Emergent BioSolutions Inc. Annual Report 2007

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FY2007 Annual Report · Emergent BioSolutions Inc.

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2007 Annual Report

About Emergent BioSolutions Emergent BioSolutions is a profitable, multinational biopharmaceutical

company dedicated to one simple mission — to protect life. We develop, manufacture and commercialize

immunobiotics, consisting of vaccines and therapeutics that assist the body’s immune system to prevent or

treat disease and other medical conditions that have resulted in significant unmet or underserved medical

needs. Our marketed product, BioThrax® (Anthrax Vaccine Adsorbed), is the only vaccine approved by the

U.S. Food and Drug Administration for the prevention of anthrax infection. More information on the

company is available at www.emergentbiosolutions.com.

gaithersburg, Md

FredericK, Md

rockville, MD
headquarters

reading, u.K.

Munich, gerMany

A global footprint

Lansing, Mi

MaLaysia

singapore

We are expanding our presence around the globe. Along with our
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 recently
established a joint venture with the government of Malaysia. We also
work with third-party marketing representatives in countries that
represent potential strategic growth markets.

While our business

can seem complex,

our mission remains

stunningly simple:

Protecting life. We pursue innovative ways of directing the immune system to

prevent and treat life-threatening diseases. Whether it is developing vaccines

and therapeutics that hold the promise of a better life for millions of adults and

children or providing the world’s only FDA-approved anthrax vaccine to protect

against the threat of bioterrorism, we are passionate in our mission.

2007 accomplishments position
us well for future growth

Dear Stockholders:

In 2007, our first full year as a public com-
pany, we achieved financial and operational
success as well as progress in our multiple
product development initiatives. Operation-
ally, we sold more of our licensed product,
BioThrax®(Anthrax Vaccine Adsorbed), and
accomplished key product development
milestones. We also advanced our manufac-
turing expansion program and completed
key business development objectives.

Achieving a track record
of financial success
In 2007, we reported another year of record
revenues of $183 million and net income of
$23 million, our sixth consecutive year of
profitable operations. As a result of this finan-
cial performance, in 2007 we continued to self-
fund a majority of the development of our
product pipeline in pursuit of vaccines and
therapeutics that address significant unmet or
underserved medical needs. With over $100 mil-
lion in cash at year-end and visibility into anti-
cipated 2008 revenues, we believe we are well
positioned to pursue the acquisition of one or
more late-stage product candidates, which would
complement the advancement of our product port-
folio. This is one of our primary goals in 2008.

Securing global demand for BioThrax
We succeeded in capturing a greater portion
of the U.S. Department of Health and Human
Services (HHS) requirements for the stockpil-
ing of anthrax vaccines. In 2007, we signed a
contract valued at $448 million with HHS that
includes the delivery of 18.75 million doses of
BioThrax over three years, the largest contract
in the history of our company. Internationally,
we closed meaningful sales of BioThrax to allied
foreign governments while pursuing growing
interest from a number of other countries.

Advancing our product pipeline
In 2007, we achieved progress in our advanced
pipeline candidates.
• Anthrax IG Therapeutic — Our anthrax
immune globulin (IG) therapeutic candidate
was granted Fast Track status by the U.S.
Food and Drug Administration (FDA) and
received additional funding of $9.5 mil-
lion in the form of a development contract
with Biomedical Advanced Research and
Development Authority (BARDA) and the
National Institute of Allergy and Infectious
Diseases (NIAID).

• Typhoid Vaccine — Our single-dose, oral
typhoid vaccine candidate completed a
Phase II clinical trial in Vietnam achieving
all endpoints for safety and immunogenicity;
if successful, it would be the world’s first
single-dose drinkable typhoid vaccine.
• Hepatitis B Therapeutic — Our hepatitis
B candidate advanced in its Phase II clinical
program following a positive Safety Moni-
toring Committee review.

Strengthening our infrastructure
We completed the construction and equipment
installation of our new state-of-the-art, large-
scale manufacturing facility located in
Lansing, Michigan. I am pleased to report that
this manufacturing expansion program is com-
ing in on time and within budget. We initiated
engineering runs for BioThrax in preparation
for the upcoming submission of a supplement
to our Biological Licensing Agreement (BLA)
to the FDA to allow us to manufacture BioThrax
in this new facility. This facility is campaign-
able, which would support manufacture of
different types of fermentation-based vaccines.
We also recently commissioned a pilot plant in
support of manufacturing clinical material for
our advancing product candidates.

Expanding our global footprint
We continued to pursue licensure of BioThrax
in various foreign markets. We also continued
to develop partnerships with government and
non-government entities in strategic growth
markets. Specifically, we formed a joint ven-
ture in Malaysia with Ninebio Sdn. Bhd.
(9Bio) to supply BioThrax and other medical
and biodefense products and related services
to the Government of Malaysia, as well as
potentially other countries within Asia.

Pursuing our mission
Protecting life is a pursuit that demands
relentless devotion and an unwavering com-
mitment. We follow five essential principles
that guide our decision-making process and
are the basis for our past and future success.
• We are focused — We focus on product
development from proof-of-concept to com-
mercialization. We continually evaluate and
prioritize our development programs to
ensure that we focus on product candidates
that hold the greatest promise.
• We are balanced — We develop both
vaccines and therapeutics serving multiple

markets. Our current focus is on infectious
diseases. We are also exploring other disease
areas that have resulted in significant unmet
or underserved public health needs.
• We are collaborative — We aim to estab-
lish non-dilutive partnerships with govern-
mental and non-governmental organizations
in the United States and abroad to leverage
our investment in the development of our
own product candidates.

• We are acquisitive — We pursue the
licensure and acquisition of products and
product candidates that leverage our existing
capabilities and expand our pipeline.
• We are profitable — We manage our
business in a fiscally responsible manner.
This has helped us achieve a track record of
financial success that has enabled us to fund
our pipeline development.
These guiding principles, along with our
2007 achievements, have laid the groundwork
and provided momentum for success in 2008.
In March 2008, we announced the acquisition
of a monoclonal antibody product candidate
against anthrax. This acquisition is designed
to round-out our anthrax countermeasure

program in that it enables us to develop an
additional therapeutic candidate in parallel to
our polyclonal anthrax IG therapeutic. HHS
has indicated its interest in acquiring both
anthrax monoclonal and polyclonal (immuno-
globulin) therapeutics for the Strategic
National Stockpile (SNS) for the treatment of
post-symptomatic anthrax infection.

In closing, I would like to thank all of our
employees worldwide who are working every
day to build our company into a leading bio-
pharmaceutical company. I am grateful for
the continued guidance provided by our
Board of Directors. I would like to acknowl-
edge the support of our key customers,
collaborators and vendors. Finally, I would
like to pay particular thanks to our stock-
holders for your confidence in our company
and the mission we are pursuing.

Sincerely yours,

Fuad El-Hibri
Chairman and Chief Executive Officer

Financial highlights

revenues
(dollars in thousands)

net income
(dollars in thousands)

assets
(dollars in thousands)

stockholders’ equity
(dollars in thousands)

earnings per share—basic
(dollars)

182,915

152,732

130,688

22,936

22,793

15,784

273,508

238,255

171,159

138,472

83,494

11,472

55,769

4,454

100,332

69,056

37,127

59,737

22,949

8,448

0.99

0.77

0.79

0.61

0.24

A biopharmaceutical company
Protecting life

Focused

We focus on product development, from proof-of-concept to

commercialization. Our approach is to continuously evaluate

and prioritize our development programs to advance those

product candidates that hold the greatest promise.

Balanced

We take a balanced approach in developing products that

serve multiple markets. Our product portfolio comprises

vaccines and therapeutics that address underserved

or unmet medical needs. We employ multiple platforms

in product development to reduce risk. Our products

target markets that provide significant opportunities for

growth, whether vaccines and therapeutics for biodefense

application or targeting infectious diseases worldwide.

Collaborative

We aim to establish collaborative non-dilutive arrangements

with governmental and non-governmental agencies in the

United States and abroad to advance the development of our

product candidates.

Acquisitive

We seek to strategically expand our product portfolio by

pursuing opportunities to acquire promising advanced

product candidates. This approach enables us to reduce

product development risk, accelerate timelines and avoid

costs associated with exploratory research.

Proven

We manage our business in a fiscally responsible

manner. This has helped us achieve a track

record of financial success that has enabled us

to fund the development of a majority of our

pipeline development.

Advancing life

A balanced product portfolio

Our approach is to achieve balance in

the products that we develop through a

portfolio comprised of innovative vaccines

and therapeutics that target infectious dis-

eases worldwide. For the development of

certain product candidates we use multiple
proprietary technologies: our spi-VEC™

bacterial platform suitable for oral deliv-
ery, and MVAtor™, a viral vector for

injectable vaccines.

Delivering the difference
spi-VEC, our proprietary oral delivery

platform, is designed to enable the effec-

tive delivery of vaccines and therapeutics.

Based on the Salmonella typhi bacterium,

the spi-VEC vector has demonstrated a

promising safety profile in clinical trials in

both adults and children. spi-VEC technol-

ogy is versatile and is designed to deliver a

wide range of antigens to prevent or treat

numerous diseases, including bacterial and
viral infections and cancer. Our spi-VEC
technology is our oral typhoid product can-
didate and is the basis by which we are
developing our hepatitis B candidate, an
immunotherapy for chronic carriers of the
hepatitis B virus.

MVAtor is a viral vector based on the
Modified Vaccinia Ankara (MVA) virus,
an attenuated virus that can be used to
deliver a foreign antigen, which stimulates
an immune response. MVA has been used
in people and shows promising results for
safety and immunogenicity. In animal
models, recombinant MVA vaccines have
been shown to be highly immunogenic and
capable of eliciting a protective immune
response against various infectious dis-
eases. Clinical trials that have been
performed with recombinant MVA under-
score the safety of MVA for potential use
as a viral vector.

Understanding vaccine vectors

Vaccine vectors are the means by which antigens can be delivered to patients to effect a
prophylactic or therapeutic immune response. Attenuated vaccine vectors are live bacteria
or viruses that have been weakened so that they are no longer capable of causing disease,
yet they can still efficiently express foreign antigens in a manner that will lead to a protec-
tive immune response. These attenuated vectors can be used as vaccines themselves, or as
a general delivery system for vaccines and therapeutics for use against a variety of diseases.

We are developing
a balanced portfolio
of vaccines and
therapeutics from
proof-of-concept to
commercialization.

Product

Preclinical

Phase 1

Phase 2

Phase 3

licensed

BioThrax® (Anthrax Vaccine Adsorbed)

Anthrax IG Therapeutic

Pivotal studies*

Typhoid Vaccine

Hepatitis B Therapeutic

Next Generation Anthrax Vaccine

Group B Streptococcus Vaccine

Botulinum Vaccines

Chlamydia Vaccine

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Meningitis B Vaccine
(sanofi pasteur)

* Pivotal studies in animals and humans expected to proceed in parallel under the FDA animal rule.

A Balanced Portfolio—a n t hr a x vac cine s

Protecting those most at risk for anthrax
exposure through vaccination

Shielding life

“ …anthrax is a top threat.
I know my colleagues
have heard me say
before that the top three
threats, in fact, are
anthrax, anthrax, anthrax.”
Gerald W. Parker
Assistant Secretary, HHS

According to the Centers for Disease Control
and Prevention (CDC), weaponized anthrax
is one of the greatest possible bioterrorist
threats to the public. To combat this Category
A threat, we have developed a franchise of
prophylaxis and post-exposure treatments to
shield against anthrax disease.

Our licensed anthrax vaccine, BioThrax®
(Anthrax Vaccine Adsorbed), is the only
FDA-approved product for pre-exposure
prophylaxis of anthrax disease. Marketed as
a biodefense countermeasure, our principal
customers include governments which
actively immunize military personnel and
which stockpile for protection in the event of
an anthrax attack on civilians. To date, more
than 7 million doses have been administered
to almost 2 million individuals. The U.S. gov-
ernment has contracted with us to supply the
CDC’s Strategic National Stockpile (SNS)
with BioThrax. Since 1998, we have deliv-
ered over 25 million doses of BioThrax under
our contracts with the Department of Defense
and the Department of Health and Human
Services (HHS). Last year, we secured a
three-year contract with HHS to continue
providing BioThrax for supply into the SNS.

We continue to advance the utility
of BioThrax through several product

enhancement programs. We are seeking
FDA approval to use BioThrax as a post-
exposure prophylaxis in conjunction with
antibiotics, to extend the label’s expiry dat-
ing to four years, to reduce the number of
doses required for immunization and to add
a new route of administration.

Expanding markets worldwide
To further expand our international market
opportunities, we are pursuing regulatory
approval in a number of foreign jurisdictions
and remain encouraged by the current level
of interest from several governments around
the world. We continued to develop partner-
ships with government and non-government
entities in strategic growth markets.
Specifically, we formed a joint venture in
Malaysia with 9Bio that focuses on creating
critical biologics infrastructure and supply-
ing biodefense countermeasures, including
BioThrax and other medical and complemen-
tary products and services to the Government
of Malaysia, as well as potentially other
countries within the region. In addition, the
Government of Malaysia, through 9Bio,
selected Emergent BioSolutions as one of its
principal partners to assist, as a contract ser-
vice provider, in building a vaccine develop-
ment and manufacturing infrastructure.

Target Indication
Pre- and post-exposure
prophylaxis for anthrax
disease

Intended Market
Civilian stockpile, military

Target Product
Characteristics
Recombinant protective
antigens or Bacillus
anthracis toxoid technology

Next generation anthrax vaccine

We have established a program to develop additional anthrax
vaccine product candidates that would incorporate advanced
characteristics, including one or more of the following: reduced
number of doses, room temperature storage, enhanced immune
response, longer expiry dating or novel delivery method. We are
evaluating candidates based on recombinant protective antigens,
or rPA, as well as a candidate based on native protective antigens
of Bacillus anthracis.

BioThrax® (Anthrax
Vaccine Adsorbed)
is the only FDA-
approved product
for pre-exposure
prophylaxis of
anthrax disease.

A Balanced Portfolio—a n t hr a x ther a P eu t ic s

Safeguarding life

Protecting those exposed to anthrax
through therapeutics

Anthrax Therapeutics
(IG & Monoclonal)

Target Indication
Treatment of
patients with
manifest symptoms
of anthrax disease

Intended Market
Civilian stockpile,
military

Target Product
Characteristics
Intravenous

For investigational use only.

In August 2004, HHS issued a request for pro-
posal seeking 200,000 doses of an anthrax
therapeutic to be administered following
exposure to anthrax. Anthrax therapies are
being purchased by HHS as means of expand-
ing its arsenal of effective countermeasures
in the event of future anthrax attacks. We
are developing a polyclonal anthrax immune
globulin and a monoclonal anthrax antibody
product candidate.

Anthrax IG Therapeutic
Our Anthrax Immune Globulin (IG)
Therapeutic for use against symptomatic
anthrax infection is in advanced develop-
ment. We are developing our anthrax IG
therapeutic using plasma produced by
healthy donors who have been immunized
with our anthrax vaccine, BioThrax. Our

FDA-approved manufacturing partner,

Talecris Biotherapeutics Inc., has completed

two full-scale commercial lots of our prod-

uct candidate for use in clinical studies. Last

year, the FDA granted our anthrax IG thera-

peutic candidate Fast Track status. We

subsequently filed an Investigational New

Drug application with the FDA for a Phase I

clinical trial to evaluate the safety and phar-

macokinetics of our product candidate. We

have signed development contracts with

NIAID totaling $13.4 million for the contin-

ued studies designed to assess tolerability of

our anthrax IG therapeutic. Pivotal animal stud-

ies and clinical trial planning are underway.

Currently, there are no FDA-approved

products for the treatment of anthrax dis-

ease that can neutralize the anthrax toxin.

Monoclonal anthrax therapeutic

We are also developing AVP-21D9, a monoclonal anthrax therapeutic for use against
symptomatic anthrax infection. This product is a human monoclonal antibody, and has
demonstrated efficacy in animal studies. Development of this product is funded in part
with a grant from NIAID. The addition of an anthrax monoclonal therapeutic to our
portfolio broadens our anthrax countermeasures program and reflects our ongoing
commitment to develop a full portfolio of countermeasures to strengthen national pre-
paredness in the event of future anthrax attacks.

Our anthrax
therapeutic product
candidates are being
designed for use
against symptomatic
anthrax infection.

A Balanced Portfolio—t y P hoid vac cine

Seeking to protect millions against typhoid fever
through innovation

Transforming life

“ The trial will advance the

development of a sorely needed

vaccine for typhoid fever. The

ease of administration of the

product is one of its chief

attractions from a public

health perspective.”

Dr. Ted Bianco, Director of Technology Transfer
at the Wellcome Trust, which funded the study

Typhoid fever is a global public health
burden with an estimated 22 million cases
and 200,000 deaths occurring worldwide
each year. Typhoid fever continues to be
a public health problem in many devel-
oping countries, with young children
being disproportionately affected. The
World Health Organization (WHO) rec-
ommends vaccinating pre-school-aged
typhoid endemic
in
children
regions against the disease. With anti-
biotic resistant strains of typhoid fever
being increasingly seen in endemic pop-
ulations, there is an even greater need
to control the disease through targeted
vaccination programs.

living

We are excited about developing the
world’s first single-dose oral vaccine to pro-
tect children and adults at risk of typhoid
fever. The patient-friendly administration
of our vaccine candidate holds the promise
of expanding the global vaccine market and
increasing the likelihood of immunization.
In 2007, we completed a randomized,
placebo-controlled Phase II clinical trial of
our vaccine candidate in Vietnam, with new
trials planned for 2008. In this Phase II trial,
the vaccine candidate achieved all clinical
endpoints for safety and immunogenicity.
The Wellcome Trust has provided important
funding for Phase I and II clinical trials of
our oral typhoid vaccine candidate.

Traveling with peace of mind

Typhoid fever is a concern for the millions of travelers who visit typhoid endemic areas.
The CDC recommends vaccinating children and adults traveling to regions with endemic
typhoid fever. Approximately 60 million U.S. and European citizens traveled overseas in
2006, with travelers to typhoid endemic regions most at risk of contracting the disease.
With global travel increasing annually, typhoid fever can affect families worldwide
regardless of economic status.

Typhoid fever
remains a major
public health
problem in
many developing
countries.

A Balanced Portfolio—hePat i t i s B t her a P eu t ic

Protecting hepatitis B patients through
targeted treatment

Improving life

“ As a serious global health issue

afflicting the lives of millions

of people, advancing the clinical

study of Emergent’s hepatitis B

immunotherapy is an important

step toward alleviating patients’

suffering from this chronic disease.”

Professor Graham Foster, Clinical Investigator,
Professor of Hepatology, Barts and The London
School of Medicine

Hepatitis B is one of the most widespread
viral infections in the world. Globally,
approximately 350 to 400 million people
are chronically infected with hepatitis B,
with over 100 million of those individuals
living in China alone. Chronic hepatitis B
infection can lead to cirrhosis, liver can-
cer and liver failure, making it the tenth
leading cause of death worldwide. Despite
improvements in hepatitis B therapy, cur-
rent therapies are only partially effective
at controlling the disease and rarely cure
infection in chronic carriers; most patients
require lifelong therapy.

Our approach uses our proprietary
spi-VEC oral delivery platform to develop a
hepatitis B immunotherapy designed to direct
the immune system against virus-infected cells
in the liver. Potentially promoting the rate of
viral clearance would also enable patients to
benefit from shorter durations of therapy,
fewer side effects and less risk of developing
resistance to antiviral therapy. We believe that
our product has the potential to improve the
standard of care for hepatitis B patients.

Addressing a scourge
in the developing world

The WHO calls hepatitis B one of the major diseases of mankind and a serious global
public health problem. High rates of chronic hepatitis B infection are found in much of the
developing world where prevention and treatment are rare. While vaccines are available
that can prevent hepatitis B infection, existing therapies have limitations in treating people
with chronic hepatitis B infection. As a result, a large number of chronically infected
people require lifelong treatment to prevent the development of liver disease and to reduce
the risk of transmitting the infection to others.

Our approach
uses our
proprietary
spi-VEC oral
delivery platform.

Extending life

Protecting against a broad spectrum of
infectious diseases

Group B streptococcus

We are developing a vaccine that would be administered

to women of child-bearing age to protect newborns against

group B streptococcus, or group B strep. Group B strep is

a bacterium that causes life-threatening infections such as

sepsis, meningitis and pneumonia in newborns. There is no

vaccine currently available to protect against group B strep.

NIAID/NIH has agreed to fund, manage and conduct a

Phase I clinical trial of our bivalent group B streptococcus

vaccine product candidate.

Target Indication
Prevention of neonatal
group B streptococcus
infections

Intended Market
Women of
childbearing age

Target Product
Characteristics
Recombinant protein
subunit vaccine

Target Indication
Prevention of botulinum
serotypes A, B and E

Intended Market
Civilian stockpile, military

Target Product
Characteristics
Injectable recombinant
protein subunit vaccine or
toxoid vaccine

Botulinum vaccines

We are developing two vaccine candidates to protect against

botulinum illness caused by botulinum serotypes A, B and E. The

first, in collaboration with the United Kingdom’s Health Protection

Agency (HPA), is a recombinant protein subunit trivalent vaccine

based on a fragment of the botulinum toxin that we have selected as

an antigen because we believe it to be non-toxic and immunogenic.

Our second vaccine candidate is a botulinum toxoid vaccine that

includes a combination of up to three botulinum serotypes A, B and E.

We are developing this product using our proprietary botulinum

serotypes B and E and serotype A from HPA.

Target Indication
Prevention of
Chlamydia trachomatis

Intended Market
Adolescents and
young adults

Target Product
Characteristics
Recombinant protein
subunit vaccine

Chlamydia

Our vaccine candidate intended for adolescents is designed to

protect against chlamydia infection, the most prevalent bacterial

sexually transmitted disease in the world. Chlamydia trachomatis

infections occur in both men and women. In women, repeat

reinfections may result in pelvic inflammatory disease, which

is a major cause of infertility, ectopic pregnancy and chronic

pelvic pain. Pregnant women infected with chlamydia can pass

the infection to their infants during delivery, potentially resulting

in neonatal ophthalmia and pneumonia. There is no vaccine

currently available to protect against chlamydia.

Meningitis B

We are collaborating with sanofi pasteur, to whom we have

out-licensed our technology, to develop a vaccine for infants,

children and adolescents to protect against meningitis B, an

infection of the fluid surrounding the spinal cord and brain.

The rapid progression of the infection means that antibiotics

can be ineffective in preventing serious morbidity and mortality.

Children from six months to two years of age are at the highest

risk of infection, with teenagers also at enhanced risk. There is

currently no licensed vaccine in the United States or Europe

that protects against group B meningococcal infection.

Target Indication
Prevention of type B
meningitis caused by
Neisseria meningitis

Intended Market
Infants, children,
adolescents

Target Product
Characteristics
Recombinant protein
subunit vaccine

Partner

Product/Focus

hhs (BARDA)

cdc

nih/niaid

Anthrax IG Therapeutic
BioThrax (Post-exposure)

BioThrax (Dose Reduction, IM)

Anthrax IG Therapeutic
Group B Streptococcus Vaccine

Wellcome trust (UK)

Typhoid Vaccine

9Bio (Malaysian Government)

BioThrax Sales and Distribution,
Product Development and
Contract Manufacturing

health Protection agency (UK)

Botulinum Vaccines

sanofi pasteur

Meningitis B Vaccine

Making progress together

No company can combat serious diseases alone. We
know that developing vaccines and therapeutics requires
significant investment and that such a pursuit must be a
collaborative effort. We are actively working to bring
together the best scientific, business and public policy
minds in pursuit of our product development goals. We
are grateful for the support we enjoy from our govern-
ment and non-government partners.

Leading the way

Guiding Emergent BioSolutions with strong leadership

Board of directors

Fuad el-hibri
Chairman and
Chief Executive Officer,
Emergent BioSolutions Inc.

Joseph M. allbaugh(2,3)
President and Chief Executive Officer,
The Allbaugh Company, LLC;
Former Director, Federal Emergency
Management Agency

sue Bailey, M.d.(3)
Former news analyst for NBC
and Assistant Secretary of
Defense (Health Affairs)

Zsolt harsanyi, Ph.d.(1*,2,4)
Chairman and
Chief Executive Officer,
Exponential Biotherapies, Inc.

1 Audit Committee

2 Compensation Committee

3 Nominating & Corporate

Governance Committee

4 Lead Independent Director

* Chairman of Committee

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

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

louis W. sullivan, M.d.(1,3*)
President Emeritus,
Morehouse School of Medicine;
Former Secretary, Department
of Health and Human Services

Corporate officers

Fuad el-hibri*
Chief Executive Officer and
Chairman of the Board of Directors

denise esposito*
Senior Vice President Legal Affairs,
General Counsel and Secretary

Kyle W. Keese*
Senior Vice President Manufacturing Operations

daniel J. abdun-nabi*
President and Chief Operating Officer

Mauro Gibellini
Senior Vice President Corporate Affairs

r. don elsey*
Senior Vice President Finance and
Administration and Chief Financial Officer

W. James Jackson, Ph.d.
Senior Vice President and
Chief Scientific Officer

denise landry
Senior Vice President Quality and
Regulatory Affairs

allen shofe
Senior Vice President Public Affairs

*Executive Officer

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.

stephen lockhart, Ma, BM, Bch,
dM, MrcP, FFPM
President, Emergent Product
Development UK Limited

andreas hartmann, Ph.d.
Managing Director, Emergent
Product Development
Germany GmbH

2007 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 Statement 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 state-
ments 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, 2007, 2006 and
2005 and the consolidated balance sheet data as of December 31, 2007 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, 2004 and 2003 and the consolidated balance sheet data as of
December 31, 2005, 2004 and 2003 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.

(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 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

2007

Year Ended December 31,
2005

2006

2004

2003

169,799
13,116
182,915

147,995
4,737
152,732

127,271
3,417
130,688

81,014
2,480
83,494

55,536
233
55,769

40,309
53,958
55,555

24,125
45,501
44,601

31,603
18,381
42,793

30,102
10,117
30,323

—

477

26,575

—

—
—
149,822
33,093

2,809
(71)
156
2,894

—
—
114,704
38,028

846
(1,152)
293
(13)

—
(10,000)
109,352
21,336

485
(767)
55
(227)

(3,819)
—
66,723
16,771

65
(241)
6
(170)

35,987
13,051
22,936
0.79
0.77

$
$
$

38,015
15,222
22,793
0.99
0.93

$
$
$

21,109
5,325
15,784
0.77
0.69

$
$
$

16,601
5,129
11,472
0.61
0.56

$
$
$

22,342
6,327
19,547

1,824

—
—
50,040
5,729

100
(293)
168
(25)

5,704
1,250
4,454
0.24
0.22

28,995,667

23,039,794

20,533,471

18,919,850

18,904,992

29,663,127

24,567,302

22,751,733

20,439,252

20,316,752

(in thousands)

Balance Sheet Data:

2007

2006

As of December 31,
2005

2004

2003

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

$105,730
88,649
273,508
46,688
171,159

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

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

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

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

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 information with respect
to our plans and strategy for our business and related
financing,
includes forward-looking statements that
involve risks and uncertainties. You should review the
“Special Note Regarding Forward Looking Statements”
section of this annual report for a discussion of important
factors that could cause actual results to differ materially
from the results described in or implied by the forward-
looking statements contained in the following discussion
and analysis.

OvERvIEw
We are a profitable multinational biopharmaceutical
company focused on the development, manufacture and
commercialization of immunobiotics, consisting of vac-
cines and therapeutics that assist the body’s immune
system to prevent or treat disease. We manufacture
and market Biothrax®, the only vaccine approved by
the U.S. Food and Drug Administration, for the preven-
tion of anthrax infection. We use internally generated
cash flows from the sale of Biothrax to fund the devel-
opment of a product pipeline that addresses a variety
of infectious diseases and other medical conditions.
We develop immunobiotics for use against infectious
diseases that have resulted in significant unmet or
underserved public health needs and against biologi-
cal agents that are potential weapons of bioterrorism
and biowarfare. We operate in two business segments,
biodefense and commercial.

Our biodefense business focuses on immunobiotics for
use against biological agents that are potential weapons
of bioterrorism and biowarfare. Our product candidates
targeted to the biodefense market are anthrax immune
globulin therapeutic, next generation anthrax vaccine
and botulinum vaccines and botulinum immune globu-
lin therapeutic. Our commercial business focuses on
immunobiotics for use against infectious diseases and
other medical conditions that have resulted in signifi-
cant unmet or underserved public health needs. Our
product candidates targeted to the commercial mar-
ket are typhoid vaccine, hepatitis B therapeutic, group
B streptococcus and chlamydia vaccines. We expect

to continue to seek to obtain marketed products and
development stage product candidates through acqui-
sitions and licensing arrangements with third parties.

Our biodefense business has generated net income
for each of the last three fiscal years. Our commer-
cial business has generated revenue through devel-
opment grant funding and an upfront license fee and
additional payments for development work under a
collaboration agreement with Sanofi Pasteur. None
of our commercial product candidates have received
marketing approval and therefore, have not generated
any product sales revenues. As a result, our commer-
cial business has incurred a net loss for each of the
last three fiscal years.

Product Sales
We have derived substantially all of our revenues from
Biothrax sales to the DoD and HHS, and expect for the
foreseeable future to continue to derive substantially all
of our revenues from the sales of Biothrax to HHS. Our
total revenues from Biothrax sales were $169.8 mil-
lion in 2007, $148.0 million in 2006 and $127.3 million in
2005. We are focused on increasing sales of Biothrax to
U.S. government customers, expanding the market for
Biothrax to other customers and pursuing label expan-
sions and improvements for Biothrax.

In addition to Biothrax, our advanced product portfolio
includes an anthrax immune globulin therapeutic can-
didate for biodefense indications and a typhoid vaccine
and hepatitis B therapeutic vaccine for commercial
infectious disease indications. We are developing our
anthrax immune globulin therapeutic in part with fund-
ing from NIAID. the Wellcome trust provided funding
for the Phase I and Phase II clinical trials of our typhoid
vaccine candidate. We typically advance development
of our biodefense product candidates only with exter-
nal funding, and may slow down or put development
programs on hold during periods that are not covered
by funding.

Our early stage product portfolio includes a next gen-
eration anthrax vaccine and botulinum vaccine and
immune globulin therapeutic candidates for biodefense
indications and group B streptococcus and chlamydia
vaccine candidates for commercial infectious disease
indications. We have entered into collaboration agree-
ments with the HPA for the development of a recom-
binant botulinum vaccine candidate and a botulinum

immune globulin candidate. the NIAID is conducting
and funding the Phase I clinical trial of our group B
streptococcus vaccine candidate.

We are actively pursuing additional government spon-
sored development grants as well as encouraging both
governmental and non-governmental agencies and
philanthropic organizations to provide development
funding, or to conduct clinical studies of these prod-
ucts. For example, the Wellcome trust provided funding
for the Phase I and Phase II clinical trials of our typhoid
vaccine candidate. In addition, the NIAID is conducting
and funding one of the Phase I clinical trials of our group
B streptococcus vaccine candidate.

Manufacturing Infrastructure
We conduct our primary vaccine manufacturing opera-
tions at a multi-building campus on approximately 12.5
acres in lansing, Michigan. to augment our existing
manufacturing capabilities, we have constructed a new
50,000 square foot manufacturing facility on our lansing
campus. We expect the facility to cost approximately
$75 million when complete, 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 have incurred
costs of approximately $63 million for these purposes
through December 2007. We substantially completed
construction of this facility in 2006, and are conduct-
ing validation and qualification activities required for
regulatory approval. this new facility is a large scale
manufacturing plant that we can use to produce mul-
tiple fermentation based vaccine products, subject to
complying with appropriate change-over procedures.

We also own two buildings in Frederick, Maryland
that are available to support our future manufacturing
requirements. We have incurred costs of approximately
$4 million through December 2007 related to initial engi-
neering design and preliminary utility build out of one
of these buildings. Because we are in the preliminary
planning stages of our Frederick build out, we cannot
reasonably estimate the timing and costs that would 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 por-
tion of, or sell, 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 preparation of these financial state-
ments requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities
and expenses.

On an ongoing basis, we evaluate our estimates
and judgments, including those related to accrued
expenses, fair value of stock-based compensation and
income taxes. We based our estimates on historical
experience and on various other assumptions that we
believe to be reasonable under the circumstances, the
results of which form the basis for making judgments
about the carrying values of assets and liabilities and
the reported amounts of revenues and expenses that
are not readily apparent from other sources. Actual
results may differ from these estimates under different
assumptions or conditions.

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

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

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

customer based on contract terms;

• the fee is fixed and determinable and no further

obligation exists; and

• collectibility is reasonably assured.

We have generated Biothrax sales revenues under U.S.
government contracts with the DoD and HHS. Under
previous DoD contracts, we invoiced the DoD for prog-
ress payments upon reaching contractually specified
stages in the manufacture of Biothrax. We recorded
as deferred revenue the full amount of each progress
payment invoice that we submitted to the DoD. title
to the product passed to the DoD upon submission of

the first invoice. the earnings process was considered
complete upon FDA release of the product for sale and
distribution. Following FDA release of the product, we
segregated the product for later shipment and recog-
nized as period revenue all deferred revenue related
to the released product in accordance with the “bill
and hold” sale requirements under SAB 104. At that
time, we also invoiced the DoD for the final progress
payment and recognized the amount of that invoice as
period revenue.

Under previous contracts with HHS, we invoiced HHS
and recognized the related revenues upon delivery of
the product to the government carrier, at which time
title to the product passed to HHS. Under our current
contract with HHS, we invoice HHS and recognize the
related revenues upon acceptance by the government
at the delivery site, at which time title to the product
passes to HHS.

Under the collaboration agreement that we entered
into with Sanofi Pasteur in May 2006 for our menin-
gitis B vaccine candidate, we received an upfront
license fee and are entitled to additional payments for
development work under the collaboration and upon
achieving contractually defined development and com-
mercialization milestones. We evaluated the various
components of the 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 units of accounting in an arrangement.
We concluded that under EItF No. 00-21, the upfront
license fee, the development work and the milestone
payments under our agreement with Sanofi Pasteur
should be accounted for as a single unit of accounting.
We recognize amounts received under this agreement
over the estimated development period as we per-
form services. We recorded the amount of the upfront
license fee as deferred revenue. We are recognizing
this revenue over the estimated development period
under the contract, currently estimated at seven years,
as adjusted from time to time for any delays or accel-
eration in the development of the product candidate.
Under the collaboration agreement, we are entitled to
payments up to specified levels for development work
we perform on behalf of Sanofi Pasteur. We generally
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
and, as services are completed, recognize the amount
of the related deferred revenue as period revenues.
Under the collaboration agreement, we also will be
entitled to royalty payments on any future net sales of
this product candidate.

From time to time, we are awarded reimbursement
contracts for services and development grant con-
tracts with government entities and non-government
and philanthropic organizations. Under these con-
tracts, we typically are reimbursed for our costs in
connection with specific development activities and
may also be entitled to additional fees. We record the
reimbursement of our costs and any associated fees
as contract and grant revenues and the associated
costs as research and development expense. We issue
invoices under these contracts after we incur the reim-
bursable 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 collection
history for receivables from these entities indicate that
collection is likely, we do not currently record an allow-
ance for doubtful accounts.

Inventories
Inventories are stated at the lower of cost or mar-
ket, with cost being determined using a standard cost
method, which approximates average cost. Average
cost consists primarily of material, labor and manufac-
turing 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 inven-
tory. We capitalize the costs associated with the manu-
facture of Biothrax as inventory from the initiation of
the manufacturing process through the completion of
manufacturing, labeling and packaging.

Accrued Expenses
As part of the process of preparing financial statements,
we are required to estimate accrued expenses. this pro-
cess involves identifying services that have been per-
formed 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 other-
wise 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 conjunction with clinical trials;

• fees payable to third party manufacturers in con-
junction with the production of clinical trial mate-
rials; 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 providers invoice us monthly in arrears for
services performed. In the event that we do not identify
costs that have begun to be incurred or we underesti-
mate 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
development in accordance with Statement of Financial
Accounting Standards, or SFAS, No. 2, Accounting for
Research and Development Costs, along with Financial
Accounting Standards Board, or FASB, Interpretation
No. 4, Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method.

Under these standards, we are required to determine
whether the technology relating to a particular research
and development project we acquire has an 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 tangible assets. Otherwise, we capitalize the value of

the research and development project not attributable
to tangible assets as an intangible asset and conduct
an impairment analysis at least annually. In connection
with our acquisitions of ViVacs GmbH, in July 2006, and
Microscience limited, or Microscience, in June 2005,
we allocated the value of the purchase consideration
to current assets, current liabilities, fixed assets and
development programs. Because we determined that
the development programs at ViVacs and Microscience
had no future alternative use, we charged the value
attributable to the development programs as in-process
research and development. the ViVacs acquisition was
a cash transaction, and therefore no fair value deter-
mination was necessary. For the Microscience acquisi-
tion, which was a share exchange, our board of directors
determined the fair value of our shares issued in the
exchange for financial statement purposes.

Stock-based Compensation
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 rec-
ognized in the income statement based on their esti-
mated grant date fair values.

We value our share-based payment transactions using
the 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. We measure
the amount of compensation cost based on the fair value
of the underlying equity award on the date of grant. We
recognize compensation cost over the period that an
employee provides service in exchange for the award. As
of December 31, 2007, total compensation expense not yet
recognized related to unvested options is approximately
$2.9 million after tax. this expense is expected to be rec-
ognized over a weighted-average period of 3.0 years.

the effect of adopting SFAS No. 123(R) on net income
(loss) and net income (loss) per share is not necessar-
ily 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.

Income Taxes
We account for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes, or SFAS No. 109.
Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are determined based
on the differences between the financial reporting and
the tax bases of assets and liabilities and are mea-
sured 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 benefit
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, primarily Maryland,
and in some foreign jurisdictions, primarily the United
Kingdom. the amount of the deferred tax assets on our
balance sheet reflects our expectations regarding our
ability to use our net operating losses to offset future
taxable income. the applicable tax rules in particular
jurisdictions limit our ability to use net operating losses
as a result of ownership changes. In particular, we
believe that these rules will significantly limit our ability
to use net operating losses generated by Microscience
and Antex Biologics, Inc., or Antex, prior to our acquisi-
tion of Microscience in June 2005 and our acquisition of
substantially all of the assets of Antex in May 2003.

We review our deferred tax assets on a quarterly basis
to assess our ability to realize the benefit from these
deferred tax as sets. 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 valua-
tion 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 record-
ing a benefit from income taxes on our income state-
ment, which increases net income, or reduces net loss,

for that period and increases our deferred tax assets
on our balance sheet.

We account for uncertainty in income taxes in accor-
dance with FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes—An Interpretation of FASB
Statement No. 109, Accounting for Income Taxes, or FIN
48. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement rec-
ognition and measurement of a tax position taken or
expected to be taken in a tax return. Under FIN 48, we
recognize in our financial statements the impact of a tax
position if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance on derecogni-
tion, classification, interest and penalties, accounting
in interim periods and disclosure.

FINANCIAL OPERATIONS OvERvIEw

Revenues
Between May 2005 and February 2007, we supplied
10.0 million doses of Biothrax to HHS for inclusion in
the SNS under a base contract for 5.0 million doses for
a fixed price of $123 million and a contract modifica-
tion for an additional 5.0 million doses for a fixed price
of $120 million. We completed delivery of all doses to
HHS under this contract in February 2007.

On September 25, 2007, we entered into an agreement
with HHS to supply 18.75 million doses of Biothrax to
HHS for placement into the SNS. the term of the agree-
ment is from September 25, 2007 through September 24,
2010. the first 5.5 million doses delivered under this
contract were sold to HHS at a discounted price, as
specified in the contract, due to the limited remaining
shelf-life for these specific doses. this discounted price
does not apply to the remaining 13.25 million doses
that will be sold to HHS under the contract. the firm
fixed price for the 18.75 million doses, including the
discount, is $400 million in the aggregate. If we receive
FDA approval of our pending application to extend the
expiry dating of Biothrax from three years to four years,
HHS has agreed to increase the price per dose under
the agreement for the remaining 13.25 million doses.
In that event, HHS would make a lump sum payment
to us reflecting an increase in the price per dose for
specified doses delivered prior to approval and pay an
increased price per dose for doses delivered following
the date of such approval. the aggregate value of such

price adjustment is $34 million. If we do not receive FDA
approval of four-year expiry dating during the term of the
agreement there will be no adjustment in the price per
dose under the agreement. We delivered over 6 million
doses of Biothrax to HHS under this agreement in 2007.
Under this agreement, we have also agreed to provide
all shipping services related to delivery of doses into the
SNS over the term of the agreement, for which HHS has
agreed to pay approximately $2.2 million. We invoice HHS
for each delivery upon acceptance of Biothrax doses
delivered into the SNS. the agreement also provides for
HHS to pay up to $11.5 million in milestone payments
in connection with us advancing a program to obtain
a post-exposure prophylaxis indication for Biothrax.
these funds are payable upon achievement of specific
program milestones. In October 2007, we achieved the
initial milestone and invoiced HHS for $8.8 million. We
received this payment from HHS and revenue was rec-
ognized in November 2007.

Since 1998, we have been a party to two supply agree-
ments for Biothrax with the DoD. Pursuant to these
contracts, we have supplied approximately 10 million
doses of Biothrax for immunization of military per-
sonnel. Our most recent contract with the DoD, as
amended in October 2006, provided for the supply of a
minimum of approximately 1.5 million doses of Biothrax
to the DoD through September 2007. As a result of a
further amendment of the DoD contract in June 2007,
we completed delivery of all doses to the DoD under
this contract prior to June 30, 2007. We are not cur-
rently party to a procurement contract with the DoD.

We believe that the DoD has a continued commitment
to procure Biothrax for its active immunization pro-
gram. We believe that, as a result of the October 2007
Presidential Directive, in the future the DoD will likely
procure additional doses of Biothrax to satisfy ongo-
ing requirements for its active immunization program
directly from HHS and not from us. We believe that these
purchases by DoD from HHS may result in additional
purchases by HHS from us.

In May 2006, we entered into a collaboration agreement
with Sanofi Pasteur relating to the development and
commercialization of our meningitis B vaccine candidate
under which we granted Sanofi Pasteur an exclusive,
worldwide license under our proprietary technology to
develop and commercialize our meningitis B vaccine

candidate and received a $3.8 million upfront license
fee. this agreement also provides for a series of mile-
stone payments upon the achievement of specified
development and commercialization objectives, pay-
ments for development work under the collaboration
and royalties on net sales of this product. We defer the
upfront license fee, milestone payments and develop-
ment reimbursement payments under this agreement,
and record revenue in accordance with our revenue
recognition policies. We are currently in negotiations
with Sanofi Pasteur to amend this agreement.

In September 2007, we received a development con-
tract from NIAID, valued at up to $9.5 million, in sup-
port of non-clinical and clinical studies of our anthrax
immune globulin therapeutic candidate. Under terms
of the development contract, we will use the funds to
conduct various studies on this product candidate,
including animal efficacy studies and clinical trials.
through December 31, 2007, we have invoiced $61,000
under this contract.

Our revenue, operating results and profitability have
varied, and we expect that they will continue to vary on
a quarterly basis, primarily because of the timing of our
fulfilling orders for Biothrax and work done under new
and existing contracts and grants.

Cost of Product Sales
the primary expense that we incur to deliver Biothrax
to our customers is manufacturing costs, which are
primarily fixed costs. these fixed manufacturing costs
consist of attributable facilities, utilities and salaries
and personnel-related expenses for indirect manufac-
turing support staff. Variable manufacturing costs for
Biothrax consist primarily of costs for materials, direct
labor and contract filling operations.

We determine the cost of product sales for doses sold
during a reporting period based on the average manu-
facturing cost per dose for the specific earlier period in
which the doses sold were manufactured. We calculate
the average manufacturing cost per dose in the period of
manufacture by dividing the actual costs of manufactur-
ing in such period by the number of units produced in that
period. In addition to the fixed and variable manufacturing
costs described above, the average manufacturing cost
per dose depends on the efficiency of the manufacturing
process, utilization of available manufacturing capacity
and the production yield for the period of production.

Research and Development Expenses
We expense research and development costs as
incurred. Our research and development expenses con-
sist primarily of:

• salaries and related expenses for personnel;
• fees to professional service providers for, among
other things, preclinical and analytical test-
ing, independently monitoring our clinical tri-
als and acquiring and evaluating 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.

We believe that significant investment in product devel-
opment is a competitive necessity and plan to continue
these investments in order to be in a position to real-
ize the potential of our product candidates. We expect
that development spending for both our advanced stage
products and earlier stage products will increase as our
product development activities continue and we prepare
for regulatory submissions and other regulatory activi-
ties. We expect that the magnitude of any increase in our
research and development spending will be dependent
upon such factors as the results from our ongoing pre-
clinical studies and clinical trials, the size, structure and
duration of any follow on clinical program that we may
initiate, costs 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 studies with Biothrax
being conducted by the Centers for Disease Control and
Prevention, or CDC, and our ability to rely upon and utilize
clinical and non-clinical data, such as the data generated
by CDC from use of the pentavalent botulinum toxoid vac-
cine previously manufactured by the State of Michigan.

Selling, General and Administrative Expenses
Selling, general and administrative expenses consist
primarily of salaries and other related costs for person-
nel serving the executive, sales and marketing, business
development, finance, accounting, information technol-
ogy, legal and human resource functions. Other costs
include facility costs not otherwise included in cost of

product sales or research and development expense
and professional fees for legal and accounting services.
We currently market and sell Biothrax directly to the
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
interest income and interest expense. We earn interest
on our cash, cash equivalents and short-term invest-
ments, and we incur interest expense on our indebted-
ness. We capitalize interest expense in accordance with
SFAS No. 34, Capitalization of Interest Cost, based on the
cost of major ongoing projects which have not yet been
placed in service, such as our new manufacturing facil-
ity. Our total interest cost will increase in future peri-
ods as compared to prior periods as a result of the term
loan that we entered into in June 2007, as well as any
borrowings under our revolving line of credit. In addi-
tion, 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, 2007 COMPARED
TO YEAR ENDED DECEMBER 31, 2006

Revenues
Product sales revenues increased by $21.8 million,
or 15%, to $169.8 million for 2007 from $148.0 mil-
lion for 2006. this increase in product sales revenues
was primarily due to a 41% increase in the number of
doses of Biothrax delivered, offset by a 19% decrease
in the average sales price per dose attributable to a
discounted price provided to HHS due to the limited
remaining shelf life for those certain doses delivered
in the third quarter and first part of the fourth quarter
of 2007. Product sales revenues in 2007 consisted of
Biothrax sales to HHS of $141.6 million, sales to the
DoD of $26.2 million and aggregate international and
other sales of $2.0 million. Product sales revenues in
2006 consisted of Biothrax sales to HHS of $109.8 mil-
lion, sales to the DoD of $37.4 million and aggregate
international and other sales of $763,000.

Contracts and grant revenues increased by $8.4 mil-
lion, or 177%, to $13.1 million in 2007 from $4.7 million in
2006. Contracts and grants revenues for 2007 consisted
of a milestone payment of $8.8 million from HHS in con-
nection with the Company advancing a program to obtain
a post-exposure prophylaxis indication for Biothrax,
$3.1 million from the Sanofi Pasteur collaboration,
related to recognition of deferred revenue associated
with the upfront payment received in 2006 as well as
development service revenue, and $1.2 million in grant
revenue from the National Institutes of Health, or NIH,
and the Wellcome trust. Contracts and grant revenues
for 2006 consisted of $3.2 million in upfront and devel-
opment program revenue from the Sanofi Pasteur
collaboration and $1.5 million in grant revenue from the
Wellcome trust.

Cost of Product Sales
Cost of product sales increased by $16.2 million, or 67%,
to $40.3 million for 2007 from $24.1 million for 2006.
this increase was attributable to a 41% increase in the
number of doses of Biothrax delivered, coupled with
increased costs associated with our annual production
shut-down, the related impact on production yield, and
the write-off of waste during the period.

Research and Development Expenses
Research and development expenses increased by
$8.5 million, or 19%, to $54.0 million for 2007 from
$45.5 million for 2006. this increase reflects additional
personnel and contract service costs, and includes
increased expenses of $2.5 million on product candidates
that are categorized in the biodefense segment, $3.7 mil-
lion on product candidates categorized in the commercial
segment, and $2.2 million in other research and develop-
ment expenses, which are in support of technology plat-
forms and central research and development activities.

began subsequent studies and trials. the spending for
Biothrax enhancements is related to preparing for and
conducting animal efficacy studies to support applica-
tions for marketing approval of these enhancements,
which we expect to submit to the FDA in late 2008 or
2009. the spending for our immune globulin therapeutic
candidate development programs related primarily to
costs associated with the plasma collection and frac-
tionation program for our anthrax immune globulin
therapeutic. the spending for the recombinant botu-
linum vaccine program resulted from advancing this
program to the process development stage and the
manufacture of clinical trial material. the spending for
the next generation anthrax vaccine program resulted
from feasibility studies and formulation development
of product candidates. We continue to assess, and may
alter, our future development plans for our products
based on the interest of the U.S. government or other
non-governmental organizations in providing funding
for further development or procurement.

the spending in 2007 for our typhoid vaccine candidate
resulted from the ongoing Phase II study in Vietnam,
which commenced in the first quarter of 2007. the
spending in 2006 for our typhoid vaccine candidate
resulted from ongoing work for the Phase I clinical trial
in Vietnam, which we completed in the second quar-
ter of 2006. the spending in 2007 for our hepatitis B
therapeutic vaccine candidate resulted from prepar-
ing for and initiating our Phase II clinical trial, which
commenced in the first quarter 2007. the spending in
2007 for our group B streptococcus vaccine candidate
resulted from preparing for Phase I clinical trials for
two of the protein components of the vaccine candidate,
which the NIAID is conducting and funding. Both our
chlamydia and meningitis B vaccine candidates are in
preclinical development.

the increase in spending on candidates in the biode-
fense and commercial segments, detailed in the table
below, was attributable to increased efforts on vari-
ous programs as we completed various studies and

the increase in other research and development
expenses was primarily attributable to spending asso-
ciated with product development programs that we
acquired in the acquisition of ViVacs in July 2006.

Our principal research and development expenses for
2007 and 2006 are shown in the following table:

(in thousands)

Biodefense:
Biothrax enhancements
Immune globulin therapeutic

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,

2007

2006

$ 5,175

$ 7,232

13,619

11,289

3,231
2,719
24,744

9,641
5,370
6,790
3,146
1,212
26,159
3,055
$53,958

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 $11.0 million, or 25%, to $55.6 million for 2007 from
$44.6 million for 2006. the increase in selling, general
and administrative expenses was driven by an increase
in our headquarters and staff organization to support our
operations as a public company and to support the overall
growth of our business, and is primarily attributable to an
increase of approximately $9.0 million resulting from
the addition of personnel and increased legal and other
professional services for our headquarters organization
and an increase of $2.1 million in sales and market-
ing expenses related to the growth of our staff and an
increase in our selling and marketing activities. the
majority of the expense is attributed to the biodefense
segment, in which selling, general and administrative
expenses increased by $7.4 million, or 21%, to $43.0 mil-
lion for 2007 from $35.6 million for 2006. Selling,
general and administrative expenses related to our
commercial segment increased by $3.6 million, or 40%,
to $12.5 million for 2007 from $9.0 million for 2006.

Purchased In-process Research and Development
In July 2006, we recorded a non-cash charge for pur-
chased
in-process research and development of
$477,000 associated with our acquisition of ViVacs.

We paid total purchase consideration of $250,000 and
assumed a net deficit of liabilities in excess of assets
of $47,000. We valued the acquisition at $430,000 after
the inclusion of acquisition costs. Of this amount, we
identified $153,000 as current assets, $97,000 as fixed
assets, $297,000 as current liabilities and $477,000 as
the value attributable to development programs and
technology. Because we determined that the develop-
ment programs and technology had no future alter-
native use, we charged the value attributable to the
development programs and technology as purchased
in-process research and development.

Total Other Income (Expense)
total other income (expense) increased by $2.9 mil-
lion to income of $2.9 million for 2007 from expense of
$13,000 for 2006. this increase resulted primarily from
an increase in interest income of $2.0 million as a result
of higher investment return on increased average cash
balances, including the net proceeds of our initial public
offering, and a decrease in interest expense of $1.1 mil-
lion due to the capitalization of interest costs related to
the construction of our new building in lansing.

Income Taxes
Provision for income taxes decreased by $2.2 million,
or 14%, to $13.1 million for 2007 from $15.2 million for
2006. the provision for income taxes for 2007 resulted
primarily from our income before provision for income
taxes of $36.0 million and an effective annual tax rate of
36%. the 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 decrease in the effective annual tax rate
is due primarily to a reduction in state valuation allow-
ances related to the expected utilization of net operat-
ing losses. the provision for income taxes also reflects
research and development tax credits of $880,000 for
2007 and $759,000 for 2006.

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 pri-
marily 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 inter-
national 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 grants revenues increased by $1.3 mil-
lion, or 39%, to $4.7 million in 2006 from $3.4 million in
2005. Contracts and grants revenues for 2006 consisted
of $3.2 million from the Sanofi Pasteur collaboration,
related to recognition of deferred revenue associated
with the upfront payment received in 2006 as well as
development service revenue, and $1.5 million in grant
revenue from the Wellcome trust. Contracts and grants
revenues for 2005 resulted from reimbursement from
the DoD for expenses related to production develop-
ment and supply chain management improvements
for Biothrax incurred in prior periods, and for addi-
tional 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 delivered. Manufacturing efficiencies resulted in
a cost savings of $13.1 million. the increase in the num-
ber of doses delivered resulted in an increase of costs
of approximately $5.6 million.

Research and Development Expenses
Research and development expenses increased by
$27.1 million, or 148%, to $45.5 million for 2006 from
$18.4 million for 2005. this increase reflects addi-
tional personnel and contract service costs, and
includes increased expenses of $11.9 million on prod-
uct candidates that are categorized in the biodefense
segment and $15.9 million on product candidates that
are categorized in the commercial segment, offset by
a reduction of $633,000 in other research and devel-
opment expenses.

spending for Biothrax enhancements is related to pre-
paring for animal efficacy studies to support applica-
tions for marketing approval of these enhancements,
which we expect to submit to the FDA in late 2008 or
2009. the increase in spending for immune globulin
therapeutic development related primarily to costs
associated with our plasma collection program for our
anthrax immune globulin therapeutic candidate. the
increase in spending for the recombinant botulinum
vaccine 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 genera-
tion anthrax vaccine program, which has product can-
didates in preclinical and Phase I clinical development,
resulted from feasibility studies and formulation devel-
opment of product candidates.

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. Research and development 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 completed in 2006 and preparing for our Phase
II clinical trial in Vietnam that we initiated in the first
quarter of 2007. the spending in 2006 for our hepatitis B
therapeutic vaccine candidate resulted from preparing
for our Phase II clinical trial, which we received regu-
latory clearance to commence in the fourth quarter of
2006. the spending in 2006 for our group B streptococ-
cus vaccine candidate resulted from costs associated
with our analysis of results from the Phase I clinical trial
for one of the protein components of the vaccine candi-
date and preparation for Phase I clinical trials for two
of the protein components of the vaccine candidate. In
December 2006, we signed an agreement with the NIAID
under which the NIAID has agreed to sponsor a Phase I
clinical trial of each of the two components separately
and the two proteins in combination in healthy human
volunteers. Both our chlamydia and meningitis B vaccine
candidates are in preclinical development.

the increase in spending on candidates in the biode-
fense segment was attributable to increased efforts on
all our programs as we completed various studies and
began subsequent studies and trials. the increase in

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

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

(in thousands)

Biodefense:
Biothrax enhancements
Immune globulin therapeutic

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,

2006

2005

$ 7,232

$ 2,883

11,289

5,309

2,610
1,088
22,219

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

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 $1.8 million, or 4%, to $44.6 million for 2006 from
$42.8 million for 2005. the increase in selling, general
and administrative expenses was primarily attrib-
utable to an increase in general and administrative
expenses of $1.0 million resulting from the addition of
personnel and increased legal and other professional
services for our headquarters organization, and an
increase of $937,000 related to the addition of person-
nel for Emergent Product Development UK. Selling,
general and administrative expenses related to our
biodefense segment decreased by $397,000, or 1%,
to $35.6 million for 2006 from $36.0 million for 2005.
Selling, general and administrative expenses related
to our commercial segment increased by $2.2 mil-
lion, or 33%, to $9.0 million for 2006 from $6.8 million
for 2005.

Purchased In-process Research and Development
In July 2006, we recorded a non-cash charge for pur-
chased
in-process research and development of
$477,000 associated with our acquisition of ViVacs.
We paid total purchase consideration of $250,000 and
assumed a net deficit of liabilities in excess of assets
of $47,000. We valued the acquisition at $430,000 after

the inclusion of acquisition costs. Of this amount, we
identified $153,000 as current assets, $97,000 as fixed
assets, $297,000 as current liabilities and $477,000 as
the value attributable to development programs and
technology. Because we determined that the develop-
ment programs and technology had no future alter-
native use, we charged the value attributable to the
development programs and technology as purchased
in-process research and development.

In June 2005, we recorded a non-cash charge for
purchased in-process research and development of
$26.6 million associated with our acquisition of
Microscience. We valued the 3,636,801 shares of class
A common stock that we issued in the acquisition at
$28.2 million after the inclusion of acquisition costs.
Of this amount, we identified $1.4 million as current
assets, $863,000 as fixed assets, $684,000 as current
liabilities and $26.6 million as the value attributable to
development programs. Because we determined that
the development programs had no future alternative
use, we charged the value attributable to the devel-
opment programs as purchased in-process research
and development.

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.

Total Other Income (Expense)
total other expense decreased by $214,000, or 94%, to
$13,000 for 2006 from $227,000 for 2005. this decrease
resulted primarily from an increase in interest income
of $361,000 as a result of higher investment return on
increased average 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 million,
or 186%, to $15.2 million 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 operat-
ing losses and an increase in permanent differences,
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.

LIqUIDITY AND CAPITAL RESOURCES

Sources of Liquidity
We require cash to meet our operating expenses
and for capital expenditures, acquisitions and prin-
cipal and interest payments on our debt. We have
funded our cash requirements from inception through
December 31, 2007 principally with a combination of
revenues from Biothrax product sales, debt financings
and facilities and equipment leases, revenues under
our collaboration agreement with Sanofi Pasteur,
development funding from government entities and
non-government and philanthropic organizations, the
net proceeds from our initial public offering 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, 2007.

As of December 31, 2007, we had cash and cash equiva-
lents of $105.7 million. On November 20, 2006, we com-
pleted our initial public offering, in which we raised
$54.2 million, net of issuance costs.

Cash Flows
the following table provides information regarding our
cash flows for the years ended December 31, 2007, 2006
and 2005.

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

Year Ended December 31,
2005
2006
2007

$ 54,790 $ (4,258) $41,974
(7,091)
(5,410)
$ 29,312 $ 40,124 $29,473

(41,446)
85,828

(43,969)
18,491

(1)

Includes the effect of exchange rate changes on cash and
cash equivalents.

$24.5 million due to amounts billed primarily to HHS in
December 2006 that were collected in 2007, partially
offset by amounts billed in December 2007 and out-
standing at year end, a decrease in inventory of $7.8 mil-
lion related to increased product sales in 2007, and
$4.8 million from the impact of non-cash deprecia-
tion and amortization, partially offset by a decrease in
income taxes payable of $5.2 million due to the timing
of payment of the 2006 income tax liability offset by the
pending payable for 2007 income taxes.

Net cash used in 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 the impact of non-cash
depreciation and amortization expense of $4.7 million,
offset by an increase in accounts receivable of $40.8 mil-
lion due from the DoD and HHS reflecting amounts billed
in December 2006 that were still outstanding at year end,
and a increase in inventory of $8.3 million reflecting the
value of work in process for Biothrax lots being manufac-
tured or awaiting delivery.

Net cash provided by operating activities of $42.0 mil-
lion in 2005 resulted principally from our net income
of $15.8 million, a non-cash charge for purchased
in-process research and development related to the
Microscience acquisition, which reduced net income by
$26.6 million, and a reduction of accounts receivable
of $16.1 million as a result of the collection of amounts
due from the DoD during 2005 for invoices outstand-
ing at the end of 2004 for progress in the manufacture
of Biothrax lots, offset by a reduction of deferred rev-
enue 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.

Net cash provided by operating activities of $54.8 mil-
lion in 2007 resulted principally from our net income
of $22.9 million, a decrease in accounts receivable of

Net cash used in investing activities for the years ended
December 31, 2007, 2006 and 2005 resulted principally
from the purchase of property, plant and equipment.

Capital expenditures in 2007 include $30.3 million in
construction and related costs for our new manufactur-
ing facility in lansing and approximately $13.7 million in
infrastructure investments and other equipment. 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
$5.3 million in infrastructure investments and other
equipment. Capital expenditures in 2005 were primar-
ily attributable to investments in information technology
upgrades and miscellaneous facility enhancements.

Net cash provided by financing activities of $18.5 million
in 2007 resulted primarily from $15.3 million in addi-
tional proceeds from a term loan with HSBC related to
financing a portion of the costs related to the construc-
tion of our new building in lansing, $17.9 million in pro-
ceeds from borrowings under our revolving line of credit
with Fifth third Bank, $6.0 million related to excess
tax benefits from the exercise of stock options, and
$2.5 million in proceeds from stock option exercises,

indebtedness,

partially offset by $18.0 million in principal payments
on long-term
including $15.0 mil-
lion in payments on our revolving line of credit with
Fifth third Bank and restricted cash deposits in 2007
consist of $5.0 million in restricted cash deposits in
conjunction with our June 2007 HSBC term loan.

Net cash provided by financing activities of $85.8 mil-
lion in 2006 resulted primarily from $54.2 million in
proceeds from our initial public offering, $15.0 mil-
lion 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 $5.4 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.

Contractual Obligations
the following table summarizes our contractual obligations at December 31, 2007:

(in thousands)

Total

2008

Payments Due by Period
2010

2009

2011

2012

After 2012

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

$46,102
13,983
50
$60,135

$3,514
2,048
50
$5,612

$6,049
1,436
—
$7,485

$3,585
1,453
—
$5,038

$16,203
1,471
—
$17,674

$16,751
1,489
—
$18,240

—
6,086
—
$6,086

(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. We are not obligated to pay any minimum royalties under
our existing contracts.

Debt Financing
As of December 31, 2007, we had $57.9 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;

• $6.6 million outstanding under a mortgage loan
from PNC Bank (formerly Mercantile Potomac
Bank) used to finance the remaining portion of
the purchase price for the first Frederick facility;
• $8.2 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;

• $28.8 million outstanding under a term loan from
HSBC Realty Credit Corporation used to finance
a portion of the costs of our facility expansion in
Lansing, Michigan; and

• $11.8 million outstanding under a $15.0 million
revolving line of credit with Fifth third Bank. this
balance was repaid in January 2008.

We can borrow under the line of credit with Fifth third
Bank through May 2008.

Some of our debt instruments contain financial and
operating covenants. In particular:

• Under our forgivable loan from the State of
Maryland, we are not required to repay the prin-
cipal amount of the loan if beginning December
31, 2009 and through 2012 we maintain a speci-
fied 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 facil-
ity, and we occupy the facility through 2012.

• Under our mortgage loan from PNC Bank for our
Frederick facility, we are required to maintain at
all times a minimum tangible net worth of not less
than $5.0 million. In addition, we are required to
maintain at all times a ratio of earnings before
interest, taxes, depreciation and amortization
to the sum of current obligations under capi-
tal leases and principal obligations and interest
expenses for borrowed money, in each case due

and payable within the following 12 months, of not
less than 1.1 to 1.0.

• Under our term loan with HSBC Realty Credit
Corporation, we are required to maintain on an
annual basis a book leverage ratio of less than
1.25. this ratio is calculated by dividing total lia-
bilities, excluding deferred revenues specific to
contracts with the U.S. government, by total net
worth. In addition, we are required to maintain
on a quarterly basis a debt coverage ratio of not
less than 1.25 to 1.00 or maintain $5.0 million in
a cash collateral account. this ratio is calculated
by dividing earnings before interest, taxes, depre-
ciation and amortization for the most recent four
quarters by the sum of current obligations under
capital leases and principal obligations and inter-
est expenses for borrowed money, in each case
due and payable for the following four quarters.
• Under our revolving line of credit with Fifth Third
Bank, our wholly owned subsidiary, Emergent
BioDefense Operations, is required to maintain at
all times a ratio of total liabilities to tangible net
worth of not more than 2.5 to 1.0.

Our debt instruments also contain negative covenants
restricting our activities. Our term loan with HSBC
Realty Credit Corporation limits the ability of Emergent
BioDefense Operations to incur indebtedness and liens,
sell assets, make loans, advances or guarantees, enter
into mergers or similar transactions and enter into
transactions with affiliates. Our line of credit with Fifth
third Bank limits the ability of Emergent BioDefense
Operations to incur indebtedness and liens, sell assets,
make loans, advances or guarantees, enter into mergers
or similar transactions, enter into transactions with affil-
iates 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 PNC Bank,
the State of Maryland and HSBC Realty Credit Corporation
serve as collateral for these loans. Our line of credit with
Fifth third Bank is secured by accounts receivable under
our DoD and HHS contracts. Our term loan with HSBC
Realty Credit Corporation is secured by substantially all
of Emergent BioDefense Operations’ assets, other than
accounts receivable under our 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 PNC Bank, we began to
make monthly principal payments beginning in November
2006. A residual principal repayment of approximately
$5.0 million is due upon maturity in October 2011. Interest
is payable monthly and accrues at an annual rate of
6.625% through October 2009. In October 2009, the inter-
est rate is scheduled to be adjusted to a fixed annual rate
equal to 3.20% over the yield on U.S. government securi-
ties 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 approxi-
mately $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 with HSBC Realty Credit
Corporation, we are required to make monthly pay-
ments in the amount of $250,000 in principal plus
accrued interest beginning August 2007, with a resid-
ual principal payment due upon maturity in June 2012.
Interest on the loan accrues at an annual rate equal to
lIBOR plus 2.75%.

Under our revolving line of credit with Fifth third Bank,
any outstanding principal is due upon maturity in May
2008. the principal amount outstanding at any time
under the line of credit may not exceed 75% of total
eligible accounts receivable under the DoD and HHS
contracts. Consistent with the terms of this agreement,
we repaid $11.8 million of outstanding principal under
the line of credit in January 2008. Interest is payable
monthly and accrues at an annual rate equal to 0.375%
less than the prime rate of interest established from
time to time by Fifth third Bank.

Tax Benefits
In connection with our facility expansion in lansing, the
State of Michigan and the City of lansing have provided
us a variety of tax credits and abatements. We estimate
that the total value of these tax benefits may be up to
$18.5 million over a period of up to 15 years, beginning
in 2006. these tax benefits are primarily based on our
$75 million planned investment in our lansing facility.
In addition, we must maintain a specified number of
employees in lansing to continue to qualify for these
tax benefits.

Funding Requirements
We expect to continue to fund our anticipated operat-
ing expenses, capital expenditures and debt service
requirements from existing cash and cash equivalents,
revenues from Biothrax product sales and other com-
mitted sources of funding. there are numerous risks
and uncertainties associated with Biothrax product
sales and with the development and commercialization
of our product candidates.

We may seek to raise additional external debt financing
to provide additional financial flexibility. Our commit-
ted external sources of funds consist of the remaining
borrowing availability under our revolving line of credit
with Fifth third Bank, development funding under our
collaboration agreement with Sanofi Pasteur and fund-
ing from the NIAID, including for studies related to our
anthrax immune globulin therapeutic product candi-
date. 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 valida-
tion and qualification activities related to 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 pre-

clinical 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, includ-
ing product marketing, sales and distribution;
• the costs involved in preparing, filing, prosecut-
ing, 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 busi-

nesses, products and technologies;

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

• our ability to establish and maintain collaborations,
such as our collaboration with Sanofi Pasteur.

We may require additional sources of funds for future
acquisitions that we may make or, depending on the
size of the obligation, to meet balloon payments upon
maturity of our current borrowings. to the extent our
capital resources are insufficient to meet our future cap-
ital 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 develop-
ment programs or reduce our planned commercializa-
tion efforts. If we raise additional funds by issuing equity
securities, our stockholders may experience dilution.
Debt financing, if available, may involve agreements that
include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt,
making capital expenditures or declaring dividends. Any
debt financing or additional equity that we raise may
contain terms, such as liquidation and other prefer-
ences that are not favorable to us or our stockholders.
If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be
necessary to relinquish valuable rights to our technol-
ogies or product candidates or grant licenses on terms
that may not be favorable to us.

Effects of Inflation
Our most liquid assets are cash, cash equivalents and
short-term investments. Because of their liquidity,
these assets are not directly affected by inflation. We
also believe that we have intangible assets in the value of
our intellectual property. In accordance with generally
accepted accounting principles, we have not capitalized
the value of this intellectual property on our balance
sheet. Due to the nature of this intellectual property, we
believe that these intangible assets are not affected by
inflation. Because we intend to retain and continue to
use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation
related to replacement costs of such items will not mate-
rially affect our operations. However, the rate of inflation
affects our expenses, such as those for employee com-
pensation and contract services, which could increase
our level of expenses and the rate at which we use
our resources.

Interests

RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling
in Consolidated Financial
Statements—an Amendment of ARB No. 51, or SFAS
No. 160. SFAS No. 160 clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity
in the consolidated financial statements, requires con-
solidated net income to be reported at amounts that
include the amounts attributable to both the parent and
the noncontrolling interest, establishes a single method
of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsoli-
dation, and requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated.
the provisions of SFAS No. 160 are effective for fiscal
years beginning on or after December 15, 2008. We are
currently evaluating the impact of the adoption of this
statement on our financial statements.

In December 2007, the FASB issued SFAS No. 141R,
Business Combinations, or SFAS No. 141R. SFAS No.
141R requires the acquiring entity in a business com-
bination to record all assets acquired and liabilities
assumed at their respective acquisition-date fair
values, changes the recognition of assets acquired
and liabilities assumed arising from contingencies,
changes the recognition and measurement of con-
tingent consideration, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R
also requires additional disclosure of information
surrounding a business combination, such that users
of the entity’s financial statements can fully under-
stand the nature and financial impact of the business
combination. SFAS No. 141R applies prospectively to
business combinations for which the acquisition date
is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, and
it may not applied before that date. the provisions of
SFAS No. 141R will impact our financial statements to
the extent that we are party to a business combination
after the pronouncement has been adopted.

In June 2007, the FASB
issued EItF No. 07-3,
Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use in Future Research
and Development Activities, or EItF No. 07-3. EItF No.
07-3 states that nonrefundable advance payments for
goods or services that will be used or rendered for

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 for-
eign currency exchange exposure. We have not used
derivative financial instruments for speculation or
trading purposes. Because of the short-term maturi-
ties of our cash and cash equivalents, we do not
believe that an increase in market rates would have a
significant impact on the realized value of our invest-
ments, but would likely increase the interest expense
associated with our debt.

future research and development activities should
be deferred and capitalized. Such amounts should be
recognized as an expense as the related goods are
delivered or the related services are performed. the
provisions of EItF No. 07-3 are effective for fiscal years
beginning after December 15, 2007. We anticipate that
the adoption of the provisions of EItF No. 07-3 will not
have a material impact on our financial statements.

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, or SFAS No. 159. SFAS No. 159 permits enti-
ties to choose to measure 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 anticipate that the adoption of
this statement will not have a material impact on our
financial statements.

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

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, 2007 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, 2007. these financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Emergent BioSolutions Inc. and Subsidiaries at December 31, 2007 and 2006, and the consoli-
dated results of their operations and their cash flows for each of the three years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 11 to the consolidated financial statements, in 2007 the Company changed its method of
accounting for uncertain tax provisions. As discussed in Note 2 to the consolidated financial statements, in 2006
the Company changed its method of accounting for share-based payments.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Emergent BioSolutions Inc. and Subsidiaries’ internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the treadway Commission and our report dated March 6, 2008 expressed an unquali-
fied opinion thereon.

Mclean, Virginia
March 6, 2008

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
Restricted cash
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
Income taxes payable
Deferred tax liabilities
Deferred revenue, current portion

total current liabilities

long-term indebtedness, 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; 15,000,000
shares authorized, 0 shares issued and
outstanding at December 31, 2007 and
2006, respectively

Common Stock, $0.001 par value; 100,000,000

shares authorized, 29,750,237 and 27,596,249
shares issued and outstanding at
December 31, 2007 and 2006, respectively

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,

2007

2006

$105,730
18,817
16,897
—
—
2,866
144,310

110,218
12,397
5,200
1,383
$273,508

$ 17,979
4,056
9,502
11,832
3,514
7,665
211
902
55,661

42,588
2,473
1,627
102,349

—

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

78,174
11,477
192
1,075
$238,255

$ 27,366
3,270
7,190
8,930
2,456
13,703
—
1,432
64,347

31,368
2,997
1,071
99,783

—

30
101,933
(1,130)
70,326
171,159
$273,508

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

Emergent BioSolutions Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

2007

Year Ended December 31,
2006

2005

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
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

169,799
13,116
182,915

147,995
4,737
152,732

127,271
3,417
130,688

40,309
53,958
55,555
—
—
33,093

2,809
(71)
156
2,894

24,125
45,501
44,601
477
—
38,028

846
(1,152)
293
(13)

35,987
13,051
22,936

0.79
0.77

$
$

28,995,667
29,663,127

38,015
15,222
22,793

0.99
0.93

$
$

23,039,794
24,567,302

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

Cash dividends per share—basic

—

0.26

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

Emergent BioSolutions Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASh FLOwS

(in thousands)

Cash flows from operating activities:

Year Ended December 31,
2006

2007

2005

Net income
Adjustments to reconcile net income to net cash provided by (used in)

$ 22,936

$ 22,793

$ 15,784

operating activities (net of effects of acquisitions):
Stock-based compensation expense (credit)
Depreciation and amortization
Deferred income taxes
loss on disposal of property and equipment
Purchased in-process research and development
Excess tax benefits 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

Net cash used in investing activities

Cash flows from financing activities:

Restricted cash deposits
Proceeds from borrowings on long term indebtedness and lines of credit
Proceeds from notes payable to employees
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

Excess tax benefits from stock-based compensation
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

2,541
4,817
5,589
24
—
(6,003)

24,514
7,825
(5,169)
(1,316)
(2,303)
2,312
734
(1,054)
55,447

(43,969)
—
(43,969)

(5,008)
33,195
—
—
2,471
—

(18,015)
6,003
(155)
—
18,491

(657)

29,312
76,418
105,730

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)
(41,446)

(192)
32,430
—
54,229
590
(192)

(1,569)
789
(257)
—
85,828

(197)

40,124
36,294
76,418

(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)
(7,091)

1,250
31
123
—
33
(337)

(1,110)
—
—
(5,400)
(5,410)

(276)

29,473
6,821
36,294

$ 3,094
$ 14,329

$ 1,681
$ 2,788

$
696
$ 17,985

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

$
—
$ 7,084

$
—
$ 11,140

$ 27,001
—
$

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

Emergent BioSolutions Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF ChANGES IN STOCKhOLDERS’ EqUITY

Class A $0.001 Par
value Common Stock

Class B $0.01 Par
value Common Stock

$0.001 Par value

Common Stock

(in thousands, except share and per share data)

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 $0.001 to common stock $.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

Exercise of stock options
Stock-based compensation expense
Cumulative effect of change in accounting

principle (FIN 48)

Excess tax benefits from exercises of

non-qualified stock options

Net income
Foreign currency translation
Comprehensive income
Balance at December 31, 2007

18,666,479

3,636,801
—
—
—
—
—
—
—
22,303,280

—
—

(22,303,280)

—
—

—
—
—
—
—

—
—

—

—
—
—
—
—

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

Amount

$ 19

3
—
—
—
—
—
—
—
$ 22

—
—

(22)

—
—

—
—
—
—
$ —

—
—

—

—
—
—
—
$ —

—

—
133,451
(112,168)
—
—
—
—
—
21,283

95,858
—

(117,141)

—
—

—
—
—
—
—

—
—

—

—
—
—
—
—

$—

—
1
(1)
—
—
—
—
—
$—

1
—

(1)

—
—

—
—
—
—
$—

—
—

—

—
—
—
—
$—

—

$ 34,595

$ (276)

$25,396

$ 59,737

Additional

Paid-In

Capital

$ 7,610

26,998

(28)

(17)

—

589

—

54,224

723

789

—

2,469

2,541

6,003

—

Accumulated

Other

Comprehensive

Loss

—

(276)

—

(657)

Retained

Earnings

$15,320

(308)

(5,400)

15,784

—

(192)

—

(607)

22,936

Total

Stock-

holders’

Equity

$ 22,949

27,001

(337)

(17)

(5,400)

15,784

(276)

15,508

590

(192)

—

54,229

723

789

22,793

(197)

22,596

2,471

2,541

(607)

6,003

22,936

(657)

22,279

$ 90,920

$ (473)

$47,997

$138,472

(197)

22,793

Amount

—

175,828

22,420,421

5,000,000

27,596,249

2,153,988

29,750,237

$101,933

$(1,130)

$70,326

$171,159

Class A $0.001 Par

value Common Stock

Class B $0.01 Par

value Common Stock

$0.001 Par value
Common Stock

par value common stock

(22,303,280)

(22)

(117,141)

(1)

(in thousands, except share and per share data)

Balance at December 31, 2004

Issuance of common stock to acquire

18,666,479

3,636,801

Amount

$ 19

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 $0.001 to common stock $.001

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

Exercise of stock options

Stock-based compensation expense

Cumulative effect of change in accounting

principle (FIN 48)

Excess tax benefits from exercises of

non-qualified stock options

Net income

Foreign currency translation

Comprehensive income

Balance at December 31, 2007

22,303,280

$ 22

—

$ —

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

133,451

(112,168)

21,283

95,858

—

$—

—

(1)

—

$—

—

$—

—

$—

Amount

—

—
—
—
—
—
—
—
—
—

175,828
—

22,420,421

5,000,000
—

—
—
—
—
27,596,249

2,153,988
—

—

—
—
—
—
29,750,237

Amount

—

—
—
—
—
—
—
—
—
—

—
—

5
—

—
—
—
—
28

2
—

—

—
—
—
—
30

Additional
Paid-In
Capital

$ 7,610

26,998
32
(28)
(17)
—
—
—
—
$ 34,595

589
—

—

54,224
723

789
—
—
—
$ 90,920

2,469
2,541

—

6,003
—
—
—
$101,933

Accumulated
Other
Comprehensive
Loss

—

—
—
—
—
—
—
(276)
—
$ (276)

—
—

—

—
—

—
—
(197)
—
$ (473)

—
—

—

—
—
(657)
—
$(1,130)

Retained
Earnings

$15,320

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

—
(192)

—

—
—

—
22,793
—
—
$47,997

—
—

(607)

—
22,936
—
—
$70,326

Total
Stock-
holders’
Equity

$ 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

2,471
2,541

(607)

6,003
22,936
(657)
22,279
$171,159

Emergent BioSolutions Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inc.

1. NATURE OF ThE BUSINESS AND ORGANIzATION
Emergent BioSolutions
(the “Company” or
“Emergent”) is a biopharmaceutical company focused
on the development, manufacture and commercialization
of immunobiotics. the Company is developing products
to be offered both to the biodefense and commercial
markets. the Company commenced operations as
BioPort Corporation (“BioPort”) in September 1998
through an acquisition from the Michigan Biologic
Products Institute of rights to the marketed product,
Biothrax, vaccine manufacturing facilities at a multi-
building campus on approximately 12.5 acres in lansing,
Michigan and vaccine development and production
know-how. In December 2001, the U.S. Food and Drug
Administration (“FDA”) approved a supplement to
the Company’s manufacturing facility license for the
manufacture of Biothrax at the renovated facilities. In
June 2004, the Company completed a corporate reor-
ganization (“Reorganization”).

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 vac-
cine candidates through an acquisition of Microscience
limited (“Microscience”) in a share exchange in June
2005 and an acquisition of substantially all of the assets,
for cash, of Antex Biologics Inc. (“Antex”) in May 2003
and ViVacs GmbH, Germany (“ViVacs”) in July 2006.
the Company has renamed Microscience as Emergent
Product Development UK limited, Antex as Emergent
Product Development Gaithersburg Inc. 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 state-
ments and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.

Cash and Cash Equivalents
Cash equivalents are highly liquid investments with a
maturity of 90 days or less at the date of purchase and
consist of time deposits and investments in money mar-
ket funds with commercial banks and financial institu-
tions. 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, 2007 and 2006 the Company
maintained all of its cash and cash equivalents in four
financial institutions.

Fair value of Financial Instruments
the carrying amounts of the Company’s short-term
financial instruments, which include cash and cash
equivalents, accounts receivable and accounts payable,
approximate their fair values due to their short maturi-
ties. the fair value of the Company’s long-term indebt-
edness is estimated based on the quoted prices for the
same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities.
the carrying value and fair value of long-term indebted-
ness were $46.1 million and $45.6 million, respectively,
at December 31, 2007 and $33.8 million and $33.2 mil-
lion, respectively, at December 31, 2006.

Restricted Cash
Restricted cash at December 31, 2007 and 2006 includes
a certificate of deposit held by a bank as collateral for a
letter of credit acting as a security deposit on a loan.
Restricted cash at December 31, 2007 also includes
$5.0 million in a pledged bank deposit account as col-
lateral for a term loan. As of December 31, 2007 and
2006 the Company had restricted cash of $5.2 million
and $192,000, respectively.

Significant Customers and Accounts Receivable
the Company’s primary customers are the U.S.
Department of Defense (the “DoD”) and U.S. Department
of Health and Human Services (“HHS”). For the years
ended December 31, 2007, 2006 and 2005, sales of
Biothrax to the DoD and HHS comprised 97%, 97% and
96%, of total revenues, respectively. As of December 31,

2007 and 2006, the Company’s receivable balances were
comprised of 84% and 100%, respectively, from these
customers. Unbilled accounts receivable, included in
accounts receivable, totaling $1.1 million and $26,000
as of December 31, 2007 and 2006, respectively, relate
to various service contracts for which product has been
delivered or work has been performed, though invoicing
has not yet occurred. Accounts receivable are stated at
invoice amounts and consist primarily of amounts due
from the DoD and HHS as well as amounts due under
reimbursement contracts with other government enti-
ties and non-government and philanthropic organiza-
tions. 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, 2007 and 2006, an allow-
ance for doubtful accounts was not recorded, as the
collection history from these customers indicates col-
lection is probable.

Concentrations of Credit Risk
Financial instruments that potentially subject the
Company to concentrations of credit risk consist pri-
marily of cash and cash equivalents and accounts
receivable. the Company places its cash and cash
equivalents with high quality financial institutions.
Management believes that the financial risks associ-
ated 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 lev-
els quarterly and writes down, in the applicable period,
inventory that has become obsolete, inventory that has a
cost basis in excess of its expected net realizable value
and inventory in excess of expected customer demand.
the Company also writes off in the applicable period the
costs related to expired inventory.

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

Buildings
Furniture and equipment
Software

leasehold improvements

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

Upon retirement or sale, the cost of assets disposed of
and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is
credited or charged to operations. Repairs and mainte-
nance costs are expensed as incurred.

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

the Company records valuation allowances to reduce
deferred tax assets to the amounts that 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
determination is made. likewise, if the Company deter-
mines that it is not able to realize all or part of the net
deferred tax asset in the future, net income will decrease
in the period in which the determination is made. the
Company applies any reversals of valuation allowance
related to an acquired deferred tax asset against other
intangibles before impacting net income.

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

Microscience in 2005 and the Company’s initial public
offering, the Company believes the use of the operating
losses will be significantly limited.

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

Revenue Recognition
the Company recognizes revenues from product sales
in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition (“SAB No. 104”). SAB No. 104
requires recognition of revenues from product sales
that require no continuing performance by the Company
if four basic criteria have been met:

• there is persuasive evidence of an arrangement;
• delivery has occurred and title has passed to the

Company’s customer;

• the fee is fixed and determinable and no further

obligation exists; and

• collectibility is reasonably assured.

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

Under the Company’s previous contracts with the DoD,
title to the product passed to the DoD upon submis-
sion of the first invoice. the earnings process was
considered complete upon FDA release of the product
for sale and distribution. Following FDA release of the
product, the product is segregated for later shipment,
and all deferred revenue related to the released prod-
uct 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 bioter-
ror countermeasures to the federal government for

placement into the Strategic National Stockpile (“SNS”).
this interpretation provides for revenue recognition for
specifically identified products purchased for the SNS
in the event that all requirements for revenue recogni-
tion, as specified in Statement of Financial Accounting
Concepts No. 5, Recognition and Measurement
in
Financial Statements of Business Enterprises, are not
met. While the Company’s contracts with HHS are for
qualifying sales of vaccine for placement into the SNS,
the Company meets all requirements for revenue rec-
ognition upon delivery of product to HHS, and therefore
has not applied this guidance.

Collaborative research and development agree-
ments can provide for one or more of up-front license
fees, research payments, and milestone payments.
Agreements with multiple components (“deliverables”
or “items”) are evaluated in accordance with Emerging
Issues task Force (“EItF”) Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables
(“EItF No. 00-2 1”), to determine if the deliverables
can be divided into more than one unit of accounting.
An item can generally be considered a separate unit
of accounting if all of the following criteria are met:
(1) the delivered item(s) has value to the customer on
a stand-alone basis; (2) there is objective and reliable
evidence of the fair value of the undelivered items(s);
and (3) if the arrangement includes a general right
of return relative to the delivered item(s), delivery or
performance of the undelivered item(s) is considered
probable and substantially in control of the Company.
Items that cannot be divided into separate units are
combined with other units of accounting, as appro-
priate. Consideration received is allocated among the
separate units based on their respective fair values or
based on the residual value method and is recognized
in full when the criteria 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 con-
tinued involvement in the research and development
process. Revenues from the achievement of research

and development milestones, if deemed substantive,
are recognized as revenue when the milestones are
achieved, and the milestone payments are due and
collectible. If not deemed substantive, the Company
would recognize such milestone as revenue on a
straight-line basis over the remaining expected term
of continued involvement in the research and develop-
ment process.

Research and Development
Research and development costs are expensed as
incurred. Research and development costs primarily
consist of salaries, materials and related expenses for
personnel and facility expenses. Other research and
development expenses include fees paid to consultants
and outside service providers and the costs of materials
used in clinical trials and research and development.

Milestones are considered substantive if all of the fol-
lowing conditions are met: (1) the milestone is non-
refundable; (2) achievement of the milestone was not
reasonably assured at the inception of the arrangement;
(3) substantive effort is involved to achieve the milestone;
and (4) the amount of the milestone appears reasonable
in relation to the effort expended, the other milestones
in the arrangement and the related risk associated
with the achievement of the milestone and any ongoing
research and development or other services are priced
at fair value. Payments received in advance of work per-
formed are recorded as deferred revenue.

Payments received by the Company for the reimburse-
ment of expenses for research and development activi-
ties 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 ser-
vices, 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.

for

(“SFAS”) No. 144, Accounting

Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting
the
Standards
Impairment or Disposal of Long-Lived Assets (“SFAS No.
144”), the Company assesses the recoverability of its
long-lived assets for which an indicator of impairment
exists by determining whether the carrying value of such
assets can be recovered through undiscounted future
operating cash flows. If the Company concludes that
the carrying value will not be recovered, the Company
measures the amount of such impairment by compar-
ing the fair value to the carrying value. the Company
has recorded no impairment losses for the years ended
December 31, 2007, 2006 and 2005.

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

Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires
the presentation of the comprehensive income and
its components 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
transactions with foreign subsidiaries that are considered
to be long-term investments and translation gains and
losses incurred when converting its subsidiaries’ financial
statements from their functional currency to the U.S. dol-
lar 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 in accordance with
SFAS No. 34, Capitalization of Interest Cost, based on the
cost of major ongoing capital projects which have not yet
been placed in service. For the years ended December
31, 2007, 2006 and 2005, the Company incurred inter-
est expense of $3.2 million, $1.9 million and $767,000,
respectively. Of these amounts, the Company capital-
ized $3.1 million, $759,000 and $0, 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 con-
tract does not necessarily increase the likelihood that it
will secure future comparable contracts with the U.S.
government. the Company expects that a significant por-
tion of the business that it will seek in the near future, in

particular for Biothrax, will be under government
contracts that present a number of risks that are not
typically present in the commercial contracting process.
U.S. government contracts for Biothrax are subject to
unilateral termination or modification by the govern-
ment. the Company may fail to achieve significant sales
of Biothrax to customers in addition to the U.S. govern-
ment, which would harm its growth opportunities. the
Company may not be able to sustain or increase profitabil-
ity. the Company is spending significant amounts for the
expansion of its manufacturing facilities. the Company
may not be able to manufacture Biothrax consistently in
accordance with FDA specifications. Other than Biothrax,
all of the Company’s product candidates are undergoing
clinical trials or are in early stages of development, and
failure is common and can occur at any stage of develop-
ment. 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 com-
puted 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:

(in thousands, except share and per share data)
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

2007

Year Ended December 31,
2006

2005

22,936

22,793

15,784

28,995,667
667,460
29,663,127

$
$

0.79
0.77

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

$
$

0.99
0.93

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

$
$

0.77
0.69

For the years ending December 31, 2007, 2006 and 2005,
outstanding stock options to purchase approximately
463,000, 160,000 and 21,000 shares, respectively, of
common stock are not considered in the diluted earn-
ings per share calculation because the exercise price
of these options is greater than the average per share
closing price during the year.

Accounting for Stock-based Compensation
As of December 31, 2007, 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
Opinion No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”) and provided the pro forma disclosures
of net income and net income per share in accor-
dance 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.

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 rec-
ognition provisions of SFAS No. 123(R), the Company
recognizes stock-based compensation net of an esti-
mated forfeiture rate. 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.

Under the modified prospective method, compensation
cost recognized in 2007 and 2006 includes: (1) compen-
sation cost for all share-based payments granted prior
to but not yet vested as of December 31, 2005, based on
the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, and (2) com-
pensation cost for all share-based payments granted
and vested subsequent to December 31, 2005, based on
the grant date fair value estimated in accordance with
the provisions of SFAS No. 123(R). Stock based com-
pensation is recognized on a straight-line basis over
the vesting period.

Results for prior periods have not been restated. Based
on options granted to employees as of December 31,
2007, total compensation expense not yet recognized
related to unvested options is approximately $2.9 mil-
lion, after tax. the Company expects to recognize that
expense over a weighted average period of 3.0 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 methodol-
ogy for developing each of the assumptions used:

Year Ended December 31,
2005
2006

2007

Expected dividend yield
0%
50%
Expected volatility
Risk-free interest rate 2.99–5.09% 4.58–5.21% 3.33–4.32%
Expected average
life of options

0%
50%

3.0 years

2.9 years

• Expected dividend yield—The Company does not
pay regular dividends on its common stock and
does not anticipate paying any dividends in the
foreseeable future.

• Expected volatility—Volatility is a measure of the
amount by which a financial variable, such as
share price, has fluctuated (historical volatility) or
is expected to fluctuate (expected volatility) dur-
ing a period. the Company analyzed the expected
historical volatility used by similar companies
at a similar stage of development 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 range of U.S.
treasury rates with a term that most closely
resembles the expected life of the option as of the
date in which the option was granted.

• Expected average life of options—This is the
period of time that the options granted are
expected to remain outstanding. this estimate is
based primarily on the employee position profile
of option holders and the trading lock out periods
that result from the employee’s 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 deduc-
tions in excess of the compensation cost recognized for
those options (excess tax benefits from stock-based
compensation) 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 year
ended December 31, 2005.

(in thousands, except per share data)
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,
2005
$15,784

—

(258)
$15,526
$ 0.77
$ 0.69

$ 0.76

$ 0.68

Reclassifications
Restricted cash deposits in the consolidated state-
ments of cash flows for the years ended December 31,
2006 and 2005 have been reclassified from investing
cash flows to financing cash flows, to conform to cur-
rent period presentation.

Interests

Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling
in Consolidated Financial
Statements—an Amendment of ARB No. 51 (“SFAS No.
160”). SFAS 160 clarifies that a noncontrolling inter-
est in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity
in the consolidated financial statements, requires
consolidated net income to be reported at amounts
that include the amounts attributable to both the
parent and the noncontrolling interest, establishes
a single method of accounting for changes in a par-
ent’s ownership interest in a subsidiary that do not
result in deconsolidation, and requires that a parent
recognize a gain or loss in net income when a sub-
sidiary is deconsolidated. the provisions of SFAS No.
160 are effective for fiscal years beginning on or after
December 15, 2008. the Company is currently evalu-
ating the impact of the adoption of this statement on
its financial statements.

In December 2007, the FASB issued SFAS No. 141R,
Business Combinations (“SFAS No. 141R”). SFAS No.
141R requires the acquiring entity in a business com-
bination to record all assets acquired and liabilities
assumed at their respective acquisition-date fair
values, changes the recognition of assets acquired

and liabilities assumed arising from contingencies,
changes the recognition and measurement of con-
tingent consideration, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R
also requires additional disclosure of information sur-
rounding a business combination, such that users of
the entity’s financial statements can fully understand
the nature and financial impact of the business com-
bination. SFAS No. 141R applies prospectively to busi-
ness combinations for which the acquisition date is
on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, and
it may not be applied before that date. the provisions
of SFAS No. 141R will impact the Company’s financial
statements to the extent that the Company is party to
a business combination after the pronouncement has
been adopted.

In June 2007, the FASB issued EItF No. 07-3, Accounting
for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and
Development Activities (“EItF No. 07-3”). EItF No. 07-3
states that nonrefundable advance payments for goods
or services that will be used or rendered for future
research and development activities should be deferred
and capitalized. Such amounts should be recognized as
an expense as the related goods are delivered or the
related services are performed. the provisions of EItF
No. 07-3 are effective for fiscal years beginning after
December 15, 2007. the Company anticipates that the
adoption of the provisions of EItF No. 07-3 will not have
a material impact on its financial statements.

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 enti-
ties to choose to measure 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 earn-
ings caused by measuring related assets and liabili-
ties 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. the Company anticipates that the adoption of
this statement will not have a material impact on its
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 account-
ing principles and expands disclosures about fair
value measurements. SFAS No. 157 emphasizes that
fair value is a market-based measurement, not an
entity-specific measurement. therefore, a fair value
measurement should be determined based on the
assumptions that market participants would use in
pricing the asset or liability. the provisions of SFAS
No. 157 are effective for fiscal years beginning after
November 15, 2007 and interim periods within those
fiscal years. the Company anticipates that the adop-
tion of this statement will not have a material impact
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, to expand
the Company’s commercial vaccine portfolio, pursu-
ant to the terms and conditions of the Share Purchase
and Assignment Agreement dated July 13, 2006 by and
between EII and ViVacs. EII paid $150,000 in cash on
the closing date of the agreement and agreed to pay
$50,000 on each of the first and second anniversaries
of the closing date. the acquisition agreement also pro-
vides for a potential variable earn-out purchase price
of up to $220,000, based on future payments from third
party licensees of the technology. As of December 31,
2007, the Company has not received any such pay-
ments 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 acquisition of assets rather than
as a business combination and, therefore, goodwill was
not recorded.

total purchase consideration consisted of:

(in thousands)

Cash (including future guaranteed

cash payments of $100)

Direct acquisition costs

total purchase consideration

the assets acquired were accounted for in accor-
dance 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:

(in thousands)
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 $477,000 for acquired research
projects associated with product candidates in devel-
opment 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 pur-
suant to the terms and conditions of the Share Exchange
Agreement dated June 23, 2005 by and between EEI and
Microscience Holdings PlC, a public limited liability
company incorporated in England. At the closing date,
the Company, through EEI, issued Microscience share-
holders 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 determination
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 acquisition of assets rather than as a business
combination and, therefore, goodwill was not recorded.

total purchase consideration consisted of:

$250

180

$430

(in thousands)
Fair value of common stock
Direct acquisition costs
total purchase consideration

$27,001
1,194
$28,195

the assets acquired were accounted for in accordance
with the provisions of SFAS No. 141. All of the tangible
and intangible assets acquired and liabilities assumed
of Microscience were recorded at their estimated fair
market values on the acquisition date. the purchase
price was allocated as follows:

(in thousands)
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 $26.6 million 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:

(in thousands)
Billed
Unbilled
total

December 31,

2007
$17,741
1,076
$18,817

2006
$43,305
26
$43,331

5. INvENTORIES
Inventories consist of the following:

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

(in thousands)
land and improvements
Buildings and leasehold

improvements

Furniture and equipment
Software
Construction-in-progress

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

December 31,

2007
$ 4,974

2006
$ 5,173

26,410
19,626
5,866
71,129
128,005

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

(17,787)

(13,536)

$110,218

$ 78,174

Depreciation and amortization expense was $4.8 mil-
lion, $4.7 million and $3.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively. For the
years ended December 31, 2007, 2006 and 2005, depreci-
ation and amortization expense included approximately
$1.0 million, $1.3 million and $1.3 million, respectively,
related to the amortization of internal-use software. As
of December 31, 2007 and 2006, unamortized software
cost was $0 and $1.2 million, respectively.

7. ACCRUED ExPENSES AND OThER

CURRENT LIABILITIES

Accrued expenses and other current liabilities consist
of the following:

December 31,

2007
$1,962
723
259
1,112

$4,056

2006
$1,218
1,115
222
715

$3,270

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

December 31,

2007
$ 2,463
11,483
2,951
$16,897

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

(in thousands)
Contract costs
Professional fees
Interest payable
Property taxes and other

total

8. LONG-TERM DEBT
the components of long term-debt are as follows:

(in thousands)
Term Loan dated June 2007; Libor plus 2.75%, due June 2012
Term Loan dated August 2006; Libor plus 3.75%, due August 2011
Revolving credit loan; Libor plus 3.75%
Term Loan dated April 2006; Libor plus 3.0%, due April 2011
Forgivable Loan dated October 2004; 3.0%, due March 2013
Term Loan dated October 2004; 6.625%, due October 2011
ERP Term Loan; Prime less 0.375%, due September 2007
Other
total long-term indebtedness
less current portion of long-term indebtedness
Noncurrent portion of long-term indebtedness

December 31,

2007
$28,750
—
—
8,167
2,500
6,671
—
14
46,102
(3,514)
$42,588

2006
—
10,000
5,000
8,383
2,500
6,955
960
26
33,824
(2,456)
$31,368

In June 2007, the Company entered into a loan agree-
ment with HSBC Realty Credit Corporation (USA)
(“HSBC”), under which HSBC provided the Company
with a term loan of $30 million. this loan replaced a
prior loan arrangement with HSBC under which HSBC
agreed to loan the Company $15 million, consisting of
a $10 million term loan and a $5 million revolving line
of credit. Under the new loan agreement, the Company
is required to maintain a minimum balance of $5 mil-
lion in a deposit account pledged to HSBC and to make
monthly payments in the amount of $250,000 in princi-
pal plus accrued interest beginning in August 2007, with
a residual principal payment due upon maturity in June
2012. Payment of the loan is secured by substantially
all of the assets of Emergent BioDefense Operations,
other than accounts receivable under Biothrax sup-
ply contracts with the DoD and HHS that are pledged
as collateral to secure the $15 million revolving line
of credit with Fifth third Bank. Interest on the loan
accrues at an annual rate of lIBOR plus 2.75% (7.73%
as of December 31, 2007).

Under this term loan, the Company is required to
maintain a book leverage ratio of less than 1.25. this
ratio is calculated by dividing total liabilities, exclud-
ing deferred revenues specific to contracts with the
U.S. government, by total net worth. In addition, the
Company is required to maintain a debt coverage ratio
of not less than 1.25 to 1.00. this ratio is calculated
by dividing earnings before interest, taxes, deprecia-
tion and amortization for the most recent four quarters
by the sum of current obligations under capital leases
and principal obligations and interest expenses for

borrowed money, in each case due and payable for the
following four quarters. the Company is in compliance
with these covenants as of December 31, 2007.

In August 2006, the Company entered into a term loan
for $10 million and a revolving credit loan that provided
for borrowings up to $5 million. Under the term loan,
the Company was required to make monthly princi-
pal payments beginning in April 2007 and a residual
principal payment of approximately $5.6 million upon
maturity in August 2011. Interest was payable monthly
and accrued at an annual rate equal to lIBOR plus
3.75%. Under the revolving credit loan, the Company
was not required to repay outstanding principal until
October 2007. In October 2007, the outstanding princi-
pal under the revolving credit loan was to convert to
a term loan with required monthly principal payments
through maturity in August 2011. Interest was payable
monthly and accrued at an annual rate equal to lIBOR
plus 3.75%. Both the term loan and the revolving credit
loan were replaced by the $30 million term loan dis-
cussed above.

In April 2006, the Company completed the acquisition
of a 145,000 square foot facility in Frederick, Maryland
for $9.8 million. this facility was previously under a
lease which contained an option to purchase the facil-
ity. the Company paid $1.3 million in cash and financed
the remaining balance with a bank loan in the amount
of $8.5 million. this loan requires monthly principal
and interest payments from May 2006 through April
2011 of $72,000 with a balloon payment for the remain-
ing unpaid principal and interest due in April 2011. the

interest rate is a floating rate based on the three month
lIBOR plus 3.0% (7.9 8% as of December 31, 2007). the
loan is collateralized by the facility. the loan requires
the Company to comply with certain non-financial cov-
enants. the Company is in compliance with these cov-
enants as of December 31, 2007.

In October 2004, the Company entered into a Secured
Conditional loan with
the Maryland Economic
Development Assistance Fund for $2.5 million. the
proceeds of the loan were used to reimburse the
Company for eligible costs it incurred to purchase a
building in Frederick, Maryland. the loan is secured
by a $1.3 million letter of credit and a security inter-
est in the building. the Company is required to pay
an annual fee of 1.0% to maintain the letter of credit.
the borrowing bears interest at 3.0% per annum, and
the term of the loan ends March 31, 2013. the principal
and related accrued interest may be forgiven if speci-
fied employment levels are achieved and maintained
through December 2012, at least $42.9 million in proj-
ect 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
$9,000 of principal plus accrued interest for each
position not filled below the target level of 280 employ-
ees. 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 building
in Frederick, Maryland discussed above, the Company
entered into a loan agreement for $7 million with a bank
to finance the remaining portion of the purchase price.
the borrowing accrued interest at 6.625% per annum
through October 2006. the Company was required
to make interest only payments through that date.

Beginning in November 2006, the Company began to
make monthly payments of $62,000, based upon a 15
year amortization schedule. In November 2009, the
monthly payments will be adjusted based upon a 12
year amortization schedule. Beginning in November
2009, the loan will bear interest at a fixed rate equal to
3.2% over the yield on actively traded U.S. Government
securities issues adjusted to a constant maturity of
two years, rounded up to the nearest one-eighth of one
percent (1/8 of 1%). All unpaid principal and interest is
due in full in October 2011. the Company is required to
maintain certain financial and non-financial covenants
including a minimum tangible net worth of not less
than $5.0 million and a debt coverage ratio of not less
than 1.1 to 1. the Company is in compliance with these
covenants as of December 31, 2007. this loan is guar-
anteed by all of the subsidiaries of the Company.

During 2004, the Company implemented an Enterprise
Resource Planning
(ERP) system. the Company
financed $2.3 million of the costs through the issuance
of a term loan. the loan bore interest at prime less
0.375%, and was fully repaid in September 2007.

Scheduled principal repayments and maturities on
long-term debt as of December 31, 2007 are as follows:

(in thousands)
2008
2009
2010
2011
2012

$ 3,514
6,049
3,585
16,203
16,751
$46,102

9. LINE OF CREDIT
In June 2007, the Company entered into a loan agree-
ment with Fifth third Bank, whereby Fifth third Bank
agreed to extend to the Company a revolving line of
credit up to $15 million. Collateral for this line of credit
consists of accounts receivable under supply contracts
with the DoD and HHS. the Company can borrow under
this line of credit through May 2008, at which time the
agreement expires. 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% (7.68% as of December 31, 2007). the Company
is subject to certain covenants, including maintenance
of specified equity levels on a quarterly basis, and
is currently in compliance with those covenants. At

December 31, 2007 and 2006, $11.8 million and $8.9 mil-
lion, respectively, were outstanding under the line of
credit. these amounts were repaid in January 2008
and 2007, respectively.

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 privi-
leges, redemption characteristics, and sinking fund
requirements as approved by the Company’s board of
directors. As of December 31, 2007 and 2006, no pre-
ferred 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 autho-
rized 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 mat-
ters as may be provided by law.

On November 14, 2006, the Company completed its ini-
tial public offering (“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 $62.5 million.
Issuance costs related to the offering were $8.3 mil-
lion, resulting in net proceeds from the offering of
$54.2 million. 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 Common Stock at a conversion rate of one share of
common stock for one share of Class A and Class B
common stock.

On September 20, 2006, the Company’s board of directors
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, reclassi-
fied the Class A Common Stock as $0.001 par value per
share Common Stock, increased the number of autho-
rized shares of Common Stock to 100,000,000 shares and
adjusted 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 direc-
tors 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 incor-
poration 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 divi-
dends 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 hold-
ers of outstanding shares of Class A Common Stock
and Class B Common Stock in an aggregate amount
of $5.4 million. 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, includ-
ing the recovery of royalties and other costs and fees,
to which the Company believed it was entitled under
a series of agreements regarding the development of
botulinum toxin products. the Company paid the spe-
cial cash dividend on July 13, 2005 to stockholders of
record as of June 15, 2005. No regular dividends have
been declared or paid.

Stock Options
As of December 31, 2007, the Company has two stock-
based employee compensation plans, the 2006 Plan and
the 2004 Plan (together, the “Emergent Plans”), under
which the Company has granted options to purchase
shares of Common Stock. the Emergent Plans have
both incentive and non-qualified stock option features.

the 2006 Plan, established in connection with the
Company’s initial public offering in November 2006, ini-
tially authorized the issuance of up to 1,089,461 shares
of Common Stock. In addition, the 2006 Plan contains
an “evergreen provision” that allows for increases in
the number of shares authorized for issuance under the
2006 Plan in the first and third quarter of each year from
2007 through 2009. Each semi-annual increase in the
number of shares will be equal to the lowest of: (1) a
specified number of shares stipulated in the 2006 Plan;
(2) a specified percentage of the aggregate number of
shares outstanding; and (3) an amount determined
by the Company’s Board of Directors. the maximum
specified number of shares per semi-annual increase
ranges from 428,700 to 937,900. the maximum speci-
fied percentage of outstanding shares for each semi-
annual increase ranges from 1.5% to 3.0%. Accordingly,
an aggregate of 1,949,362 shares of Common Stock

are authorized for issuance under the 2006 Plan as of
December 31, 2007. the Company has granted options
to purchase a total of 1,380,111 shares of Common Stock
under the 2006 Plan as of December 31, 2007. the maxi-
mum 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
a contractual life of no more than 10 years. the terms
and conditions of stock options (including price, vesting
schedule, term and number of shares) under the
Emergent Plans are determined by the Company’s com-
pensation committee, which administers the Emergent
Plans. Following the closing of the Company’s initial
public offering, the Company no longer granted options
pursuant to the 2004 Plan.

Each option granted under the Emergent Plans becomes exercisable as specified in the relevant option agree-
ment, 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, 2006
Exercisable at December 31, 2006

Granted
Exercised
Forfeited
Cancelled

Outstanding at December 31, 2007
Exercisable at December 31, 2007

2006 Plan

2004 Plan

Number
of Shares
1,030,500
—
620,811
—
(271,200)
—
1,380,111
289,900

weighted-
Average
Exercise Price
$10.13
—
$
9.44
—
10.41
—
$ 9.77
$10.27

Number
of Shares
2,936,389
2,395,693
—
(2,153,988)
(110,668)
(5,214)
666,519
507,802

weighted-
Average
Exercise Price
$2.53
$1.43
—
1.15
8.31
1.49
$6.04
$4.94

Aggregate
Intrinsic
value
26,375,147
23,310,093

743,995
682,439

the weighted average remaining contractual term
of options outstanding as of December 31, 2007 and
2006 was 5.5 and 3.2 years, respectively. the weighted
average remaining contractual term of options exercis-
able as of December 31, 2007 and 2006 was 4.6 and 1.1
years, respectively.

respectively. the total fair value of shares vested dur-
ing 2007 was $1.9 million.

Stock-based compensation expense was recorded in the
following financial statement line items:

the weighted average grant date fair value of options
granted during the years ended December 31, 2007,
2006 and 2005 was $3.58, $3.94 and $1.37, respec-
tively. the total intrinsic value of options exercised
during the years ended December 31, 2007, 2006 and
2005 was $20.5 million, $2.3 million and $563,000,

(in thousands)
Cost of sales
Research and development
General and administrative
total stock-based
compensation expense

Years Ended
December 31,
2006
2007
$ 3
82
$
97
377
623
2,082

$2,541

$723

A summary of the status of the Company’s nonvested stock options at December 31, 2007 is presented below:

Nonvested at December 31, 2006

Granted
Exercised
Vested
Forfeited

Nonvested at December 31, 2007

2006 Plan

2004 Plan

Number
of Shares
1,030,500
620,811
—
(289,900)
(271,200)
1,090,211

weighted-
Average
Grant Date
Fair value
$3.09
3.58
—
3.91
3.85
$3.66

Number
of Shares
537,532
—
—
(278,598)
(100,217)
158,717

weighted-
Average
Grant Date
Fair value
$5.30
—
—
2.84
3.00
$3.53

During the year ended December 31, 2007, the Company received a tax benefit from stock options exercised of
approximately $6.0 million and $789,000 respectively.

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

(in thousands)
Current

Federal
State

total Current
Deferred

Federal
State

total Deferred
total Provision for Income taxes

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

(in thousands)
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

2007

$11,189
2,275
13,464

2,832
(3,245)
(413)
$13,051

Year Ended December 31,
2006

$14,212
812
15,024

100
98
198
$15,222

2005

$ 16,093
200
16,293

(9,769)
(1,199)
(10,968)
$ 5,325

December 31,

2007
$ 6,361
511
523
39,044
1,508
47,971
(756)
(1,303)
(2,059)
(33,702)
$ 12,186

2006
$ 4,160
549
1,452
32,534
1,681
40,376
(888)
(433)
(1,321)
(27,283)
$ 11,772

Net operating loss carryforwards consist of approximately $118 million for state jurisdictions and $100 million
for foreign jurisdictions. the state net operating loss carryforwards will begin to expire in 2018. the foreign net
operating loss carryforwards will have an indefinite life unless the foreign entities have a change in the nature or
conduct of the business in the three years following a change in ownership. the use of the Company’s net operat-
ing 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 statu-
tory rate to loss before provision for income taxes as a
result of the following:

(in thousands)
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 change

in rates

Effect of foreign rates
tax credits
Other differences
Permanent differences
Provision for

Year Ended December 31,
2007
2005
2006
$ 54,259
$ 56,698
$ 62,016
(33,150)
(18,683)
(26,029)

35,987

38,015

21,109

$ 12,595

$ 13,305

$ 7,388

701

(395)

(2,329)

(7,106)

(6,050)

(17,982)

6,419

6,605

18,995

493
154
(880)
(617)
1,292

—
752
(759)
1,044
720

—
264
(474)
(212)
(325)

income taxes

$ 13,051

$ 15,222

$ 5,325

the effective annual tax rate for the years ended
December 31, 2007, 2006 and 2005 was 36%, 40% and
25%, respectively. the decrease in the effective rate
from 2006 to 2007 was due primarily to a reduction in
state valuation allowances related to the expected uti-
lization of net operating losses.

In September 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 prescribes a recognition
threshold and measurement attribute for the financial
statement recognition and measurement of a tax posi-
tion 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 to be 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 Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of
FIN 48, the Company recognized, as a cumulative effect

of change in accounting principle, a $607,000 increase
in tax-related liabilities for unrecognized tax benefits
and a $607,000 reduction to beginning retained earn-
ings. the Company recognizes interest in interest
expense and recognizes potential penalties related
to unrecognized tax benefits in selling, general and
administrative expense. the Company accrued approx-
imately $27,000 for the payment of interest and penal-
ties as of December 31, 2007. Of the total unrecognized
tax benefits recorded at December 31, 2007, $33,000
is classified as a current liability and $244,000 is clas-
sified as a non-current liability on the balance sheet.
As of December 31, 2007, $33,000 of unrecognized tax
benefits will reverse within the next twelve months.

A reconciliation of the beginning and ending balances
of the total amounts of gross unrecognized tax benefits
is as follows:

(in thousands)
Gross unrecognized tax benefits at

January 1, 2007

Increases for tax positions for prior years
Decreases for tax positions for prior years
Increases for tax positions for current year
Settlements
lapse of statue of limitations
Gross unrecognized tax benefits at
December 31, 2007

$ 607
262
(65)
100
(201)
(426)

$ 277

Substantially all of these reserves would impact the
effective tax rate if released into income.

the Company’s federal and state income tax returns
for the tax years 2006-2004 remain open to examina-
tion. the Company’s tax returns in the United Kingdom
remain open to examination for the tax years 2006–2001,
and tax returns in Germany remain open indefinitely. A
federal income tax audit of the Company’s tax return for
the 2004 tax year was completed in March 2007. As a
result of this audit, the Company paid an assessment of
$722,000, including $96,000 of interest. the Company is
the subject of an ongoing federal income tax audit for the
tax year ended December 31, 2005. the financial state-
ment impact of the audit has been estimated at approxi-
mately $451,000, including $56,000 of interest. this
amount has been accrued as of December 31, 2007.

12. 401(K) SAvINGS PLAN
the Company has established a defined contribu-
tion savings plan under Section 401(k) of the Internal
Revenue Code. the 401(k) Plan covers substantially

all employees. Under the 401(k) Plan, employees may
make elective salary deferrals. the Company provides
for matching of qualified deferrals up to 50% of the first
6% of the employee’s salary. During the years ended
December 31, 2007, 2006 and 2005, the Company made
matching contributions of approximately $682,000,
$573,000 and $520,000, 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 in November 2008. the Company leases office
and laboratory space in Wokingham, England under two
coterminous non-cancelable operating leases that expire
in November 2016. the Company leases office space in
Rockville, Maryland under a non-cancelable operating
lease that contains a 3% annual escalation clause over
the ten year term of the lease, which expires in December
2016 and the Company has a five year renewal option at
the end of the initial term. For the years ended December
31, 2007, 2006 and 2005, total rent expense was $3.4 mil-
lion, $2.4 million and $2.5 million, respectively.

Future minimum lease payments under operating lease
obligations as of December 31, 2007 are as follows:

(in thousands)
2008
2009
2010
2011
2012
2013 and beyond
total minimum lease payments

$ 2,048
1,436
1,453
1,471
1,489
6,086
$13,983

Litigation
In June 2002, the Company initiated a lawsuit against
Élan Pharmaceuticals and related entities in an effort
to clarify intellectual property rights, including the
recovery of royalties and other costs and fees, to which
the Company believed it was entitled under a series of
agreements and to clarify intellectual property rights
associated with those agreements. the Company
sought damages, injunctive relief and declaratory relief.
On June 27, 2005, the Company obtained a settlement
pursuant to which Élan and related entities agreed to

pay the Company $10.0 million. Payment of such settle-
ment was received by the Company in July 2005. the
agreement also clarified the parties’ intellectual prop-
erty rights. Upon receipt of the settlement from Élan
Pharmaceuticals and related entities, the Company dis-
tributed a net settlement amount (total proceeds from
the settlement less reserves for applicable federal and
state income taxes, legal expenses related to the suit
and other miscellaneous expenses) of $5.4 million to all
Company stockholders of record as of June 15, 2005.

From time to time, the Company is involved in product
liability claims and other litigation considered normal
in the nature of its business. the Company does not
believe that any such proceedings would have a mate-
rial, adverse effect on the results of its operations. For
claims filed against the Company for use of Biothrax by
the DoD, the Company expects 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
the Company has engaged Wilmer Cutler Pickering
Hale and Dorr llP (“WilmerHale”) to provide certain
legal services to the Company. the Company’s Senior
Vice President legal Affairs and General Counsel is
married to a partner at WilmerHale, who has not par-
ticipated in providing legal services to the Company. the
Company has incurred fees for legal services rendered
by WilmerHale of approximately $1.0 million for the year
ended December 31, 2007. Of this amount, approximately
$131,000 was in accounts payable at December 31, 2007.

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
certain 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.
this arrangement terminated in 2006. A marketing
arrangement with an entity affiliated with the family of
Chief Executive Officer required a payment of 40% of
gross sales in countries in the Middle East and North
Africa, except Israel. this arrangement terminated in
2007. A similar marketing arrangement with the same
entity was entered into in 2008 that requires a payment
of 17.5% of net sales and reimbursement of certain
expenses, for certain countries in the Middle East and

North Africa, excluding countries to which export is
prohibited by the U.S. government. No royalty payments
under these agreements have been triggered for the
years ended December 31, 2007, 2006 and 2005.

the Company has entered into consulting, lease and
transportation arrangements with various persons or
entities affiliated with the Chief Executive Officer and
two members of the board of directors. At December 31,
2007 and 2006, there was $18,000 and $17,000, respec-
tively, in accounts payable for these services. For the
years ended December 31, 2007, 2006 and 2005, the
Company paid approximately $200,000, $387,000 and,
$625,000, respectively, to various persons or entities
affiliated with two members of our board of directors.
For the years ended December 31, 2007, 2006 and 2005,
the Company paid approximately $33,000, $33,000 and

$169,000, respectively, to entitles owned by or affiliated
with the Chief Executive Officer. the Company currently
has an agreement with a director to perform corporate
strategic issues consultation and directed project sup-
port to the marketing and communications group and an
agreement with a company owned by the Chief Executive
Officer to provide transportation and logistical support.

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 normal commercial rate. For the years
ended December 31, 2006 and 2005, the Company paid
approximately $13,000 and $34,000, respectively, for
transportation on an as needed basis for business pur-
poses. In May 2006, this arrangement was terminated.

15. SEGMENT INFORMATION
the Company reports financial information for 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 that have
resulted in significant unmet or underserved medical needs. Revenues in this segment consist predominantly of mile-
stone payments and development and grant revenues received under collaboration and grant arrangements. the “All
Other” segment relates to the general operating costs of the Company and includes costs of the centralized services
departments, which are not allocated to the other segments, as well as spending on product candidates or activities
that are not classified as biodefense or commercial. the assets in this segment consist of cash and fixed assets.

(in thousands)

Biodefense

Commercial

All Other

Total

Reportable Segments

Year Ended December 31, 2007

External revenue
Intersegment 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, 2006

External revenue
Intersegment revenue (expense)
Research and development
Interest revenue
Interest expense
Depreciation and amortization
Net income (loss)
Assets
Expenditures for long-lived assets

$179,738
—
24,744
—
—
3,445
76,397
133,692
38,880

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

$ 3,177
—
26,159
—
—
947
(38,213)
21,672
1,991

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

—
—
3,055
2,809
(71)
425
(15,248)
118,144
3,098

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

$182,915
—
53,958
2,809
(71)
4,817
22,936
273,508
43,969

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

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, 2007 and 2006 is presented in the following tables:

(in thousands)
Fiscal year 2007
Revenue
Income (loss) from operations
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted

Fiscal year 2006
Revenue
Income (loss) from operations
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted

COMMON STOCK INFORMATION

March 31

June 30

September 30

December 31

Three Months Ended

$26,448
(5,831)
(2,690)
(0.10)
(0.10)

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

$23,186
(8,657)
(4,961)
(0.17)
(0.17)

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

$43,644
4,422
2,845
0.10
0.10

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

$89,637
43,159
27,742
0.93
0.93

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

Market Information and holders
Our common stock has traded on the New York Stock Exchange under the symbol “EBS” since November 15, 2006.
Prior to that time, there was no public market for our common stock. the following table sets forth the high and low
sales prices per share of our common stock during each quarter of the year ended December 31, 2007 and for the
period from November 15, 2006 to December 31, 2006:

Year Ended December 31, 2007
High
low

Year Ended December 31, 2006
High
low

First
quarter

$17.75
$10.50

n/a
n/a

Second
quarter

$14.85
$ 8.33

n/a
n/a

Third
quarter

$12.67
$ 7.67

n/a
n/a

Fourth
quarter

$10.70
$ 4.40

$12.72
$ 9.75

As of February 29, 2008, the closing price per share of our common stock on the New York Stock Exchange was
$7.47 and we had 48 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 common stock in an aggregate amount of approximately $5.4 million. Our board of directors declared this special
dividend in order to distribute the net proceeds of a payment that we received as a result of the settlement of litiga-
tion 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.

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, 2007 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 our common stock, the investment of $100.00 on October 31, 2006
in each of the S&P 500 Index and the S&P Biotechnology Index, and 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*

$150

$125

$100

$75

$50

$25

11/06 11/06 12/06 1/07

2/07

3/07

4/07

5/07

6/07

7/07

8/07

9/07 10/07 11/07 12/07

Emergent BioSolutions Inc.

S&P 500

S&P Biotechnology

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

Base
Period
100.00
100.00
100.00

Month End

11/06
89.66
101.90
97.29

12/06
95.38
103.33
94.65

1/07
128.97
104.89
95.77

2/07
107.44
102.84
92.08

3/07
114.70
103.99
87.96

5/07
85.56
112.39
96.60

6/07
88.03
110.52
93.77

7/07
79.40
107.10
92.87

Month End

8/07
76.32
108.70
91.87

9/07
75.90
112.77
100.91

10/07
86.15
114.56
107.51

11/07
47.78
109.77
104.49

4/07
112.31
108.60
100.34

12/07
43.25
109.01
91.41

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 UK 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, MVAtor™ spi-VEC™ are our trademarks.

annual report on Form 10-K
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, 2007.

a copy of the company’s Form 10-K
for the year ended december 31, 2007, 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

investor relations
Robert G. Burrows
Vice President,
Investor Relations
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 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.

special 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 commercialization, 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, 2007 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.

A global footprint

We are expanding our presence around the globe. Along with our

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 recently

established a joint venture with the government of Malaysia. We also

work with third-party marketing representatives in countries that

represent potential strategic growth markets.

Corporate Headquarters

2273 Research Boulevard, Suite 400, Rockville, MD 20850 USA

www.emergentbiosolutions.com

AR08-1