term in the sole discretion of HSBC Realty Credit
Corporation for five additional years until August 2016 for
an extension fee of 1.00% of the principal balance of the
loan. If the term of the loan were extended, we would be
required to continue to make monthly principal payments
through maturity in August 2016 in lieu of the residual
principal payment otherwise due in August 2011. Interest
is payable monthly and accrues at an annual rate equal to
lIBOR plus 3.75%.

Under our revolving line of credit with HSBC Realty Credit
Corporation, we are not required to repay outstanding prin-
cipal until October 2007. In October 2007, the outstand-
ing principal under the revolving line of credit will convert
to a term loan with required monthly principal payments
through maturity in August 2011. Interest is payable monthly
and accrues at an annual rate equal to lIBOR plus 3.75%.
We also are required to pay a fee on a quarterly basis equal
to 0.50% of the average daily difference between $5.0 mil-
lion and the amount outstanding under the revolving line of

credit. As of December 31, 2006, $5.0 million was outstand-
ing under the revolving line of credit.

Tax Benefits
In connection with our facility expansion in lansing, the
State of Michigan and the City of lansing have provided us a
variety of tax credits and abatements. We estimate that the
total value of these tax benefits may be up to $18.5 million
over a period of up to 15 years. these tax benefits are based
on our $75 million planned additional investment in our
lansing facilities. In addition, we must maintain a specified
number of employees in lansing to continue to qualify for
these tax benefits.

Funding requirements
We expect to continue to fund our anticipated operating
expenses, capital expenditures and debt service require-
ments 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 devel-
opment and commercialization of our product candidates.
We may seek to raise additional external debt financing of
up to $20 million to fund our facility expansion in lansing,
Michigan and to provide additional financial flexibility. In
addition to purchase obligations and orders under our
contract with the DoD for Biothrax sales, our only com-
mitted external sources of funds are remaining borrowing
availability under our revolving line of credit with Fifth third
Bank, development funding under our collaboration agree-
ment with Sanofi Pasteur, funding from NIAID, including
for animal efficacy studies of our anthrax immune globulin
candidate, and funding from the Wellcome trust for our
Phase II clinical trial of our typhoid vaccine candidate in
Vietnam. Our ability to borrow additional amounts under
our loan agreements is subject to our satisfaction of
specified conditions. Our future capital requirements will
depend on many factors, including:

• the level and timing of Biothrax product sales and cost

of product sales;

• the timing of, and the costs involved in, constructing
our new manufacturing facility in lansing, Michigan
and the build out of our manufacturing facility in
Frederick, Maryland;

• the scope, progress, results and costs of our preclini-

cal and clinical development activities;

• the costs, timing and outcome of regulatory review of

our product candidates;

• the number of, and development requirements for,

other product candidates that we may pursue;

• the costs of commercialization activities, including

product marketing, sales and distribution;

• the costs involved in preparing, filing, prosecuting,

2006 Annual Report

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,

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.

products and technologies;

• our ability to obtain development funding from govern-
ment entities and non-government and philanthropic
organizations; and

• our ability to establish and maintain collaborations,

such as our collaboration with Sanofi Pasteur.

We may require additional sources of funds for future acqui-
sitions 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 pro-
grams 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 expen-
ditures or declaring dividends. Any debt financing or addi-
tional 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 par-
ties, 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 intel-
lectual 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, furni-
ture and fixtures and leasehold improvements, we believe
that the incremental inflation related to replacement costs
of such items will not materially affect our operations.

recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes—an interpreta-
tion of FASB Statement No. 109, Accounting for Income Taxes
(FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 requires
that the Company recognize in its financial statements,
the impact of a tax position, if that position is more likely
than not of being sustained on audit, based on the techni-
cal merits of the position. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. the provi-
sions of FIN 48 are effective for fiscal years beginning after
December 15, 2006,

We will adopt FIN 48 as of January 1, 2007, as required.
the cumulative effect of adopting FIN 48 will be recorded
as an adjustment to beginning retained earnings and other
accounts as applicable. Although we have not made a final
determination of the effect the adoption of FIN 48 will have
on our financial position and results of operations, it is
expected that the cumulative adjustment to retained earn-
ings will not have a material effect on our financial state-
ments. the adoption of FIN 48 will impact the amount of,
and balance sheet classification of, deferred tax assets and
liabilities, and other accounts as applicable, and result in
greater volatility in the effective tax rate.

In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities—
Including an Amendment of FASB Statement No. 115 (SFAS
No. 159). SFAS No. 159 permits entities to choose to mea-
sure many financial instruments and certain other items at
fair value. the objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. the provisions of SFAS No. 159 are
effective for fiscal years beginning after November 15, 2007.
We have not yet determined the impact of the adoption of
this statement on our financial statements.

In September 2006, the SEC issued Staff Accounting
Bulletin (SAB 108), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current
Year Financial Statements. SAB 108 requires that registrants

Emergent BioSolutions Inc.

qUANTITATIvE AND qUALITATIvE
DISCLOSUrES ABOUT MArKET rISK
Our exposure to market risk is currently confined to our
cash and cash equivalents and restricted cash that have
maturities of less than three months. We currently do not
hedge interest rate exposure or foreign currency exchange
exposure. We have not used derivative financial instru-
ments for speculation or trading purposes. Because of
the short-term maturities of our cash and cash equiva-
lents, 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.

quantify errors using both a balance sheet and statement of
operations approach and evaluate whether either approach
results in a misstated amount that, when all relevant quan-
titative and qualitative factors are considered, is material.
SAB 108 became effective during the fourth quarter of 2006.
the Company has determined that adoption of this state-
ment had no impact on the financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS No. 157). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157
emphasizes that fair value is a market-based measure-
ment, not an entity-specific measurement. therefore, a fair
value measurement should be determined based on the
assumptions that market participants would use in pric-
ing the asset or liability. the provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We have not
yet determined the impact of the adoption of this statement
on our financial statements.

2006 Annual Report

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, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2006. 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. We were not engaged to perform an audit of the Company’s inter-
nal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state-
ments, 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, 2005 and 2006, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, in 2006 the Company changed its method of accounting
for share-based payments.

Mclean, Virginia
March 21, 2007

Emergent BioSolutions Inc.

Emergent BioSolutions Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

ASSETS
Current assets:

Cash and cash equivalents
Accounts receivable
Inventories
Income taxes receivable
Deferred tax assets
Prepaid expenses and other current assets

total current assets

Property, plant and equipment, net
Deferred tax assets, net of current
Other assets
total assets

LIABILITIES AND STOCKHOLDErS’ EqUITY
Current liabilities:

Accounts payable
Accrued expenses and other current liabilities
Accrued compensation
Indebtedness under lines of credit
long-term indebtedness, current portion
Notes payable to employees, current portion
Income taxes payable
Deferred revenue, current portion

total current liabilities

long-term indebtedness, net of current portion
Notes payable to employees, net of current portion
Deferred revenue, net of current portion
Other liabilities
total liabilities

Commitments and contingencies

Stockholders’ equity:

Preferred Stock $0.001 par value; 3,000,000 and

15,000,000 shares authorized, 0 shares issued and
outstanding at December 31, 2005 and 2006, respectively

Common Stock, Class A, $0.001 par value; 100,000,000
shares authorized, 22,303,280 issued and outstanding
at December 31, 2005; 0 shares authorized, issued
and outstanding at December 31, 2006

Common Stock, Class B, $0.01 par value; 2,000,000

shares authorized, 21,283 issued and outstanding at
December 31, 2005; 0 shares authorized, issued and
outstanding at December 31, 2006

Common Stock, $0.001 par value; 0 shares authorized,

issued and outstanding at December 31, 2005;
100,000,000 shares authorized, 27,596,249 shares
issued and outstanding at December 31, 2006

Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
total stockholders’ equity
total liabilities and stockholders’ equity

the accompanying notes are an integral part of the consolidated financial statements.

December 31,

2005

2006

$ 36,294
2,530
16,441
763
1,989
1,099
59,116

30,645
9,981
590
$100,332

$ 10,425
2,609
6,177
—
902
506
2,134
7,340
30,093

10,471
31
—
—
40,595

—

$ 76,418
43,331
24,721
869
295
1,703
147,337

78,174
11,477
1,267
$238,255

$ 27,366
3,253
7,190
8,930
2,456
17
13,703
1,432
64,347

31,368
—
2,997
1,071
99,783

—

—
34,595
(276)
25,396
59,737
$100,332

28
90,920
(473)
47,997
138,472
$238,255

2006 Annual Report

Emergent BioSolutions Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPErATIONS

(in thousands, except share and per share data)

revenues:

Product sales
Contracts and grants

Total revenues

Operating expense (income):

Cost of product sales
Research and development
Selling, general and administrative
Purchased in-process research and development
Settlement of State of Michigan obligation
litigation settlement
Income from operations

Other income (expense):

Interest income
Interest expense
Other income (expense), net
Total other income (expense)

Income before provision for income taxes
Provision for income taxes
Net income

Earnings per share—basic
Earnings per share—diluted

Weighted-average number of shares—basic
Weighted-average number of shares—diluted

2004

2005

2006

81,014
2,480
83,494

127,271
3,417
130,688

147,995
4,737
152,732

30,102
10,117
30,323
—
(3,819)
—
16,771

65
(241)
6
(170)

16,601
5,129
11,472

0.61
0.56

$
$

18,919,850
20,439,252

31,603
18,381
42,793
26,575
—
(10,000)
21,336

485
(767)
55
(227)

21,109
5,325
15,784

0.77
0.69

$
$

20,533,471
22,751,733

24,125
45,501
44,601
477
—
—
38,028

846
(1,152)
293
(13)

38,015
15,222
22,793

0.99
0.93

$
$

23,039,794
24,567,302

Cash dividends per share—basic

—

0.26

—

the accompanying notes are an integral part of the consolidated financial statements.

Emergent BioSolutions Inc.

Emergent BioSolutions Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOwS

(in thousands)

Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities (net of effects of acquisitions):

Stock-based compensation expense (credit)
Non-cash gain on settlement
Depreciation and amortization
Deferred income taxes
Other obligations
loss on disposal of property and equipment
Purchased in-process research and development
Excess tax benefit from stock based compensation
Changes in operating assets and liabilities:

Accounts receivable
Inventories
Income taxes
Prepaid expenses and other assets
Accounts payable
Accrued compensation
Accrued expenses and other liabilities
Deferred revenue
Net cash provided by (used in) operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment
Acquisitions, net of cash received
Restricted cash deposits
Proceeds from investment maturities
Net cash used in investing activities

Cash flows from financing activities:

Proceeds from borrowings on long term
indebtedness and lines of credit
Proceeds from notes payable to employees
Repayments on product supply and royalty obligations
Issuance of common stock in initial public offering
(net of issuance cost)
Issuance of common stock subject to exercise of stock options
Redemption of Class B common stock
Principal payments on long term indebtedness,
notes payable to employees, and lines of credits
Proceeds from excess tax benefits
Debt issuance costs
Payment of dividend

Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

Supplemental disclosure of cash flow information:

Cash paid during the year for interest
Cash paid during the year for income taxes

Supplemental information on non-cash investing and financing activities:

Issuance of common stock to acquire Microscience limited
Purchases of property, plant and equipment unpaid at year end

Year Ended December 31,
2005

2004

2006

$ 11,472

$ 15,784

$ 22,793

4,310
(3,819)
1,867
(418)
200
43
—
—

(15,664)
(1,609)
5,794
50
2,472
585
44
3,869
9,196

(17,072)
—
(1,250)
147
(18,175)

10,992
947
(2,351)

—
12
(665)

(184)
—
(70)
—
8,681
—
(298)
7,119
6,821

(17)
—
3,549
(10,968)
—
32
26,575
—

16,107
(3,189)
(2,390)
(865)
5,463
2,466
619
(10,916)
42,250

(6,532)
(559)
1,250
—
(5,841)

31
123
—

—
33
(337)

(1,110)
—
—
(5,400)
(6,660)
(276)
29,473
6,821
36,294

723
—
4,715
987
—
27
477
(789)

(40,801)
(8,280)
11,463
(792)
5,801
1,013
1,513
(2,911)
(4,061)

(41,228)
(218)
(192)
—
(41,638)

32,430
—
—

54,229
590
(192)

(1,569)
789
(257)
—
86,020
(197)
40,124
36,294
76,418

$
$

170
—

—
—

$
696
$ 17,985

$ 27,001
—
$

$ 1,681
$ 2,788

—
$
$ 11,140

the accompanying notes are an integral part of the consolidated financial statements.

2006 Annual Report

Emergent BioSolutions Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDErS’ EqUITY

Class A No-Par
Common Stock

Class B No-Par
Common Stock

Amount

Class A $0.001 Par
value Common Stock
Shares

Amount

Class B $0.01 Par

value Common Stock

$0.001 Par value

Common Stock

Amount

18,017,994
—
—

$ 2,940
—
—

1,099,223
(573,322)
122,584

$101
(53)
12

—
—
—

(18,017,994)

(2,940)

—

18,017,994

(in thousands, except share and per share data)

Balance at December 31, 2003
Redemption of common stock
Issuance of common stock
Conversion of class A no-par
common stock to class A $.001
par value common stock
Conversion of class B no-par
common stock to class A $.01
par value common stock
Stock-based compensation
expense
tax benefit related to the
disqualifying disposition
Net Income

Balance at December 31, 2004

Issuance of common stock to
acquire Microscience limited
Exercise of stock options
Redemption of common stock
Forfeiture of stock options
Payment of dividend
Net income
Foreign currency translation
Comprehensive income

Balance at December 31, 2005

Exercise of stock options
Redemption of common stock
Conversion of class A $0.001 and
class B par value $0.01 to $0.001
par value common stock
Issuance of common stock in
initial public offering (net of
issuance cost)
Stock-based compensation
expense
Excess tax benefits from
exercises of non-qualified
stock options
Net income
Foreign currency translation
Comprehensive income

Balance at December 31, 2006

—

—
—
—

—
—
—
—
—
—
—
—
—

—
—

—

—
—
—
—
—

—

—
—
—

—
—
—
—
—
—
—
—
—

—
—

—

—
—
—
—
—

(648,485)

—

—
—
—

—
—
—
—
—
—
—
—
—

—
—

—

—
—
—
—
—

(60)

—

—
—
$ —

—
—
—
—
—
—
—
—
$ —

—
—

—

—
—
—
—
$ —

$ —
—
—

—

—
—
$ 19

3
—
—
—
—
—
—
—
$ 22

—
—

648,485

—

—
—
18,666,479

3,636,801
—
—
—
—
—
—
—
22,303,280

—
—

$ —

$ 7,610

$ —

Accumulated

Additional

Other

Paid-In

Capital

Comprehensive

Loss

retained

Earnings

—

$ —

$ 5,407

(1,559)

—

2,922

4,310

319

—

26,998

(28)

(17)

—

589

—

723

789

—

(276)

11,472

$15,320

(308)

(5,400)

15,784

—

(192)

—

Total

Stock-

holders’

Equity

$ 8,448

(1,612)

—

4,310

319

11,472

$ 22,949

27,001

(337)

(17)

(5,400)

15,784

(276)

15,508

590

(192)

54,229

723

789

22,793

(197)

22,596

—

$ —

—

$ —

$34,595

$(276)

$25,396

$ 59,737

175,828

5,000,000

54,224

$—

27,596,249

$28

$90,920

$(473)

$47,997

$138,472

22,793

(197)

—

133,451

(112,168)

21,283

95,858

—

$—

—

$—

—

(1)

—

$—

—

(22,303,280)

(22)

(117,141)

(1)

22,420,421

—

—
—
—
—
—

—

—
—
—
—
$ —

the accompanying notes are an integral part of the consolidated financial statements.

Emergent BioSolutions Inc.

Class A No-Par

Common Stock

Class B No-Par

Common Stock

Class A $0.001 Par

value Common Stock

Amount

Class B $0.01 Par
value Common Stock
Shares

Amount

$0.001 Par value
Common Stock

Amount

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
Loss

(in thousands, except share and per share data)

Balance at December 31, 2003

18,017,994

$ 2,940

1,099,223

(573,322)

122,584

$101

(53)

$ —

—

par value common stock

(18,017,994)

(2,940)

—

18,017,994

(648,485)

(60)

648,485

Balance at December 31, 2004

—

$ —

18,666,479

$ 19

Redemption of common stock

Issuance of common stock

Conversion of class A no-par

common stock to class A $.001

Conversion of class B no-par

common stock to class A $.01

par value common stock

Stock-based compensation

expense

tax benefit related to the

disqualifying disposition

Net Income

Issuance of common stock to

acquire Microscience limited

Exercise of stock options

Redemption of common stock

Forfeiture of stock options

Payment of dividend

Net income

Foreign currency translation

Comprehensive income

Balance at December 31, 2005

Exercise of stock options

Redemption of common stock

Conversion of class A $0.001 and

class B par value $0.01 to $0.001

par value common stock

Issuance of common stock in

initial public offering (net of

issuance cost)

Stock-based compensation

expense

Excess tax benefits from

exercises of non-qualified

stock options

Net income

Foreign currency translation

Comprehensive income

Balance at December 31, 2006

—

3,636,801

—

the accompanying notes are an integral part of the consolidated financial statements.

—

$ —

—

$ —

22,303,280

$ 22

—
—
—

—

—
—
—

—
133,451
(112,168)
—
—
—
—
—
21,283

95,858
—

$—
—
—

—

—
—
$—

—
1
(1)
—
—
—
—
—
$—

1
—

—
—
—

—

—
—
—

—
—
—
—
—
—
—
—
—

175,828
—

(22,303,280)

(22)

(117,141)

(1)

22,420,421

—

—
—
—
—
—

—

—
—
—
—
$—

5,000,000

—

—
—
—
—
27,596,249

$ —
—
—

—

—
—
$ —

—
—
—
—
—
—
—
—
$ —

—
—

—

—
—
—
—
$28

—
—
—

2,922

4,310

319
—
$ 7,610

26,998
32
(28)
(17)
—
—
—
—
$34,595

589
—

—

54,224

723

789
—
—
—
$90,920

$ —
—
—

—

—
—
$ —

—
—
—
—
—
—
(276)
—
$(276)

—
—

—

—
—
(197)
—
$(473)

retained
Earnings

$ 5,407
(1,559)
—

—

—
11,472
$15,320

—
—
(308)
—
(5,400)
15,784
—
—
$25,396

—
(192)

—

—
22,793
—
—
$47,997

Total
Stock-
holders’
Equity

$ 8,448
(1,612)
12

—

4,310

319
11,472
$ 22,949

27,001
33
(337)
(17)
(5,400)
15,784
(276)
15,508
$ 59,737

590
(192)

54,229

723

789
22,793
(197)
22,596
$138,472

2006 Annual Report

Emergent BioSolutions Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

1. NATUrE OF THE BUSINESS AND OrGANIzATION
Emergent Biosolutions Inc. (the Company or Emergent) is
a biopharmaceutical company focused on the development,
manufacture and commercialization of immunobiotics. the
Company operates in two business segments: biodefense
and commercial. the Company commenced operations as
BioPort Corporation (BioPort) in September 1998 through an
acquisition from the Michigan Biologic Products Institute of
rights to the marketed product, Biothrax, vaccine manufac-
turing facilities at a multi-building campus on approximately
12.5 acres in lansing, Michigan and vaccine develop-
ment and production know-how. Following this acquisi-
tion, the Company completed renovations at the lansing
facilities that had been initiated by the State of Michigan.
In December 2001, the U.S. Food and Drug Administration
(FDA) approved a supplement to the Company’s manufac-
turing facility license for the manufacture of Biothrax at the
renovated facilities. In June 2004, the Company completed a
corporate reorganization (Reorganization) in which:

• Emergent issued 18,666,479 shares of Class A
Common Stock in exchange for 18,017,994 shares of
BioPort class A common stock and 648,485 shares of
BioPort class B common stock;

• all other issued and outstanding shares of BioPort class
B common stock were repurchased and retired; and
• all outstanding stock options to purchase BioPort
class B common stock were assumed by Emergent
and option holders were granted replacement stock
options to purchase an equal number of shares of
Class B Common Stock of Emergent.

As a result of the Reorganization, BioPort became a wholly
owned subsidiary of Emergent. the Company has renamed
BioPort as Emergent BioDefense Operations lansing Inc.
(Emergent BioDefense Operations). the Company acquired
its portfolio of commercial vaccine candidates through an
acquisition of Microscience limited (Microscience) in a
share exchange in June 2005 and an acquisition of sub-
stantially all of the assets, for cash, of Antex Biologics
Inc. (Antex) in May 2003 and ViVacs GmbH, Germany in
July 2006. the Company has renamed Microscience as
Emergent Product Development UK limited and Antex as
Emergent Product Development Gaithersburg and ViVacs
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
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

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 matu-
rity 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. At December 31, 2005
and 2006 the Company maintained all of its cash and cash
equivalents in three financial institutions.

Fair value of Financial Instruments
the carrying amounts of the Company’s short-term finan-
cial 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 esti-
mated 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 $11,910 and
$11,497, respectively, at December 31, 2005 and $33,841
and $33,233, respectively, at December 31, 2006.

restricted Cash
Restricted cash at December 31, 2006 consists of a cer-
tificate of deposit held by a bank as collateral for a let-
ter of credit acting as a security deposit on a loan. As of
December 31, 2005 and 2006 the Company had restricted
cash of $0 and $192, respectively.

Significant Customers and Accounts receivable
the Company’s primary customers are the U.S. Department
of Defense (DoD) and U.S. Department of Health and Human
Services (HHS). For the years ended December 31, 2004,
2005 and 2006, sales of Biothrax to the DoD and HHS com-
prised 99%, 96% and 97% of total revenues, respectively. As
of December 31, 2005 and 2006, the Company’s receivable
balances were comprised of 38% and 100%, respectively,
from these customers. the balance of the receivables in
2005 was attributable to government funding for NIAID.
Unbilled accounts receivable, included in accounts receiv-
able, totaling $1,418 and $26 as of December 31, 2005 and

Emergent BioSolutions Inc.

2006, respectively, relate to various service contracts for
which product has been delivered or work has been per-
formed, though invoicing has not yet occurred. Accounts
receivable are stated at invoice amounts and consist pri-
marily of amounts due from the DoD and HHS as well as
amounts due under reimbursement contracts with other
government entities and non-government and philan-
thropic 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, 2005 and 2006, an allowance for doubt-
ful accounts was not recorded, as the prior collection his-
tory from these customers indicates collection is likely.

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 finan-
cial 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, inven-
tory that has become obsolete, inventory that has a cost
basis in excess of its expected net realizable value and
inventory in excess of expected customer demand. the
Company also writes off in the applicable period the costs
related to expired inventory.

Property, Plant and Equipment
Property, plant and equipment are stated at cost.
Depreciation is computed using the straight-line method
over the following estimated useful lives:

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.

Under the provisions of the Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, the Company capitalizes
costs associated with software developed or obtained for
internal use when the preliminary project stage is com-
pleted. Capitalized costs include only: (1) external direct
costs of materials and services consumed in developing
or obtaining internal use software and (2) payroll and pay-
roll-related costs for employees who are directly associ-
ated with and who devote time to the internal use software
project during the development stage. Capitalization of
such costs ceases before training and other post imple-
mentation software activities occur. Computer software
maintenance costs related to software development are
expensed as incurred.

Income Taxes
Income taxes are accounted for using the liability method.
Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
carryforwards. Deferred tax assets and liabilities are mea-
sured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are
expected to be recovered or settled.

the Company records valuation allowances to reduce
deferred tax assets to the amounts that more likely than
not will be realized. the Company considers future taxable
income and ongoing tax planning strategies in assess-
ing the need for valuation allowances. In general, if the
Company determines that it is able to realize more than the
recorded amounts of net deferred tax assets in the future,
net income will increase in the period in which the deter-
mination is made. likewise, if the Company determines
that it is not able to realize all or part of the net deferred tax
asset in the future, net income will decrease in the period
in which the determination is made. the Company applies
any reversals of valuation allowance related to an acquired
deferred tax asset against other intangibles before impact-
ing net income.

Buildings
Furniture and equipment
Software
leasehold improvements

39 years
3–7 years
lesser of 3 years or product life
lesser of the asset life or
life of lease

Under sections 382 and 383 of the Internal Revenue Code,
if an ownership change occurs with respect to a “loss cor-
poration”, as defined, there are annual limitations on the
amount of net operating losses and deductions that are

2006 Annual Report

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 signifi-
cantly limited.

pretation is applicable to the Company’s contracts with
HHS, but because the Company recognizes revenue upon
delivery of product to HHS, the Company has not applied
this guidance.

the Company’s ability to realize deferred tax assets depends
upon future taxable income as well as the limitations dis-
cussed above. For financial reporting purposes, a deferred
tax asset must be reduced by a valuation allowance if it is
more likely than not that some portion or all of the deferred
tax assets will not be realized prior to expiration.

revenue recognition
the Company recognizes revenues from product sales in
accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB No. 104). SAB No. 104 requires recogni-
tion of revenues from product sales that require no continu-
ing 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 obliga-

tion exists; and

• collectibility is reasonably assured.

All revenues from product sales are recorded net of appli-
cable allowances for sales returns, rebates, special pro-
motional programs, and discounts. For arrangements
where the risk of loss has not passed to the customer,
the Company defers the recognition of revenue until such
time that risk of loss has passed. Also, the cost of revenue
associated with amounts recorded as deferred revenue
is recorded in inventory until such time as risk of loss
has passed.

Under the Company’s contract with the DoD, title to the
product passes to the DoD upon submission of the first
invoice. the earnings process is complete upon FDA
release of the product for sale and distribution. Following
FDA release of the product, the product is segregated for
later shipment, and all deferred revenue related to the
released product is recognized in accordance with the “bill
and hold” requirements under SAB 104.

In December 2005,
the Securities and Exchange
Commission released an interpretation with respect to
the accounting for sales of vaccines and bioterror coun-
termeasures to the federal government for placement into
the SNS. this interpretation provides for revenue recogni-
tion for specifically identified products purchased for the
SNS in the event that all requirements for revenue recog-
nition, as specified in Statement of Financial Accounting
Concepts No. 5, Recognition and Measurement in Financial
Statements of Business Enterprises, are not met. this inter-

Collaborative research and development agreements can
provide for one or more up-front license fees, research
payments, and milestone payments. Agreements with
multiple components (“deliverables” or “items”) are evalu-
ated in accordance with Emerging Issues task Force (EItF)
Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables (EItF No. 00-21), to determine if
the deliverables can be divided into more than one unit of
accounting. An item can generally be considered a sepa-
rate 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 item(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 sub-
stantially 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 respec-
tive fair values or based on the residual value method and
is recognized in full when the criteria in the discussion of
SAB No. 104 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 sub-
stantive, are recognized as revenue when the milestones
are achieved, and the milestone payments are due and col-
lectible. If not deemed substantive, the Company would rec-
ognize 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 incep-
tion 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

Emergent BioSolutions Inc.

ongoing research and development or other services are
priced at fair value. Payments received in advance of work
performed are recorded as deferred revenue.

Payments received by the Company for the reimbursement
of expenses for research and development activities are
recorded in accordance with EItF Issue No. 99-19, Reporting
Revenue Gross as Principal Versus Net as an Agent (EItF No.
99-19). Pursuant to EItF No. 99-19, for transactions in which
the Company acts as principal, with discretion to choose
suppliers, bears credit risk and performs a substantive part
of the services, revenue is recorded at the gross amount
of the reimbursement. Costs associated with these reim-
bursements are reflected as a component of research and
development expenses.

Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144), the Company
assesses the recoverability of its long-lived assets by
determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash
flows. If an impairment is indicated, the Company mea-
sures the amount of such impairment by comparing the
fair value to the carrying value. the Company has recorded
no impairment losses for the years ended December 31,
2004, 2005 and 2006.

research and Development
Research and development costs are expensed as incurred.
Research and development costs primarily consist of sala-
ries, materials and related expenses for personnel and facil-
ity expenses. Other research and development expenses
include fees paid to consultants and outside service provid-
ers and the costs of materials used in clinical trials and
research and development.

Purchased In-process research and Development
the Company accounts for purchased in-process research
and development in accordance with the Statement of
Financial Accounting Standards No. 2, Accounting for
Research and Development Costs (SFAS No. 2) along with
Financial Accounting Standards Board (FASB) Interpretation
No. 4, Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method—an
interpretation of FASB Statement No. 2 (FIN 4). Under these
standards, the Company is required to determine whether
the technology relating to a particular research and devel-
opment project acquired through an acquisition has an
alternative future use. If the determination is that the tech-
nology has no alternative future use, the acquisition amount
assigned to assets to be used in the particular research and
development project is expensed. Otherwise, the Company

capitalizes and amortizes the costs incurred over their esti-
mated useful lives of the technology acquired.

Comprehensive Income
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS No. 130), requires
the presentation of the comprehensive income and its com-
ponents as part of the financial statements. 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 transac-
tions with foreign subsidiaries that are considered to be
long-term investments and translation gains and losses
incurred when converting its subsidiaries’ financial state-
ments from their functional currency to the U.S. dollar in
accumulated other comprehensive income (loss).

Foreign Currencies
the local currency is the functional currency for the
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 (loss).

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, 2004,
2005 and 2006, the Company capitalized $0, $0 and $759 of
interest, respectively.

Certain risks and Uncertainties
the Company has derived substantially all of its revenue
from sales of Biothrax under contracts with the DoD and
HHS. the Company’s ongoing U.S. government contracts
do not necessarily increase the likelihood that it will secure
future comparable contracts with the U.S. government.
the Company expects that a significant portion of the busi-
ness that it will seek in the near future, in particular for
Biothrax, will be under government contracts that pres-
ent a number of risks that are not typically present in the
commercial contracting process. U.S. government con-
tracts for Biothrax require annual funding decisions by the
government and are subject to unilateral termination or
modification by the government. the Company may fail to
achieve significant sales of Biothrax to customers in addi-
tion 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

2006 Annual Report

than Biothrax, all of the Company’s product candidates are undergoing clinical trials or are in early stages of develop-
ment, and failure is common and can occur at any stage of development. None of the Company’s product candidates other
than Biothrax has 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:

Numerator:
Net Income

Denominator:
Weighted-average number of shares—basic
Dilutive securities—stock options
Weighted-average number of shares—diluted

Earnings per share-basic
Earnings per share-diluted

2004

Year Ended December 31,
2005

2006

11,472

15,784

22,793

18,919,850
1,519,402
20,439,252

$
$

0.61
0.56

20,533,471
2,218,262
22,751,733

$
$

0.77
0.69

23,039,794
1,527,508
24,567,302

$
$

0.99
0.93

For the years ending December 31, 2004, 2005 and 2006,
outstanding stock options to purchase approximately 0,
21,000 and 160,000 shares, respectively, of common stock
are not considered in the diluted earnings per share calcu-
lation because the exercise price of these options is greater
than the average per share closing price during the year.

the Company has taken into consideration the disclosure
required by the Participating Securities and the two-Class
Method under FASB Statement No. 128 (EItF No. 03-6).

Accounting for Stock-based Compensation
As of December 31, 2006, the Company has two stock-based
employee compensation plans, the 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 10—Stockholders’
Equity. through December 31, 2005, the Company accounted
for grants under the 2004 Plan using the intrinsic value
method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and has provided the pro
forma disclosures of net income and net income per share
in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosures using the fair value method. Under APB No. 25,
compensation expense is based on the difference, if any, on
the date of the grant between the fair value of the Company’s
stock and the exercise price of the option and is recognized
ratably over the vesting period of the option. the Company

accounts for equity instruments issued to non-employees in
accordance with SFAS No. 123 and EItF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services, (EItF No. 96-18).

Effective January 1, 2006, the Company adopted the fair
value provisions of SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), using the modified prospective
method. Under the fair value recognition provisions of SFAS
No. 123(R), the Company recognizes stock-based compen-
sation net of an estimated forfeiture rate.

Under the modified prospective method, compensation
cost recognized in 2006 includes: (1) compensation cost
for all share-based payments granted prior to but not yet
vested as of December 31, 2005, based on the grant date
fair value estimated in accordance with the original provi-
sions of SFAS No. 123, and (2) compensation cost for all
share-based payments granted and vested subsequent to
December 31, 2005, based on the grant date fair value esti-
mated in accordance with the provisions of SFAS No. 123(R).
As a result of adopting SFAS No. 123(R) on January 1,
2006, the Company’s income before income taxes and net
income for the year ended December 31, 2006 are approx-
imately $723 and $470 lower, respectively, than if it had
continued to account for share-based compensation under
APB No. 25.

Both basic and diluted income per share for the year ended
December 31, 2006 are $0.02 lower than if the Company
had continued to account for share-based compensation

Emergent BioSolutions Inc.

under APB No. 25. Results for prior periods have not been
restated. Based on options granted to employees as of
December 31, 2006, total compensation expense not yet
recognized related to unvested options is approximately
$3,119, after tax. the Company expects to recognize that
expense over a weighted average period of 2.9 years.

the Company has utilized the Black-Scholes valuation
model for estimating the fair value of all stock options
granted. the fair value of each option is estimated on the
date of grant. Set forth below are the weighted-average
assumptions used in valuing the stock options granted and
a discussion of the Company’s methodology for developing
each of the assumptions used:

Year Ended December 31,
2005

2004

2006

Expected dividend yield
Expected volatility
Risk-free interest rate
Expected average
life of options

0%
52%

0%
50%
2.93% 3.33–4.32% 4.58–5.21%

0%
50%

2.5 years

2.9 years

3.0 years

• Expected dividend yield—the Company does not pay reg-
ular dividends on its common stock and does not antici-
pate 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 expected historical volatility
used by similar companies at a similar stage of devel-
opment to estimate expected volatility. the volatility
used by these similar companies ranged from 33% to
79%, with an average estimated volatility of 53%.

• Risk-free interest rate—this is the average U.S.
treasury rate with a term that most closely resembles
the expected life of the option for the quarter in which
the option was granted.

• Expected average life of options—this is the period of
time that the options granted are expected to remain
outstanding. this estimate is based primarily on the
employee position profile of option holders and the
trading lock out periods that result from the employ-
ees access to stock price sensitive information.

Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits of deductions resulting from
the exercise of stock options as operating cash flows in
the statement of cash flows. SFAS No. 123(R) requires the
cash flows resulting from the tax benefits of deductions
in excess of the compensation cost recognized for those
options (excess tax benefits) to be classified as financing
cash flows.

the following table illustrates the effect on net income and net income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation for the years ended December 31, 2004
and 2005.

Net income, as reported
Add: Stock-based compensation in reported
net income, net of taxes
Deduct: total stock-based compensation expense
determined under the fair value based method
for all awards, net of taxes
Pro forma net income

Net income per common share—basic
Net income per common share—diluted
Pro forma net income per common share—basic
Pro forma net income per common share—diluted

Year Ended
December 31,

2004
$11,472

2005
$15,784

2,801

—

(3,185)
$11,088

$ 0.61
$ 0.56
$ 0.59
$ 0.54

(258)
$15,526

$ 0.77
$ 0.69
$ 0.76
$ 0.68

2006 Annual Report

recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes—an interpretation
of FASB Statement No. 109, Accounting for Income Taxes (FIN
48). FIN 48 clarifies the accounting for uncertainty in income
taxes. FIN 48 prescribes a recognition threshold and mea-
surement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 requires that the Company rec-
ognize in its financial statements, the impact of a tax posi-
tion, if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. FIN
48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and
disclosure. the provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006.

the Company will adopt FIN 48 as of January 1, 2007, as
required. the cumulative effect of adopting FIN 48 will be
recorded as an adjustment to beginning retained earnings
and other accounts as applicable. Although the Company
has not made a final determination of the effect the adop-
tion of FIN 48 will have on the Company’s financial position
and results of operations, it is expected that the cumulative
adjustment to retained earnings will not have a material
effect on its financial statements. the adoption of FIN 48
will impact the amount of, and balance sheet classification
of, deferred tax assets and liabilities, and other accounts
as applicable, and result in greater volatility in the effective
tax rate.

In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities—Including an Amendment of FASB Statement
No. 115 (SFAS No. 159). SFAS No. 159 permits entities to
choose to measure many financial instruments and certain
other items at fair value. the objective is to improve finan-
cial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measur-
ing related assets and liabilities differently without having
to apply complex hedge accounting provisions. the provi-
sions of SFAS No. 159 are effective for fiscal years begin-
ning after November 15, 2007. the Company has not yet
determined the impact of adoption of this statement on its
financial statements.

In September 2006, the SEC issued Staff Accounting
Bulletin, or SAB, No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108). SAB 108
requires that registrants quantify errors using both a bal-

ance sheet and statement of operations approach and
evaluate whether either approach results in a misstated
amount that, when all relevant quantitative and qualitative
factors are considered, is material. SAB 108 became effec-
tive during the fourth quarter of 2006. the Company has
determined that adoption of this statement had no impact
on the financial statements.

In September 2006, the FASB issued Statement No. 157, Fair
Value Measurements (SFAS No. 157). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157
emphasizes that fair value is a market-based measurement,
not an entity-specific measurement. therefore, a fair value
measurement should be determined based on the assump-
tions that market participants would use in pricing the asset
or liability. the provisions of SFAS No. 157 are effective for
fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. the Company has not yet
determined the impact of adoption of this statement on its
financial statements.

3. ACqUISITIONS

vivacs GmbH
On July 13, 2006, Emergent International, Inc., a wholly
owned subsidiary of the Company incorporated in Delaware
(EII), completed the acquisition of ViVacs GmbH, a German
limited liability company (ViVacs) to expand the Company’s
commercial vaccine portfolio, pursuant to the terms and con-
ditions of the Share Purchase and Assignment Agreement
dated July 13, 2006 by and between EII and ViVacs. EII paid
$150 in cash on the closing date of the agreement and
agreed to pay $50 on each of the first and second anniver-
saries of the closing date. the acquisition agreement also
provides for a potential variable earn-out purchase price
of up to $220, based on future payments from third party
licensees of the technology. As of December 31, 2006, the
Company has not received any such payments from third
party licensees. Because ViVacs was a development stage
company and had not commenced its planned principal
operations, the transaction was accounted for as an acqui-
sition of assets rather than as a business combination and,
therefore, goodwill was not recorded.

total purchase consideration consisted of:

Cash (including future guaranteed
cash payments of $100)
Direct acquisition costs
total purchase consideration

$250
180
$430

Emergent BioSolutions Inc.

the assets acquired were accounted for in accordance
with the provisions of SFAS No. 141, Business Combinations
(SFAS No. 141). All of the tangible and intangible assets
acquired and liabilities assumed of ViVacs were recorded at
their estimated fair market values on the acquisition date.

the purchase price was allocated as follows:

Current assets
Property and equipment
Current liabilities
Net liabilities acquired
In-process research and development
total purchase consideration

$ 153
97
(297)
(47)
477
$ 430

In connection with the transaction, the Company recorded
a charge of $477 for acquired research projects associ-
ated with product candidates in development for which, at
the acquisition date, technological feasibility had not been
established and, for accounting purposes, no alternative
future use existed.

Microscience Limited
On June 23, 2005, Emergent Europe, Inc., a wholly owned
subsidiary of the Company incorporated in Delaware (EEI),
completed the acquisition of Microscience pursuant to the
terms and conditions of the Share Exchange Agreement
dated June 23, 2005 by and between EEI and Microscience
Holdings PlC, a public limited liability company incorpo-
rated in England. At the closing date, the Company, through
EEI, issued Microscience shareholders 3,636,801 shares of
the Company’s Class A Common Stock in exchange for all
of the outstanding stock of Microscience. Shares of Class
A Common Stock of the Company were valued for financial
statement purposes at $7.42 per share based on a determi-
nation of the estimated fair value by the Company’s board of
directors. Because Microscience was a development stage
company and had not commenced its planned principal
operations, the transaction was accounted for as an acqui-
sition of assets rather than as a business combination and,
therefore, goodwill was not recorded.

total purchase consideration consisted of:

Fair value of common stock
Direct acquisition costs
total purchase consideration

$27,001
1,194
$28,195

values on the acquisition date. the purchase price was allo-
cated as follows:

Current assets
Property and equipment
Current liabilities
Net assets acquired
In-process research and development
total purchase consideration

$ 1,441
863
(684)
1,620
26,575
$28,195

In connection with the transaction, the Company recorded a
charge of $26,575 for acquired research projects associated
with products in development for which, at the acquisition
date, technological feasibility had not been established and,
for accounting purposes, no alternative future use existed.

4. ACCOUNTS rECEIvABLE
Accounts receivable consist of the following:

Billed
Unbilled
total

5. INvENTOrIES
Inventories consist of the following:

Raw materials and supplies
Work-in-process
Finished goods
total inventories

December 31,

2005
$1,112
1,418
$2,530

2006
$43,305
26
$43,331

December 31,

2005
$ 2,229
9,547
4,665
$16,441

2006
$ 2,133
22,239
349
$24,721

6. PrOPErTY, PLANT AND EqUIPMENT
Property, plant and equipment consist of the following:

land and improvements
Buildings and leasehold
improvements
Furniture and equipment
Software
Construction-in-progress

the assets acquired were accounted for in accordance
with the provisions of SFAS No. 141. All of the tangible
and intangible assets acquired and liabilities assumed of
Microscience were recorded at their estimated fair market

less: Accumulated
depreciation and
amortization
total Property, plant
and equipment, net

December 31,

2005
$ 2,995

2006
$ 5,173

14,143
12,520
3,937
6,197
39,792

25,074
15,963
3,937
41,563
91,710

(9,147)

(13,536)

$30,645

$ 78,174

2006 Annual Report

Depreciation and amortization expense was $1,867, $3,549 and $4,715 for the years ended December 31, 2004, 2005 and
2006, respectively. For the years ended December 31, 2004, 2005 and 2006, depreciation and amortization expense included
approximately $209, $1,257 and $1,257 respectively, related to the amortization of internal-use software. As of December
31, 2005 and 2006, un-amortized software cost was $2,471 and $1,214, respectively.

7. ACCrUED ExPENSES AND OTHEr CUrrENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:

Contract costs
Professional fees
Interest payable
Property taxes and other

December 31,

2005
$ 445
1,390
146
628
$2,609

2006
$1,218
1,115
222
698
$3,253

8. LONG-TErM DEBT AND rELATED PArTY NOTES PAYABLE
the components of long term-debt and related party notes payable are as follows:

term loan dated August 2006; lIBOR plus 3.75%, due August 2011
Revolving credit loan, lIBOR plus 3.75%
term loan dated October 2004; 6.625%, due October 2011
Forgivable loan dated October 2004; 3.0%, due March 2013
ERP term loan; Prime less 0.375%, due September 2007
term loan dated April 2006; lIBOR plus 3%, due April 2011
Employee notes payable for stock redemption; 6%, due 2006
Other
total long-term indebtedness and related party notes payable
less current portion of long-term indebtedness and related party notes payable
Noncurrent portion of long-term indebtedness and related party notes payable

December 31,

2005

—
—
7,000
2,500
1,760
—
537
113
11,910
(1,408)
$10,502

2006
$10,000
5,000
6,955
2,500
960
8,383
17
26
33,841
(2,473)
$31,368

In August 2006, the Company entered into a term loan for
$10,000 and a revolving credit loan that provides for bor-
rowings up to $5,000. Under the term loan, the Company
is required to make monthly principal payments begin-
ning in April 2007. A residual principal payment of approxi-
mately $5,600 is due upon maturity in August 2011. At the
Company’s request, the term loan is subject to an exten-
sion term at the sole discretion of the lender for five addi-
tional years until August 2016 for an extension fee of 1.00%
of the principal balance of the loan. If the term of the loan
were extended, the Company would be required to continue
to make monthly principal payments through maturity in
August 2016 in lieu of the residual principal payment oth-
erwise due in August 2011. Interest is payable monthly and
accrues at an annual rate equal to lIBOR plus 3.75% (9.11%
as of December 31, 2006).

Under the revolving credit loan, the Company is not
required to repay outstanding principal until October 2007.
In October 2007, the outstanding principal under the
revolving credit loan will convert to a term loan with
required monthly principal payments through maturity
in August 2011. Interest is payable monthly and accrues

at an annual rate equal to lIBOR plus 3.75% (9.11% as

of December 31, 2006). the Company also is required to

pay a fee on a quarterly basis equal to 0.50% of the aver-

age daily difference between $5,000 and the amount out-

standing under the revolving credit loan.

the term loan and revolving credit loan are secured by sub-

stantially all of Emergent BioDefense Operations’ assets,

other than accounts receivable under Biothrax supply con-

tracts with the DoD and HHS. the Company is required to

maintain on an annual basis a minimum tangible net worth

of not less than the sum of 85% of tangible net worth for

the most recently completed fiscal year plus 25% of current

net operating profit after taxes. In addition, the Company is

required to maintain on a quarterly basis a ratio of earn-

ings before interest, taxes, depreciation and amortization

for the most recent four quarters to the sum of current

obligations under capital leases and principal obligations

and interest expenses for borrowed money, in each case

due and payable for the following four quarters, of not less

than 1.25 to 1.00. the Company is in compliance with these

covenants as of December 31, 2006.

Emergent BioSolutions Inc.

In April 2006, the Company completed the acquisition of
a 145,000 square foot facility in Frederick, Maryland for
$9,750. this facility was previously under a lease which
contained an option to purchase the facility. the Company
paid $1,250 in cash and financed the remaining balance
with a bank loan in the amount of $8,500. this loan requires
monthly principal and interest payments from May 2006
through April 2011 of $72 with a balloon payment for the
remaining unpaid principal and interest due in April 2011.
the interest rate is a floating rate based on the three month
lIBOR plus 3% (8.36% as of December 31, 2006). the loan
is collateralized by the facility. the loan requires the
Company to comply with certain non-financial covenants.
the Company is in compliance with these covenants as of
December 31, 2006.

In October 2004, the Company entered into a Secured
Conditional loan with the Maryland Economic Development
Assistance Fund for $2,500. the proceeds of the loan were
used to reimburse the Company for eligible costs it incurred
to purchase a building in Frederick, Maryland. the loan is
secured by a $1,250 letter of credit and a security interest in
the building. the Company is required to pay an annual fee
of 1% to maintain the letter of credit. the borrowing bears
interest at 3% per annum, and the term of the loan ends
March 31, 2013. the principal and related accrued interest
may be forgiven if specified employment levels are achieved
and maintained through December 2012, at least $42,900 in
project costs are expended prior to December 2009, and the
Company occupies the building through December 2012.
For the loan to be forgiven, the Company must employ at
least 280 full-time employees at the Company’s facilities in
Frederick, Maryland as of December 31, 2009 and maintain
at least 280 full-time employees through December 31,
2012. If as of December 31, 2009, 2010, 2011 or 2012 the
Company employs fewer than 280 and more than 225 full-
time employees at the Company’s facilities in Frederick,
Maryland, then the Company will be required to repay $9 of
principal plus accrued interest for each position not filled
below the target level of 280 employees. If as of December 31,
2009, 2010, 2011 or 2012 the Company employs fewer than
225 full-time employees at the Company’s facilities in
Frederick, Maryland, then the Company will be required to
repay the entire outstanding principal amount of the loan
plus accrued interest. this loan is guaranteed by all of the
subsidiaries of the Company.

In connection with the 2004 purchase of the first build-
ing in Frederick, Maryland discussed above, the Company
entered into a loan agreement for $7,000 with a bank to
finance the remaining portion of the purchase price. the
borrowing 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, 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 matu-
rity 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
$5,000 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, 2006. this loan is guaranteed by all of the
subsidiaries of the Company.

During 2004, the Company implemented an Enterprise
Resource Planning (ERP) system. the Company financed
$2,280 of the costs through the issuance of a term loan.
the loan bears interest at prime less 0.375% (7.88% as of
December 31, 2006) and is due in September 2007. Monthly
payments escalate from $40 to $106 over the term. the
ERP system provides security for the loan.

In 2004, the Company issued notes as consideration for
the repurchase of outstanding class B common stock of
BioPort. these notes were issued to various current and
past employees who were issued equity as a result of ear-
lier stock option exercises. Amounts are payable in annual
installments, through 2007, and bear interest at 6%.

Scheduled principal repayments and maturities on long-
term debt as of December 31, 2006 are as follows:

2007
2008
2009
2010
2011
thereafter

$ 2,473
2,624
5,265
2,916
15,313
5,250
$33,841

9. LINE OF CrEDIT
On April 1, 2005, the Company, through Emergent
BioDefense Operations, formerly BioPort, obtained a line
of credit that provides for borrowings of up to $10,000. the
line of credit is scheduled to expire on May 15, 2007. the
line of credit is secured by accounts receivable under the
Company’s DOD and HHS contracts and bears interest
at the prime rate less 0.375% (7.88% as of December 31,
2006). Emergent BioDefense Operations is subjected to
certain covenants, including maintenance of specified
equity levels on a quarterly basis. Emergent BioDefense

2006 Annual Report

Operations is currently in compliance with those cove-
nants. A total of $8,930 was outstanding under this line of
credit as of December 31, 2006. this amount was repaid in
January 2007. No borrowings were outstanding under this
line of credit as of December 31, 2005.

10. 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 character-
istics, and sinking fund requirements as approved by the
Company’s board of directors. As of December 31, 2006, 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.

On November 14, 2006, the Company completed its initial
public offering, or IPO, which resulted in the issuance of
5,000,000 shares of common stock at a price of $12.50 per
share for gross proceeds of $62,500. Issuance costs related
to the offering were $8,271, resulting in net proceeds from
the offering of $54,229. In conjunction with the completion
of the IPO, all outstanding shares of Class A and Class B
common stock were converted into 22,420,421 shares of
$0.001 Common Stock at a conversion rate of one share of
common stock for one share of Class A and Class B com-
mon stock.

On September 20, 2006, the Company’s board of direc-
tors recommended to the stockholders of the Company an
amendment of the Company’s amended and restated cer-
tificate of incorporation, which the stockholders approved
on October 27, 2006, that, among other things, reclassifies
the Class A Common Stock as $0.001 par value per share
Common Stock, increases the number of authorized shares
of Common Stock to 100,000,000 shares and adjusts the par
value of the Preferred Stock from $0.01 par value per share
to $0.001 par value per share. the amendment became
effective on October 27, 2006. On September 20, 2006, the
Company’s board of directors also authorized the pricing
committee of the board of directors to effect a stock split of
both the Common Stock, in the form of a dividend of shares
of Common Stock, and the Class B Common Stock, in the

form of a dividend of shares of Class B Common Stock. the
pricing committee subsequently declared a 2.8771-for-one
stock split of the Common Stock and the Class B Common
Stock effective as of October 27, 2006. the par values, the
number of authorized shares and all share and per share
amounts in the consolidated financial statements have
been retroactively adjusted to give effect to the filing of the
certificate of amendment of the Company’s amended and
restated certificate of incorporation and the stock split.
the consolidated financial statements do not reflect the
reclassification of the Class A Common Stock as Common
Stock, other than the related adjustment to par value and
the increase in the number of authorized shares.

Holders of Common Stock are entitled to receive ratably
dividends payable as and when declared by the Company’s
board of directors. On June 15, 2005, the Company’s board
of directors declared a special cash dividend to the holders
of outstanding shares of Class A Common Stock and Class
B Common Stock in an aggregate amount of $5,400. the
Company’s board of directors declared this special dividend
in order to distribute the net proceeds of a payment received
as a result of the settlement of litigation initiated in 2002 by
the Company against Elan Pharmaceuticals, Inc., Athena
Neurosciences, Inc. and Solstice Neurosciences, Inc. in an
effort to clarify intellectual property rights, including the
recovery of royalties and other costs and fees, to which the
Company believed it was entitled under a series of agree-
ments regarding the development of botulinum toxin prod-
ucts. the Company paid the special cash dividend on July 13,
2005 to stockholders of record as of June 15, 2005. No reg-
ular dividends have been declared or paid.

In June 2004, in connection with the Reorganization, the
Company issued 18,666,479 shares of Class A Common
Stock in exchange for 18,017,994 shares of BioPort Class
A Common Stock and 648,485 shares of BioPort Class B
Common Stock held by BioPharm, l.l.C. the Company
repurchased and retired the remaining issued and out-
standing shares of BioPort Class B Common Stock from
former employees. Approximately 544,000 BioPort shares
were repurchased at $2.74 per share and approximately
28,000 BioPort shares were repurchased at $4.12 per share.
Shares were repurchased for $665 in cash and the issu-
ance of $947 in notes payable. See Note 8—long-term debt
and related party notes payable, for additional information
related to the former employee notes payable.

During the year ended December 31, 2005, the Company
repurchased 112,168 shares of Class B Common Stock
with an original weighted average cost of $0.26 per share,
for $337.

Emergent BioSolutions Inc.

Stock Options
As of December 31, 2006, the Company has two stock-based
employee compensation plans, the 2006 Plan and the 2004
Plan, under which the Company has granted options to pur-
chase shares of Common Stock. the Emergent Plans have
both incentive and non-qualified stock option features.

Prior to the Reorganization, BioPort had a separate stock
option plan (BioPort plan) under which options were granted
to purchase BioPort Class B Common Stock. the exercise
price and vesting schedule for options were determined by
BioPort’s board of directors, or a committee thereof, which
was established to administer the BioPort plan options.

the Company established the 2006 Plan in connection
with its initial public offering in November 2006. Under
the 2006 Plan, the Company may grant options for a total
of 503,500 shares of Common Stock, plus the number of
shares of Common Stock reserved for issuance under
the 2004 Plan that remained available for grant immedi-
ately prior to the initial public offering on November 14,
2006, of 585,961 shares. Accordingly, the 2006 Plan initially
authorizes the issuance of up to 1,089,461 shares. In addi-
tion, the 2006 Plan contains an “evergreen provision” that
allows for increases in the number of shares available for
issuance under the 2006 Plan in the first and third quar-
ter of each year from 2007 through 2009. the maximum
number of options 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 contractual life of no more
than 10 years.

In conjunction with the establishment of the 2006 Plan, as
noted above, the shares reserved for issuance under the
2004 Plan that remained available for grant became avail-
able for grant under the 2006 Plan. the exercise price of
each incentive option granted under the 2004 Plan must be
not less than 100% of the fair market value of the shares on
the date of grant, except in the case of the incentive stock
option being granted to a 10% stockholder, in which case
the exercise price must be not less than 110% of the fair
market value of the shares on the date of grant.

As of June 30, 2004, options to purchase 1,948,892 shares
of BioPort Class B Common Stock were outstanding under
the BioPort plan. Pursuant to the Reorganization, all out-
standing BioPort plan options were assumed by Emergent
and option holders were granted replacement stock options
to purchase an equal number of shares of Class B Common
Stock of Emergent. the exercise period for the replacement
options was extended to June 30, 2007. the BioPort options
were scheduled to expire on June 30, 2004.

In connection with the Reorganization, the Company
recorded stock-based compensation expense as a result
of the issuance of the stock options to purchase Class B
Common Stock. Based upon the guidance in APB No. 25,
because the stock options granted for Class B Common
Stock provided for an extended term over that of the can-
celled BioPort plan options, a new measurement date was
created and the Company recorded as stock-based com-
pensation expense the excess of the intrinsic value of the
modified options over the intrinsic value of the BioPort
plan options when originally issued. this resulted in stock-
based compensation expense of $4,310, or $2,801 net of
taxes, for the year ended December 31, 2004.

Outside of the Reorganization, options to purchase an addi-
tional 322,235 shares of Class B common stock of Emergent
under the 2004 Plan were granted during the year ended
December 31, 2004.

the terms and conditions of stock options (including price,
vesting schedule, term and number of shares) under the
Emergent Plans are determined by the Company’s compen-
sation committee, which administers the Emergent Plans.

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:

Outstanding at December 31, 2005
Exercisable at December 31, 2005

Granted
Exercised
Forfeited

Outstanding at December 31, 2006
Exercisable at December 31, 2006

Emergent 2004 Plan

Number
of Shares
3,141,829
2,452,483
258,933
(271,686)
(195,851)
2,933,225
2,395,693

weighted-
Average
Exercise Price
$ 1.78
$ 1.22
11.36
2.16
2.63
$ 2.53
$ 1.43

Number
of Shares
—
—
1,030,500
—
—
1,030,500
—

Emergent 2006 Plan
weighted-
Average
Exercise Price

Aggregate
Intrinsic
value

$
$

—
—
10.13
—
—
$10.13
—
$

26,375,147
23,310,093

2006 Annual Report

the weighted average remaining contractual term of options outstanding and exercisable as of December 31, 2005 and
December 31, 2006 was 2.46 years and 3.18 years, and 2.12 years and 1.06 years, respectively.

the weighted average grant date fair value of options granted during the years ended December 31, 2004, 2005 and 2006
was $0.95, $1.37 and $3.94, respectively. the total intrinsic value of options exercised during the years ended December 31,
2004, 2005 and 2006 was $325, $563 and $2,337, respectively. the total fair value of shares vested during 2006 was $434.

During 2006, the Company recognized pre-tax share-based compensation cost of $723. Of this amount, $623 is included
in Selling, General and Administrative Expense, $97 is included in Research and Development Expense, and $3 is included
in Cost of Product Sales.

A summary of the status of the Company’s nonvested stock options at December 31, 2006 is presented below:

Nonvested at December 31, 2005

Granted
Exercised
Vested
Forfeited

Nonvested at December 31, 2006

Emergent 2004 Plan

Emergent 2006 Plan

Number
of Shares
684,551
258,933
—
(345,536)
(60,416)
537,532

weighted-
Average
Exercise Price
$ 3.77
11.23
—
1.28
1.49
$ 9.21

Number
of Shares
—
1,030,500
—
—
—
1,030,500

weighted-
Average
Exercise Price

—
10.13
—
—
—
$10.13

During the year ended December 31, 2006, the Company received a tax benefit from stock options exercised of approxi-
mately $1,300.

11. INCOME TAxES
Significant components of the provision for income taxes attributable to operations consist of the following:

Year Ended December 31,
2005

2004

2006

Current

Federal
State

total Current
Deferred
Federal
State

total Deferred
total Provision for
Income taxes

$5,547
—
5,547

$ 16,093
200
16,293

$14,212
812
15,024

(372)
(46)
(418)

(9,769)
(1,199)
(10,968)

100
98
198

$5,129

$ 5,325

$15,222

the Company’s net deferred tax asset consists of the following:

December 31,

2005

2006

$ 2,242

$ 4,160

721
1,696
27,797
1,219
33,675
(1,387)
(393)
(1,780)
(19,925)
$ 11,970

549
1,452
32,534
1,681
40,376
(888)
(433)
(1,321)
(27,283)
$ 11,772

Net operating loss
carryforward
Research and development
credit carryforward
Stock compensation
Foreign deferrals
Other
Deferred tax asset
Fixed assets
Other
Deferred tax liability
Valuation allowance
Net deferred tax asset

Emergent BioSolutions Inc.

Net operating loss carryforwards consist of $91,000 for
state jurisdictions and $77,000 for foreign jurisdictions.
the state net operating loss carryforwards will begin to
expire in 2018. the foreign net operating loss carryfor-
wards 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:

US
International
Earnings before
taxes on income

Federal tax at
statutory rates
State taxes, net of
federal benefit
Impact of foreign
operations
Change in valuation
allowance
Effect of foreign rates
tax credits
Other differences
Permanent differences
Provision for
income taxes

Year ended December 31,
2005
$ 54,259
(33,150)

2006
$ 56,698
(18,683)

2004
$16,601
—

$16,601

$ 21,109

$ 38,015

$ 5,863

$ 7,388

$ 13,305

(714)

(2,329)

(395)

—

(17,982)

(6,050)

479
—
(492)
11
(18)

16,901
2,358
(474)
(212)
(325)

4,248
3,110
(759)
1,043
720

$ 5,129

$ 5,325

$ 15,222

the estimated effective annual tax rate for the years ended
December 31, 2005 and 2006 was 25% and 40%, respec-
tively. the increase in the estimated rate is due primarily
to the impact of foreign and state net operating losses and
an increase in permanent differences, including incentive
stock options.

the Company is the subject of an ongoing federal income
tax audit for the tax years ended December 31, 2004 and
2005. the financial statement impact of the audit has been
estimated at approximately $760. this amount has been
accrued as of December 31, 2006.

12. 401(K) SAvINGS PLAN
the Company has established a defined contribution sav-
ings 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 sal-
ary deferrals. the Company provides for matching of quali-
fied deferrals up to 50% of the first 6% of the employee’s

salary. During the years ended December 31, 2004, 2005
and 2006, the Company made matching contributions of
approximately $452, $520 and $573, respectively.

13. COMMITMENTS AND SETTLEMENT GAINS

Leases
the Company leases laboratory and office facilities, office
equipment and vehicles under various operating lease
agreements. the Company leases office and laboratory
space in Gaithersburg, Maryland under a non-cancelable
operating lease that contains a 3% annual escalation and
expires on November 30, 2008.

the Company leases approximately 23,000 square feet
of office space in Rockville, Maryland under a non-can-
celable operating lease that contains a 3% annual esca-
lation clause over the ten year term of the lease. the
Company has a five year renewal option at the end of the
initial term. For the years ended December 31, 2004, 2005
and 2006, total rent expense was $1,334, $2,526 and
$2,386, respectively.

Future minimum payments under operating lease obliga-
tions as of December 31, 2006 are as follows:

2007
2008
2009
2010
2011
2011 and beyond
total minimum lease payments

$1,726
1,866
634
651
669
3,633
$9,179

vendor Contracts
In accordance with a recently signed research contract, the
Company is committed to spending a minimum of $100 in
research and development activities by September 2007.
to date, the Company has incurred minimal expenditures
under this contract.

Litigation
In June 2002, the Company initiated a lawsuit against Élan
Pharmaceuticals and related entities in an effort to clarify
intellectual property rights, including the recovery of roy-
alties and other costs and fees, to which the Company
believed it was entitled under a set of 1991 agreements
and to clarify intellectual property rights associated with
those agreements. the Company sought damages, injunc-
tive relief and declaratory relief. On June 27, 2005, the
Company obtained a settlement pursuant to which Élan
and related entities agreed to pay the Company $10,000.
Payment of such settlement was received by the Company
in July 2005. the agreement also clarified the parties’
intellectual property rights. Upon receipt of the settle-
ment from Élan Pharmaceuticals and related entities,

2006 Annual Report

the Company distributed a net settlement amount (total
proceeds from the settlement less reserves for appli-
cable federal and state income taxes, legal expenses
related to the suit and other miscellaneous expenses)
of $5,400 to all Company stockholders of record as of
June 15, 2005.

In 1998, the Company recorded obligations related to the
initial purchase agreement of Michigan Biologic Products
Institute of $10,119. During 2004, the Company settled
its entire remaining purchase obligations to the State of
Michigan for $6,300, resulting in a gain of $3,819, which is
reflected as a component of operations on the accompany-
ing statement of operations.

From time to time, the Company is involved in product lia-
bility 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. For claims filed against the
Company for use of Biothrax by the DoD, we expect to rely
on contractual indemnification provisions with the DoD and
statutory protections to limit our potential liability resulting
from the pending lawsuits.

14. rELATED PArTY TrANSACTIONS
Simba llC, a Maryland based limited liability company
100% owned by the Company’s Chief Executive Officer and
his wife, provides chartered air transportation. Simba offers
its services to the Company on a discount from Simba’s nor-
mal commercial rate. For the years ended December 31,
2004, 2005 and 2006, the Company paid approximately
$32, $34 and $13, respectively, for transportation on an as
needed basis for business purposes. As of May 2006, this
arrangement has been terminated.

the Company has entered into marketing and sales con-
tracts with entities controlled by family members of the
Chief Executive Officer to market and sell Biothrax in cer-
tain international territories if certain conditions are met. A
consulting arrangement with the Chief Executive Officer’s
sister required a payment of 4% of net sales, not to exceed
$2.00 per dose, under the agreement. A marketing arrange-
ment with an entity affiliated with the Chief Executive Officer
and his family requires a payment of 40% of gross sales in
countries in the Middle East and North Africa, except Israel.
No royalty payments under these agreements have been
triggered for the years ended December 31, 2004, 2005 and
2006. the arrangement with the Chief Executive Officer’s
sister has been terminated.

For the years ended December 31, 2004, 2005 and 2006,
the Company paid approximately $494, $794 and $419,
in consulting, lease and transportation
respectively,
arrangements with various persons or entities affiliated
with the Chief Executive Officer or two members of the
board of directors. For the year ended December 31, 2005
and 2006, there was $22 and $17 respectively, in accounts
payable for these services. the Company currently has an
agreement with a director to perform corporate strategic
issues consultation and directed project support to the
marketing and communications group and an agreement
with East West Resources Corporation, a company owned
by the Chief Executive Officer, to provide transportation
and logistical support.

Emergent BioSolutions Inc.

15. SEGMENT INFOrMATION
the Company operates in two business segments: biodefense and commercial. In the biodefense business, the Company
develops, manufactures and commercializes products for use against biological agents that are potential weapons of
bioterrorism. Revenues in this segment relate to the Company’s FDA-approved product, Biothrax. In the commercial
business, the Company develops products for use against infectious diseases with significant unmet or underserved medi-
cal needs. Revenues in this segment consist predominantly of milestone payments and development and grant revenues
received under collaboration and grant arrangements. the “All Other” segment relates to the general operating costs of
the business and includes costs of the centralized services departments, which are not allocated to the other segments.
the assets in this segment consist of cash and fixed assets.

Biodefense

Commercial

All Other

Total

reportable Segments

Year Ended December 31, 2006

External revenue
Inter-segment revenue (expense)
Research and Development
Interest revenue
Interest expense
Depreciation and amortization
Net Income (loss)
Assets
Expenditures for long-lived assets

Year Ended December 31, 2005

External revenue
Inter-segment revenue
Research and Development
Interest revenue
Interest expense
Depreciation and amortization
Net Income (loss)
Assets
Expenditures for long-lived assets

$147,707
—
22,219
—
—
3,586
55,074
125,562
29,273

$128,219
—
10,327
—
—
2,911
58,632
40,502
$ 3,286

$ 5,025
—
22,425
—
—
830
(24,538)
13,732
1,455

$ 2,469
—
6,962
—
—
411
(40,325)
5,489
$ 3,052

—
—
857
846
(1,152)
299
(7,743)
98,961
10,500

—
—
1,092
485
(767)
226
(2,523)
54,341
194

$152,732
—
45,501
846
(1,152)
4,715
22,793
238,255
41,228

$130,688
—
18,381
485
(767)
3,548
15,784
100,332
$ 6,532

the accounting policies of the segments are the same as those described in Note 2—Summary of significant accounting
policies. there are no inter-segment transactions.

16. qUArTErLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the years ended December 31, 2005 and 2006 is presented in the following tables:

Fiscal year 2006

Revenue
Income (loss) from operations
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted

Fiscal year 2005

Revenue
Income from operations
Net income
Net income per share, basic
Net income per share, diluted

March 31,

June 30,

September 30,

December 31,

Three months ended

$12,223
(9,398)
(4,636)
(0.21)
(0.21)

$15,261
425
225
0.01
0.01

$11,446
(6,194)
(3,054)
(0.14)
(0.14)

$44,058
3,699
2,616
0.14
0.12

$42,174
9,720
4,354
0.19
0.18

$27,581
4,498
3,410
0.15
0.13

$86,889
43,900
26,129
1.04
0.99

$43,788
12,714
9,533
0.43
0.38

2006 Annual Report

COMMON STOCK INFOrMATION

STOCK PErFOrMANCE GrAPH
the stock performance graph below compares the cumulative total stockholder return for our common stock between
November 15, 2006, the date our common stock was first publicly traded, and December 31, 2006 with the cumulative total
return of the S&P 500 Index and the S&P Biotechnology Index. the comparison assumes the investment of $100.00 on
November 15, 2006 in each of our common stock, the S&P 500 Index and the S&P Biotechnology Index and assumes the
reinvestment of dividends. the graph below assumes that the initial value of our common stock on November 15, 2006 was
the closing sales price of $11.70 per share.

COMPArISON OF CUMULATIvE TOTAL rETUrN
Among Emergent BioSolutions Inc., the S&P 500 Index
and the S&P Biotechnology Index

$105

$100

$95

$90

$85

$80
11/15/06

11/30/06

12/31/06

Emergent BioSolutions Inc.

S&P 500

S&P Biotechnology

Emergent BioSolutions Inc.
S&P 500 Index
S&P Biotechnology Index

11/15/06
$100.00
100.00
100.00

11/30/06
$ 89.66
101.90
97.29

12/31/06
$ 95.38
103.33
94.65

For the period from November 15, 2006 to December 31, 2006, our common stock had a high sales price of $12.72 per
share and a low sales price of $9.75 per share. As of March 15, 2007, we had 57 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 currently intend to retain all of our future earnings to finance the growth and development of our business. We do not
intend to pay cash dividends to our stockholders in the foreseeable future.

On June 15, 2005, our board of directors declared a special cash dividend to the holders of our outstanding shares of com-
mon stock in an aggregate amount of approximately $5.4 million. Our board of directors declared this special dividend in
order to distribute the net proceeds of a payment that we received as a result of the settlement of litigation that we initiated
against Elan Pharmaceuticals, Inc., Athena Neurosciences, Inc. and Solstice Neurosciences, Inc. We paid the special cash
dividend on July 13, 2005 to stockholders of record as of June 15, 2005. Prior to this special cash dividend, we had never
declared or paid any cash dividends on our common stock.

Emergent BioSolutions Inc.

CORPORATE INFORMATION

Corporate Headquarters
2273 research Blvd.
Suite 400
rockville, MD 20850
United States
Tel: 301-795-1800
Fax: 301-795-1899
www.emergentbiosolutions.com

other Locations
Emergent Biodefense
Operations Lansing Inc.
3500 N. Martin Luther King Jr. Blvd.
Lansing, MI 48906
United States
Tel: 517-327-1500
Fax: 517-327-7202

Emergent Product
Development Gaithersburg Inc.
300 Professional Drive, Suite 100
Gaithersburg, MD 20879
United States
Tel: 301-590-0129
Fax: 301-590-1252

Emergent Product
Development Germany GMBH
Am Klopferspitz 19
82152 Martinsried
Germany
Tel: +49 89 550 698 80
Fax: +49 89 550 698 888

Emergent Product
Development U.K. Limited
540-545 Eskdale road
Winnersh Triangle
Wokingham, Berkshire, rG41 5TU
United Kingdom
Tel : +44 (0)118 944 3300
Fax: +44 (0)118 944 3302

Emergent Sales and
Marketing Germany
Am Klopferspitz 19
82152 Martinsried
Germany
Tel: +49 89 895 449 28
Fax: +49 89 895 458 81

Emergent Sales and
Marketing Singapore
10 Anson road
International Plaza #16-12
Singapore 079903
Tel: +65-6822 8007
Fax: +65-6822 8006

BioThrax® is a registered trademark
and spi-VEC™ is a trademark of
Emergent BioSolutions.

The information in this annual report is
a summary and should be considered
along with the company’s Annual report
on Form 10-K for the year ended
December 31, 2006.

A copy of the company’s Form 10-K
for the year ended December 31, 2006,
filed with the Securities and Exchange
Commission, is available without charge
upon written request to Investor
relations, Emergent BioSolutions, 2273
research Blvd, Suite 400, rockville, MD
20850, by calling (301) 795-1800 or by
accessing the company’s website at
www.emergentbiosolutions.com.

Independent registered
Public Accounting Firm
Ernst & Young LLP
McLean, VA
United States

Stock Transfer Agent and registrar
Investors with questions concerning
account information, new certificate
issuances, lost or stolen certificate
replacement, securities transfers, or
the processing of a change of address
should contact:

American Stock Transfer &
Trust Company
59 Maiden Lane, 1st Floor
New York, NY 10038
United States
Tel: 800-937-5449 or 212-936-5100
www.amstock.com

Corporate Counsel
Wilmer Cutler Pickering Hale
and Dorr LLP
Washington, DC
United States

Annual Meeting
Thursday, June 14, 2007
10 a.m. Eastern Time
Hyatt regency Bethesda
1 Bethesda Metro Center
Bethesda, MD 20814
United States

Investor relations
Mr. robert Burrows
Vice President,
Corporate Communications
E-mail: burrowsr@ebsi.com
Tel: 301-795-1877
Fax: 301-795-1899

Market Information
Emergent BioSolutions Inc. common
stock has traded on the New York Stock
Exchange under the trading symbol EBS
since November 15, 2006.

Corporate Governance
Our Chief Executive Officer and Chief
Financial Officer have provided the
certifications required by rule 13a-14(a)
under the Securities Exchange Act of
1934, copies of which are filed as exhibits
to our Annual report on Form 10-K. In
addition, our Chief Executive Officer intends
to submit his initial annual chief executive
officer certification to the New York Stock
Exchange within 30 days of the date of
our Annual Meeting of Stockholders in
accordance with the New York Stock
Exchange listing requirements.

Emergent BioSolutions Inc. is strongly
committed to the highest standards of
ethical conduct and corporate governance.
Our Board of Directors has adopted
Corporate Governance Guidelines, along
with the charters of the Board Committees
and a Code of Conduct and Business Ethics
for directors, officers and employees, all
of which are available on the company’s
website at www.emergentbiosolutions.com.

Important Note About Forward-Looking Statements
This annual report contains 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.

There are a number of important factors that could
cause the company’s actual results to differ materially
from those indicated by such forward-looking statements,
including our performance under existing BioThrax
sales contracts with the U.S. government, including the
timing of deliveries under these contracts; our ability
to obtain new BioThrax sales contracts with the U.S.
government; our plans for future sales of BioThrax; our
plans to pursue label expansions and improvements
for BioThrax; our plans to expand our manufacturing
facilities and capabilities; the rate and degree of market
acceptance and clinical utility of our products; our ongoing
and planned development programs, preclinical studies
and clinical trials; our ability to identify and acquire or in
license products and product candidates that satisfy our
selection criteria; the potential benefits of our existing
collaboration agreements and our ability to enter into
selective additional collaboration arrangements; the
timing of and our ability to obtain and maintain regulatory
approvals for our product candidates; our commercial-
ization, marketing and manufacturing capabilities and
strategy; our intellectual property portfolio; our estimates
regarding expenses, future revenue, capital requirements
and needs for additional financing; and other factors
identified in the company’s Annual report on Form 10-K
for the year ended December 31, 2006 and subsequent
reports filed with the SEC. The company disclaims any
intention or obligation to update any forward-looking
statements as a result of developments occurring after
the date of this annual report. Our forward-looking
statements do not reflect the potential impact of any
future acquisitions, mergers, dispositions, joint ventures
or investments we may make.

Corporate Headquarters

2273 research Boulevard, Suite 400, rockville, MD 20850, USA