p r o t e c t i n g
2008 Annual Report
About Emergent BioSolutions Emergent BioSolutions Inc. is a biopharmaceutical company focused on
the development, manufacture and commercialization of vaccines and therapeutics that assist the
body’s immune system to prevent or treat disease. Emergent’s marketed product, BioThrax® (Anthrax
Vaccine Adsorbed), is the only vaccine licensed by the U.S. Food and Drug Administration for the
prevention of anthrax infection. Emergent’s development pipeline includes programs focused on
anthrax, botulism, tuberculosis, typhoid, hepatitis B and chlamydia. Additional information may be
found at www.emergentbiosolutions.com.
gaithersburg, Md
FredericK, Md
rockville, MD
headquarters
reading, u.K.
Munich, gerMany
A global footprint
Lansing, Mi
MaLaysia
singapore
Emergent’s presence around the globe includes manufacturing
facilities in the United States, product development operations
in the United States and Europe, marketing and sales offices
in the United States, Germany and Singapore, and we have
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:
A global footprint
to protect life. We pursue innovative ways of directing the immune system to
prevent or 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.
2008 accomplishments position
us well for future growth
daniel J. abdun-nabi
President and
Chief Operating Officer
Fuad el-hibri
Chairman and
Chief Executive Officer
Dear Stockholders:
We had the great pleasure in 2008 of
celebrating a major company milestone,
Emergent’s 10-year anniversary. Much of our
growth and success is based on our flagship
product, BioThrax® (Anthrax Vaccine
Adsorbed), the only FDA-licensed vaccine
for the prevention of anthrax disease. This
vaccine continues to be a valuable medical
countermeasure for the U.S. government and
is gaining interest globally. The consistent
revenue and cash generation from the sales
of BioThrax enables us to pursue the devel-
opment of a broader pipeline of products
targeting infectious diseases. This growth-
oriented approach allows us to realize our
mission—to protect life.
Our strategy
Our goal is to become a leading, fully inte-
grated biopharmaceutical company focused on
the manufacture, development and commer-
cialization of vaccines and therapeutics that
assist the body’s immune system to prevent
or treat disease. In 2008, we established
four strategic priorities to help us achieve
this goal and drive our long-term growth.
We are pleased to report our key opera-
tional achievements within each strategic
priority during 2008 and to provide a brief
look into our plans for 2009.
Our strategic priorities
Expand biodefense franchise. Our biodefense
franchise provides a growing source of
non-dilutive development funding from
the U.S. government, thereby reducing our
cost and risk. We believe that such funding
increases the likelihood that the govern-
ment will buy those products under future
procurement contracts. Our 2008
achievements include:
• Secured a follow-on contract with the
U.S. Department of Health and Human
Services (HHS) valued at up to $405 million
for delivering 14.5 million additional doses
of BioThrax into the strategic national
stockpile (SNS);
• Received FDA approval for a change to
the BioThrax license providing for an
intramuscular (IM) route of administration
and a reduction in schedule to five doses
over 18 months;
• Received awards of over $58 million in multi-
year government development contracts
and grants to fund future work on anthrax
and botulism product candidates; and
• Submitted a response to the HHS request for
proposal to procure up to 25 million doses
of a recombinant anthrax (rPA) vaccine for
the SNS. If awarded, this is expected to be
a multi-year contract, consisting of both a
development funding component and a
procurement component, with an expected
value in excess of $500 million.
In 2009, we anticipate continued progress
in our BioThrax enhancement initiatives,
including four-year dating and a further
reduction in the immunization schedule.
Additionally, we intend to expand our
foreign licensing activities for BioThrax,
building upon the recent market authorization
in India. We believe these steps will enable
continued growth of BioThrax sales both
domestically and internationally. We
also expect additional opportunities to
secure U.S. government development and
procurement contracts for our anthrax and
2
3
botulinum programs. Beyond anthrax and
botulinum, we anticipate exploring oppor-
tunities to expand our biodefense franchise
into other disease areas, specifically Category
A agents, that are of interest to the U.S.
government as it seeks to implement a
comprehensive biopreparedness strategy.
commercial manufacturing. Our employees
possess broad expertise in manufacturing,
quality and regulatory affairs that we believe
provides advantages in bringing new products
to market. Our 2008 achievements include:
• Completed construction of our new
50,000-square-foot, campaignable facility
In 2009, we intend to assess in-licensing,
acquisition and partnership opportunities
related to late-stage vaccine and immune-
related therapeutic candidates. We will
primarily target opportunities in the field of
infectious diseases for both the commercial
and biodefense markets.
Grow immune-related pipeline using
platform technologies. Our focus on delivery
platform technologies optimizes our research
and development investment. We believe
this approach builds on our expertise in
process development, leverages our manu-
facturing capabilities and establishes
proprietary and competitive advantages.
Our 2008 achievements include:
• Completed a Phase IIa clinical study in
Vietnam of TyphellaTM, the company’s
single-dose, oral typhoid vaccine candidate,
and reported that it was both immunogenic
and well-tolerated in this trial;
• Initiated a Phase IIb clinical trial of
TyphellaTM in healthy patients in the
United States; and
• Initiated a Phase II study for our TB
in Lansing, Michigan;
• Established pilot plant capabilities to support
process development and scale-up activities
for a variety of biologic products; and
• Expanded manufacturing development
capabilities to support our clinical
product portfolio.
In 2009, we expect to enhance our
manufacturing capabilities to support
our platform technologies. We also have
initiated plans to expand our BioThrax
manufacturing capacity at existing scale
to address future market opportunities.
Complement organic growth with strategic
M&A. Our pursuit of M&A activities focuses
on companies or late-stage products that
accelerate our progress toward a mature
vaccine candidate using an MVA-based
injectable, viral platform.
product portfolio and complement our existing
pipeline. We believe this approach allows us
In 2009, we will continue to drive the
to grow more efficiently and cost effectively.
ongoing development of our spi-VEC and
MVA platform technologies in pursuit of
creating additional product candidates for
clinical development.
Expand core biologics manufacturing
capabilities. Our ability to manufacture
biologics enables us to better control the
manufacturing process, provides cost benefits
for development and manufacturing and
mitigates the risks associated with outsourcing
Our 2008 achievements include:
• Acquired a late-stage recombinant anthrax
vaccine candidate (rPA);
• Acquired an anthrax monoclonal antibody
therapeutic candidate; and
• Formed a joint venture with the University
Our future
Our future growth and continued success
will be guided by the same disciplined
approach that we have developed over our
first 10 years of operations: Dedication to
our mission and strategic vision, careful
stewardship of our assets, and well-defined
strategic priorities that align and guide our
operations. With these strong fundamentals
in place and a commitment to fiscal respon-
sibility, we are confident about Emergent’s
future. We are dedicated to delivering
vaccines and therapeutics that address
infectious diseases impacting millions of
people worldwide, and in so doing, generate
attractive returns for our valued stakeholders.
Sincerely yours,
Daniel J. Abdun-Nabi
President and Chief Operating Officer
of Oxford to develop an advanced tuber-
Fuad El-Hibri
culosis vaccine with financial and clinical
Chairman and Chief Executive Officer
support from Wellcome Trust and Aeras
March 20, 2009
Global TB Vaccine Foundation.
2
3
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.
4
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 expand our product portfolio by pursuing
strategic acquisitions of promising advanced product
candidates. This approach enables us to reduce product
development risk, accelerate timelines and avoid costs
associated with exploratory research.
JOint VentuRe PARtneR
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.
5
Pursuing our mission
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 diseases
worldwide. We believe development of
multiple product candidates on a common
platform enables us to build on common
expertise in process development and
manufacturing scale-up, leverage platform
manufacturing facilities and can establish
proprietary and competitive advantages.
For the development of certain product
candidates, we use two proprietary tech-
nologies: our spi-VEC™ (live attenuated
bacterial vaccine vector) platform suitable
for oral delivery, and MVAtor™ (viral
vaccine vector) for injectable vaccines.
technology platforms
spi-VEC, our proprietary oral delivery
platform, is designed to enable the effective
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
technology is versatile and is designed to
deliver a wide range of antigens to prevent
or treat numerous diseases. Our spi-VEC
technology is our oral typhoid product
candidate 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
antigens, which stimulate an immune
response. Another strain of 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 diseases. Clinical trials
that have been performed with recombi-
nant MVA underscore 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 modified 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 protective 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.
6
We are developing a balanced portfolio
of vaccines and immune-related
therapeutics from proof-of-concept
to commercialization.
proDuct
preclinical
phase 1
phase 2
phase 3
licenseD
biothrax® (anthrax Vaccine adsorbed)
anthrax ig therapeutic
pivotal studies1
recombinant anthrax Vaccine (rpa)
tuberculosis Vaccine
typhellatM (typhoid Vaccine Live oral Zh9)
hepatitis b therapeutic
advanced anthrax Vaccine2
recombinant botulinum Vaccine
anthrax Monoclonal antibody therapeutic
chlamydia Vaccine
d
e
s
n
e
c
i
L
l
a
c
i
n
i
l
c
l
a
c
i
n
i
l
c
e
r
p
1. Pivotal studies in animals and humans expected to proceed in parallel under the FDA animal rule.
2. Biothrax combined with adjuvant CpG 7909.
7
Celebrating
T E N y E a r s
1998–2008
to protect life: our mission
and our passion since day one
Emergent began with a simple—yet very powerful—mission: to protect life. Thanks
to 10 years of effort by a dedicated team, those three small words now have the
potential to impact the world.
Since its first day of operation in 1998, Emergent has grown from a private company
with a single product and single operation in Lansing, Michigan, to a thriving public
company with locations on three continents. Our marketed product—BioThrax—
has established our position as a leader in medical countermeasures for biodefense
and as an emerging contributor in the commercial vaccine marketplace. Our goal
of harnessing the human immune system to protect against or treat life-threatening
infectious diseases has resulted in a portfolio of promising late-stage vaccine and
therapeutic candidates.
While there have been scores of business achievements through the decade, we
are most gratified that our efforts are improving the lives of people across the globe.
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
178,554
22,793 22,936
20,682
152,732
130,688
83,494
15,784
11,472
290,788
273,508
238,255
199,349
0.99
171,159
138,472
0.77
0.79
0.69
0.61
100,332
69,056
59,737
22,949
04
05
06
07
08
04
05
06
07
08
04
05
06
07
08
04
05
06
07
08
04
05
06
07
08
* Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
8
Emergent BioSolutions Inc.
Form 10-K
This annual report consists of our Annual Report on Form 10-K for the year ended December 31, 2008,
as filed with the Securities and Exchange Commission, together with the accompanying pages.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K
(Mark One)
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2008
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
[X]
Commission file number: 001-33137
Emergent BioSolutions Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
14-1902018
(I.R.S. Employer Identification No.)
2273 Research Boulevard, Suite 400, Rockville, MD
(Address of principal executive offices)
20850
(Zip code)
(Registrant’s telephone number, including area code): (301) 795-1800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value per share
Series A junior participating preferred stock
purchase rights
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by ref-
erence in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2008
was approximately $131,173,000 based on the price at which the common stock was last sold on that date as reported on the
New York Stock Exchange.
As of February 27, 2009, the registrant had 30,171,613 shares of common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for its 2009 annual meeting of stockholders scheduled to be held on May
21, 2009, which is expected to be filed with the Securities and Exchange Commission not later than 120 days after the end of the
registrant’s fiscal year ended December 31, 2008, are incorporated by reference into Part III of this annual report on Form
10-K. With the exception of the portions of the registrant’s definitive proxy statement for its 2009 annual meeting of stockhold-
ers that are expressly incorporated by reference into this annual report on Form 10-K, such proxy statement shall not be
deemed filed as part of this annual report on Form 10-K.
BioThrax®, spi-VEC™, MVAtor™ and Typhella™ are our trademarks. Each of the other trademarks, trade names or service
marks appearing in this annual report on Form 10-K are the property of their respective owners.
Index
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Page
16
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75
76
78
79
79
81
97
98
123
123
125
126
126
126
127
127
128
129
13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and the documents
incorporated by reference herein contain forward-
looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section
21E of the Securities Exchange Act of 1934, as amended,
that involve substantial risks and uncertainties. All
statements, other than statements of historical fact,
including statements regarding our strategy, future
operations, future financial position, future revenues,
projected costs, prospects, plans and objectives of man-
agement, are forward-looking statements. The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,”
“may,” “plan,” “predict,” “project,” “will,” “would” and
similar expressions are intended to identify forward-
looking statements, although not all forward-looking
statements contain these identifying words.
These forward-looking statements include, among
other things, statements about:
• our ability to perform under our contracts with the
U.S. government for sales of BioThrax® (Anthrax
Vaccine Adsorbed), our FDA-approved anthrax
vaccine, including the timing of deliveries;
• our plans for future sales of BioThrax, includ-
ing our ability to obtain new contracts with the
U.S. government;
• our plans to pursue label expansions and improve-
ments for BioThrax;
• our ability to win a development award and pro-
curement contract with the U.S. government, for
our recombinant protective antigen anthrax vac-
cine candidate, or rPA vaccine;
• 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 manufac-
turing capabilities and strategy;
• our intellectual property portfolio; and
• our estimates regarding expenses, future rev-
enues, capital requirements and needs for addi-
tional financing.
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking state-
ments, and you should not place undue reliance on our
forward-looking statements. Actual results or events
could differ materially from the plans, intentions and
expectations disclosed in the forward-looking state-
ments we make. We have included important factors
in the cautionary statements included in this annual
report, particularly in the “Risk Factors” section, that
we believe could cause actual results or events to dif-
fer materially from the forward-looking statements
that we make. Our forward-looking statements do not
reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or investments
we may make.
You should read this annual report, including the docu-
ments that we have incorporated by reference herein
and filed as exhibits hereto, completely and with the
understanding that our actual future results may
be materially different from what we expect. We do
not assume any obligation to update any forward-
looking statements.
15
PART I
ITEM 1. BUSINESS
Overview
We are a biopharmaceutical company focused on the
development, manufacture and commercialization of
vaccines and immune-related therapeutics that assist
the body’s immune system to prevent or treat disease. We
develop vaccines and therapeutics for use against bio-
logical agents that are potential weapons of bioterrorism
and biowarfare and infectious diseases that have resulted
in significant unmet or underserved public health needs.
We manufacture and market BioThrax®, also referred to
as anthrax vaccine adsorbed, the only vaccine approved
by the U.S. Food and Drug Administration, or FDA, for
the prevention of anthrax infection. BioThrax is approved
for pre-exposure prevention of anthrax infection by all
routes of exposure, including inhalation. We also seek
to obtain marketed products and development stage
product candidates through acquisitions and licensing
arrangements and collaborations with third parties.
In addition to our licensed BioThrax product, we have
product candidates in advanced stages of development
and earlier stages of development. Our advanced stage
product candidates, which are in Phase II through
Phase IV clinical development, which include enhance-
ments to BioThrax, include the following:
• rPA vaccine—an injectable vaccine that is com-
posed of a purified recombinant protein with an
alum adjuvant;
• Anthrax immune globulin therapeutic—an intrave-
nous therapeutic antibody product for the treatment
of symptomatic anthrax infection, which we are
developing in part with funding from the National
Institute of Allergy and Infectious Diseases, or
NIAID, for which we expect to initiate pivotal human
and animal studies in 2009;
• Tuberculosis vaccine—a single-dose, injectable
vaccine for use in persons who have been pre-
viously vaccinated with Bacille Calmett-Guerin,
or BCG, the only vaccine currently available
against tuberculosis, for which we anticipate
commencing a Phase IIb clinical trial in South
Africa in the first half of 2009, and which we are
developing as part of our joint venture with the
University of Oxford with funding and services
from The Wellcome Trust and the Aeras Global
Tuberculosis Vaccine Foundation;
• Typhella™ (typhoid vaccine live oral ZH9)—a
single-dose, drinkable vaccine which we are
developing with funding from the Wellcome Trust,
for which we have completed Phase I clinical tri-
als in the United States, the United Kingdom and
Vietnam, and a Phase II clinical trial in Vietnam,
and for which we are conducting an ongoing clini-
cal trial in the U.S.;
• Hepatitis B therapeutic vaccine—a multiple-dose,
drinkable therapeutic vaccine for the treatment of
chronic carriers of hepatitis B infection, for which
we have completed a Phase I clinical trial in the
United Kingdom and are conducting a Phase II
clinical program; and
• BioThrax enhancements—label expansions to
authorize BioThrax as a post-exposure prophy-
laxis against anthrax infection in combination with
antibiotic treatment, to extend expiry dating from
three years to four years and to reduce the number
of required doses from five to three, which we are
developing with funding from the U.S. Department
of Health and Human Services, or HHS.
Our product pipeline also includes the following earlier
stage product candidates:
• Advanced BioThrax vaccine—an anthrax vaccine
product candidate that would incorporate one or
more advanced characteristics articulated by the
Biomedical Advanced Research and Development
Authority, or BARDA, such as a reduced number of
doses, room temperature storage, novel adjuvants,
an enhanced immune response, longer expiry dat-
ing and a novel delivery method, which we are devel-
oping in part with funding from NIAID and BARDA;
• Anthrax monoclonal antibody therapeutic—a
human monoclonal antibody product candidate
being developed as an intravenous treatment for
patients who present symptoms of anthrax dis-
ease, which we are developing in part with fund-
ing from NIAID and BARDA;
• Recombinant botulinum vaccine—a prophylac-
tic vaccine product candidate to protect against
illness caused by botulinum toxin, which we
are developing in collaboration with the United
Kingdom Health Protection Agency, or HPA; and
• Chlamydia vaccine—a vaccine for administration to
adolescents designed to prevent disease caused by
clinically relevant strains of Chlamydia trachomatis.
16
We have derived substantially all of our product sales
revenues from BioThrax sales to HHS and the U.S.
Department of Defense, or DoD, and expect for the fore-
seeable future to continue to derive substantially all of
our product sales revenues from the sales of BioThrax
to the U.S. government. Revenues from product sales
of BioThrax were $169.1 million in 2008, $169.8 million
in 2007 and $148.0 million in 2006. We are focused on
increasing sales of BioThrax to U.S. government cus-
tomers, expanding the market for BioThrax to other
customers domestically and internationally and pursu-
ing label expansions and improvements for BioThrax.
We also seek to advance development of our product
candidates through external funding arrangements.
Revenues from contracts and grants were $9.4 million
in 2008, $13.1 million in 2007 and $4.7 million in 2006.
We continue to actively pursue additional government
sponsored development contracts and grants and to
encourage both governmental and non-governmental
agencies and philanthropic organizations to provide
development funding or to conduct clinical studies of
our product candidates.
We were incorporated as BioPort Corporation under the
laws of Michigan in May 1998. In June 2004, we com-
pleted a corporate reorganization in which Emergent
BioSolutions Inc., a Delaware corporation formed in
December 2003, issued shares of class A common
stock to stockholders of BioPort in exchange for an
equal number of outstanding shares of common stock
of BioPort. As a result of this reorganization, BioPort
became our wholly owned subsidiary. We subsequently
renamed BioPort as Emergent BioDefense Operations
Lansing Inc.
Our Strategy
Our goal is to become a leading, fully integrated biop-
harmaceutical company focused on the manufacture,
development and commercialization of vaccines and
immune-related therapeutics. We are focused on four
key strategic priorities to achieve this goal and drive
our long-term growth. These priorities are:
Expand biodefense franchise. Our biodefense busi-
ness provides several advantages. Many of our costs of
development are reimbursed by the U.S. government,
reducing our risk and in some cases also providing a
profit margin for our development work. We believe
that if the government supports the development of
a biodefense product candidate, it will be more likely
to procure that product. Furthermore, cash flows gen-
erated by BioThrax our biodefense product candidates
fund our development efforts, which we believe gives us
an advantage over many of our competitors that rely pri-
marily on non-governmental external sources of funds.
We are focused on increasing sales of BioThrax to the
U.S. government, expanding the market for BioThrax to
other customers domestically and internationally and
pursuing label expansion improvements for BioThrax.
Other product candidates in our biodefense franchise,
such as our anthrax immune globulin therapeutic and
rPA vaccine, have the potential to generate product rev-
enue in advance of marketing approval.
Grow immune-related product pipeline using plat-
form technologies. Focusing on delivery platform
technologies optimizes our research and development
investment. Our spi-VEC technology is based on our live
attenuated typhoid vaccine and employs recombinant
technology to insert the gene encoding vaccine anti-
gens or therapeutic proteins into the live attenuated
Salmonella bacteria. Our MVA platform technology
can potentially be used as a viral vector for delivery of
multiple vaccine antigens for different disease-causing
organisms using recombinant technology. Development
of multiple product candidates on a common platform
enables us to build on common expertise in process
development and manufacturing scale-up, leverage
platform manufacturing facilities and, we believe,
establish proprietary and competitive advantages. We
anticipate conducting proof-of-concept studies in new
product candidates using our proprietary spi-VEC and
MVA platforms, and may consider opportunistic acqui-
sitions of additional platform technologies.
Expand core biologics manufacturing capabilities.
Since 1998, we have manufactured BioThrax at our vac-
cine manufacturing facility in Lansing, Michigan. To
augment our existing manufacturing capabilities, we
constructed a new 50,000 square foot manufacturing
facility on our Lansing campus. In the event that we
obtain an award for the development and procurement of
our rPA vaccine candidate, we currently expect to use the
new facility for the manufacture of our rPA vaccine prod-
uct candidate. We designed the plant to be campaign-
able, or capable of manufacturing multiple fermentation
based products, subject to complying with appropriate
change-over procedures, and we may seek permission
17
from the FDA to use the facility for the manufacture of
both BioThrax and rPA vaccine. We also anticipate using
a commercial manufacturing partner for the manufac-
ture of one or more of our commercial products, and may
explore additional alternatives to support the manufac-
ture of our platform products. Our employees possess
manufacturing, quality and regulatory expertise that we
believe provides advantages in bringing new products to
market, and provides us with a competitive advantage.
Complement organic growth with strategic mergers
and acquisitions. We seek to obtain product candidates
through acquisitions and licensing arrangements with
third parties, with a primary focus on late-stage devel-
opment programs. This approach enables us to avoid
the expense and time entailed in early-stage research
activities and, we believe, to minimize product develop-
ment and commercialization risks and may enable us to
accelerate product development timelines. Specifically,
we are primarily seeking to acquire one or more addi-
tional product candidates that are based on platform
technologies and are either in Phase III clinical trials or
well positioned for entry into Phase III clinical trials in
the near term as well as in-license one or more novel
antigens for development using our platform technolo-
gies. Additionally, we may announce, from time to time,
the acquisition or license of early stage product can-
didates or the entry into collaborations to continue to
grow our product portfolio.
Market Opportunity
Vaccines have long been recognized as a safe and cost-
effective method for preventing infection caused by vari-
ous bacteria and viruses. Because of an increased empha-
sis on preventative medicine in industrialized countries,
vaccines are now well recognized as an important part
of effective public health management. According to a
2008 report issued by Kalorama Information, a market
research organization, the world market for preven-
tative vaccines in 2007 totaled $16.3 billion, up from
$11.7 billion in 2006. The Kalorama report estimates
that the world vaccines market will grow at a compound
annual rate of 13.1% from 2008 to 2013, and exceed
$36 billion by 2013, as new product introductions con-
tinue and usage of current products expands further.
New vaccine technologies, coupled with a greater
understanding of how infectious microorganisms, or
pathogens, cause disease are leading to the introduc-
tion of new vaccine products. Moreover, while existing
marketed vaccines generally are designed to prevent
infections, new vaccine technologies have also led to a
focus on the development of vaccines for therapeutic
purposes. Potential therapeutic vaccines extend beyond
infectious diseases to cancer, autoimmune diseases
and allergies.
Most non-pediatric commercial vaccines are paid for
either directly by patients or paid for or reimbursed
by managed care organizations, other private health
plans or public insurers. With respect to certain dis-
eases affecting general public health, particularly in
developing countries, public health authorities or non-
governmental organizations may fund the cost of
developing vaccines against these diseases. According
to a 2006 report issued by Frost & Sullivan, a market
research organization, public purchases of vaccines,
including immunization programs and government
stockpiles, account for approximately 90% of the total
volume of worldwide vaccine sales. Although private
market purchases of vaccines represent only 10% of
total worldwide vaccine sales in terms of volume, they
accounted for approximately 60% of total worldwide
vaccine revenues in 2005.
The market for biodefense countermeasures, includ-
ing vaccines and therapeutics, has grown dramatically
as a result of the increased awareness of the threat of
global terror activity in the wake of the September 11,
2001 terrorist attacks and the October 2001 anthrax let-
ter attacks. The U.S. government is the principal source
of worldwide biodefense spending. Most U.S. govern-
ment spending on biodefense programs is in the form of
development funding from NIAID, BARDA and the DoD,
and procurement of countermeasures by BARDA, the
Centers for Disease Control, or CDC, and the DoD. The
U.S. government is now the largest source of develop-
ment and procurement funding for academic institutions
and biotechnology companies conducting biodefense
research or developing vaccines and immunotherapies
directed at potential agents of bioterror or biowarfare.
The Project BioShield Act, which became law in 2004,
authorizes the procurement of countermeasures for
chemical, biological, radiological and nuclear attacks
for the Strategic National Stockpile, or SNS, which is
a national repository of medical assets and counter-
measures designed to provide federal, state and local
public health agencies with medical supplies needed
18
to treat those affected by terrorist attacks, natural
disasters, industrial accidents and other public health
emergencies. Project BioShield provided appropria-
tions of $5.6 billion to be expended over ten years into
a special reserve fund. The Pandemic and All-Hazards
Preparedness Act, passed in 2006, established BARDA
as the agency responsible for awarding procurement
contracts for biomedical countermeasures and pro-
viding development funding for advanced research
and development in the biodefense arena, and supple-
ments the funding available under Project BioShield for
chemical, biological, radiological and nuclear counter-
measures, and provides funding for infectious disease
pandemics. Funding for BARDA is provided by annual
appropriations by Congress. Congress also appropri-
ates annual funding for the CDC for the procurement of
medical assets and countermeasures for the SNS and
for NIAID to conduct biodefense research. This appro-
priation funding supplements amounts available under
Project BioShield.
The DoD, primarily through the Military Vaccine Agency,
or MilVax, administers various vaccination programs
for military personnel, including vaccines for common
infectious diseases, such as influenza, and vaccines
to protect against specific bioterrorism threats, such
as anthrax and smallpox. The level of spending by the
DoD for MilVax is a function of the size of the U.S. mili-
tary and the DoD’s protocols with respect to vaccine
stockpile management and active immunization. The
DoD provides development funding for biodefense vac-
cines through its Joint Vaccine Acquisition Program, or
JVAP. The DoD procures doses of BioThrax from HHS,
rather than from us directly, to satisfy ongoing require-
ments for its active immunization program in accor-
dance with an October 2007 Presidential Directive that
outlines the U.S. governments objective to enhance
coordination and cooperation among federal agen-
cies with respect to countermeasure procurement and
stockpile management.
In addition to the U.S. government, we believe that other
potential markets for the sale of biodefense counter-
measures include:
• state and local governments, which we expect
may be interested in these products to protect
emergency responders, such as police, fire and
emergency medical personnel;
• foreign governments, including both defense and
public health agencies;
• non-governmental organizations and multi-
national companies, including the U.S. Postal
Service and transportation and security compa-
nies; and
• health care providers, including hospitals and
clinics.
Although there have been modest sales to these mar-
kets to date, we believe that they may comprise an
important growth opportunity for the overall biode-
fense market in the future.
Scientific Background
The immune system provides protection against patho-
gens, such as bacteria and viruses, through immune
responses that are generated by a type of white blood
cell known as lymphocytes. Immune responses that
depend on lymphocyte recognition of components
of pathogens, called antigens, have two important
characteristics. First, these immune responses are
specific, which means that lymphocytes recognize
particular antigens on pathogens. Second, these
immune responses induce memory so that when the
antigen is encountered again, the immune response
to that antigen is recalled. Generally, there are two
types of specific immune responses: humoral immune
response.
response and cell-mediated
Humoral immunity is provided by proteins, known as
antibodies or immunoglobulins, that are produced by
specific lymphocytes. Antibodies are effective in dealing
with pathogens before the pathogens enter cells. Cell-
mediated immunity is provided by lymphocytes that
generally deal with threats from cells that are already
infected with pathogens by directly killing infected cells
or by interacting with other immune cells to initiate the
production of antibodies or activating cells that kill and
eliminate infected cells.
immune
A vaccine is normally given to a healthy person as a pro-
phylaxis in order to generate an immune response that
will protect against future infection and disease caused
by a specific pathogen. Following vaccination against
specific disease, the immune system’s memory of
antigens induced by the vaccine allows for an immune
response to be generated against a future response to
a pathogen in order to provide protection against dis-
ease. A therapeutic vaccine is slightly different in that
19
it acts to strengthen or modify the immune response in
patients already infected with bacterial and viral patho-
gens in order to clear the pathogens from the infected
host. Without treatment, such patients can be subject
to recurring bouts of the disease.
An immune globulin, also known as a polyclonal anti-
body, is a therapeutic that provides an immediate
protective effect. Immune globulin is normally made
by collecting plasma from individuals who have con-
tracted a particular disease or who have been vacci-
nated against a particular disease and whose plasma
contains protective antibodies, known as IgG. These
antibodies are isolated by fractionation of the plasma,
purified and then administered either intravenously or
by intramuscular injection to patients.
A monoclonal antibody is also a therapeutic that pro-
vides an immediate effect. However, unlike immune
globulins, monoclonal antibodies are specific to a sin-
gle antigen and are generally produced in cell culture
rather than collected from humans. Monoclonal anti-
bodies are also administered either intravenously or by
intramuscular injection to patients.
Because it normally takes several weeks for the immune
system to generate antibodies after vaccination, immune
globulins and monoclonal antibodies are used in situa-
tions in which it is not possible to wait for active immuni-
zation to generate the protective immune response. This
use of immune globulins and monoclonal antibodies is
therefore termed passive immunization.
Products
The following table summarizes key information about
our marketed product, BioThrax, and our advanced and
earlier stage product candidates. We use multiple tech-
nologies to develop our product candidates, including
conventional and recombinant technologies. For each
development program, we select and apply the technol-
ogy that we believe is best suited to address the particu-
lar disease based on our evaluation of factors such as
safety, efficacy, manufacturing requirements, regula-
tory pathway and cost. We currently hold all commercial
rights to BioThrax and all of our product candidates, other
than our recombinant botulinum vaccine, for which HPA
has the non-exclusive right to make, use and sell to meet
public health requirements in the United Kingdom.
Product or Product Candidate
BioThrax® (Anthrax Vaccine Adsorbed)
Prophylactic or Therapeutic
Pre-exposure prophylactic
Stage of Development
FDA approved
Post-exposure prophylactic*
Post-approval label expansion;
animal efficacy and human safety
and immunogenicity studies ongo-
ing; BLA supplement planned
rPA vaccine*
Pre and post-exposure prophylactic
Phase II
Advanced BioThrax vaccine*
Pre and post-exposure prophylactic
Preclinical and Phase I
Anthrax immune globulin*
Therapeutic
Anthrax monoclonal antibody*
Therapeutic
Typhella™ (typhoid vaccine live oral ZH9)
Prophylactic
Tuberculosis vaccine
Hepatitis B therapeutic vaccine
Recombinant botulinum vaccine*
Chlamydia vaccine
Prophylactic
Therapeutic
Prophylactic
Prophylactic
Pivotal animal studies and pivotal
human trial planned for 2009
Preclinical
Phase II
Phase II
Phase II
Preclinical
Preclinical
* We currently intend to rely on the FDA animal rule in seeking marketing approval for indications or product candidates. Under the animal rule,
if human efficacy trials are not ethical or feasible, the FDA can approve drugs or biologics used to treat or prevent serious or life threatening
conditions caused by exposure to lethal or permanently disabling toxic chemical, biological, radiological or nuclear substances based on
human clinical data demonstrating safety and immunogenicity and evidence of efficacy from appropriate animal studies and any additional
supporting data. For more information about the FDA animal rule, see “Government Regulation—Clinical Trials.”
20
No assessment of the safety or efficacy of our vaccine
candidates can be considered definitive until all clini-
cal trials needed to support a submission for market-
ing approval are completed and a license granted. The
results of our completed preclinical tests and Phase I
and Phase II clinical trials do not ensure that our ongo-
ing and planned later stage clinical trials for our vaccine
candidates will be successful. A failure of one or more
of our clinical trials can occur at any stage of testing.
Anthrax
Disease overview. Anthrax is a potentially fatal disease
caused by the spore forming bacterium Bacillus anthra-
cis. Anthrax bacteria are naturally occurring, and spores
are found in soil throughout the world. Anthrax spores
can withstand extreme heat, cold and drought for long
periods. Anthrax infections occur if the spores enter the
body through a cut, abrasion or open sore, or by inges-
tion or inhalation of the spores. Once inside the body,
anthrax spores germinate into bacteria that then multi-
ply. Anthrax bacteria secrete three proteins: protective
antigen, lethal factor and edema factor, which individu-
ally are non-toxic but can become highly toxic if allowed
to interact on the surface of human or animal cells.
Cutaneous anthrax, although rare in the United States,
is the most common type of naturally acquired anthrax.
Cutaneous anthrax is typically acquired through contact
with contaminated animals and animal products. The
fatality rate for untreated cases of cutaneous anthrax
is estimated to be approximately 20%.
Inhalational anthrax is the most lethal form of anthrax.
We believe that aerosolized anthrax spores are the most
likely method to be used in a potential anthrax bioter-
rorism attack. Inhalational anthrax has been reported to
occur from one to 43 days after exposure to aerosolized
spores. Initial symptoms of inhalational anthrax are non-
specific and may include sore throat, mild fever, cough,
malaise, or weakness, lasting up to a few days. After a
brief period of improvement, the release of anthrax toxins
may cause an abrupt deterioration of the infected per-
son, with the sudden onset of symptoms, including fever,
shock and respiratory failure as the lungs fill with fluids.
Hemorrhagic meningitis is common. Death often occurs
within 24 hours of the onset of advanced respiratory
complications. The fatality rate for inhalational anthrax
is estimated to be between 45% and 90%, depending on
whether aggressive, early treatment is provided.
Market opportunity and current treatments. To date,
the principal customer for anthrax countermeasures
has been the U.S. government, specifically HHS and the
DoD. We believe that federal, state and local govern-
ments and allied foreign governments are significant
potential customers for anthrax countermeasures.
The only FDA-approved product for pre-exposure pro-
phylaxis against anthrax infection is BioThrax. The only
FDA-approved products for post-exposure prophylaxis
against anthrax infection are antibiotics, which are
typically administered over a 60-day period. Antibiotics
are effective against anthrax post-exposure by killing
the anthrax bacteria before the bacteria can release
anthrax toxins into the body. However, antibiotics are
not effective against anthrax toxins once the toxins
are present in the body. Nor are antibiotics effective
against anthrax spores that are in the body and that
remain dormant following exposure. Anthrax spores
may remain in the body, for extended periods, which can
potentially germinate into bacteria following the end of
antibiotic treatment and lead to infection. Infection may
also occur if patients do not adhere to the prolonged
course of antibiotic treatment or are not able to remain
on antibiotics for extended periods of time. In addition,
antibiotics may not be effective against antibiotic resis-
tant strains of anthrax. Because of these limitations,
the CDC recommends administering BioThrax in com-
bination with antibiotics under an investigational new
drug application, or IND, with informed consent of the
patient as a post-exposure prophylaxis against anthrax
infection as an emergency public health intervention.
BioThrax may also be administered in a post-exposure
setting without informed consent under an Emergency
Use Authorization, or EUA, which can be issued in the
event of a declared emergency by the commissioner of
the FDA.
Although BioThrax is not currently approved by the
FDA for post-exposure prophylaxis, as discussed
below, we are actively pursuing a label expansion for
this indication. We are also developing an anthrax
immune globulin therapeutic product candidate and
an anthrax monoclonal antibody therapeutic product
candidate, both of which are designed for treatment
of symptomatic patients. Several other companies
also are developing post-exposure anthrax therapeu-
tic products.
21
Anthrax Vaccines
• BioThrax. BioThrax is the only FDA-approved
vaccine for the prevention of anthrax infection. It
is approved by the FDA as a pre-exposure pro-
phylaxis for use in adults who are at high risk of
exposure to anthrax spores. BioThrax is manufac-
tured from a sterile culture filtrate, made from a
non-virulent strain of Bacillus anthracis. Based on
its current product labeling, BioThrax is adminis-
tered by intramuscular injection in five doses over
an 18-month period, with an annual booster dose
recommended thereafter. After the initial dose,
four additional doses are given at one, six, 12 and
18 months. BioThrax includes aluminum hydrox-
ide, or alum, as an adjuvant. BioThrax is not cur-
rently approved as a post-exposure prophylaxis.
Following the October 2001 anthrax letter attacks,
however, the CDC provided BioThrax under an IND
protocol for administration on a voluntary basis to
Capitol Hill employees and certain others who may
have been exposed to anthrax.
As with any pharmaceutical product, the use of
vaccines carries a risk of adverse health effects
that must be weighed against the expected health
benefit of the product. The adverse reactions that
have been associated with the administration of
BioThrax are similar to those observed follow-
ing the administration of other adult vaccines and
include local reactions, such as redness, swelling
and limitation of motion in the inoculated arm, and
systemic reactions, such as headache, fever, chills,
nausea and general body aches. In addition, some
serious adverse events have been reported to the
vaccine adverse event reporting system, or VAERS,
database maintained by the CDC and the FDA with
respect to BioThrax. The report of any such adverse
event to the VAERS database is not proof that the
vaccine caused such an event. These putative
serious adverse events, including diabetes, heart
attacks, autoimmune diseases, Guillian Barre syn-
drome, lupus, multiple sclerosis, lymphoma and
death, have not been causally linked to the admin-
istration of BioThrax. In December 2008, the FDA
approved our supplemental biologics license appli-
cation, or BLA, to provide for intramuscular injection
of BioThrax instead of subcutaneous injection and
to reduce the number of required doses of BioThrax
for pre-exposure prophylaxis from six to five, with
an annual booster dose thereafter. We are actively
pursuing additional label expansions and improve-
ments for BioThrax, including the following:
} Reduced dosing schedule. The FDA’s approval
of our supplemental BLA in December 2008 for
a five-dose regimen, with an annual booster
thereafter, was based on an analysis of interim
data from an ongoing clinical trial being con-
ducted by the CDC to evaluate whether as few
as three doses of BioThrax, administered over
six months, with booster doses up to three
years apart, will confer an adequate immune
response. If the final data from the CDC dose-
reduction trial support a further reduction of
doses, we plan to file an additional BLA sup-
plement with the FDA for approval of a three-
dose regimen, with booster doses thereafter
up to three years apart.
} Extended expiry dating. The current FDA-
approved expiry dating for BioThrax is three
years. In December 2006, based on data gener-
ated from our ongoing stability studies, we sub-
mitted a supplemental BLA to extend the expiry
dating of BioThrax from three years to four
years, which, if granted, would allow BioThrax
to be stockpiled for a longer period of time. This
application is still pending and we continue to
discuss with the FDA the requirements for
approval of this supplement. We anticipate that
this application will be approved in 2009.
} Expanded label indication to include post-
exposure prophylaxis. We plan to seek approval
of BioThrax for post-exposure prophylaxis
against anthrax infection, to be administered
along with antibiotics. In October 2007, we com-
pleted a human clinical trial of BioThrax for the
post-exposure indication using the anticipated
dosing schedule of three doses of BioThrax
given two weeks apart. The purpose of this
trial was to collect data that, in combination
with data from our non-clinical studies, will be
used to design our pivotal human clinical trial
for this indication. We are currently conduct-
ing non-clinical studies for the post-exposure
indication pursuant to the FDA animal rule. In
these studies, we are evaluating the effect of
a humanized dose of BioThrax in combination
22
with antibiotics compared to antibiotics alone
in rabbits exposed by inhalation to anthrax
spores. We may also conduct one or more piv-
otal studies in non-human primates.
In 2005, NIAID completed a proof-of-concept
study in which rabbits infected with anthrax
were treated with the antibiotic levofloxacin or
with levofloxacin in combination with two doses
of BioThrax in one of three dose amounts. One
of the dose amounts tested was a dilution of
BioThrax designed to elicit an immune response
that is similar to the effect of an undiluted dose
in humans. This is referred to as a human-
ized dose. Only 44% of the rabbits treated with
antibiotics alone survived, while 100% of the
rabbits treated with either humanized doses
or undiluted doses of BioThrax in combination
with levofloxacin survived. In the trial, there
were statistically significant increases in sur-
vival rates for rabbits treated with all dose
amounts of BioThrax in combination with the
antibiotic compared to rabbits treated with
levofloxacin alone. These results were consis-
tent with an earlier animal test conducted by
the U.S. Army Medical Research Institute of
Infectious Diseases, or USAMRIID, involving
the administration of BioThrax in combina-
tion with an antibiotic to non-human primates
infected with anthrax. We believe that the data
from our planned non-clinical efficacy stud-
ies, together with the human immunogenicity
data, if favorable, will be sufficient to support
the filing with the FDA of a BLA supplement for
marketing approval of BioThrax for the post-
exposure indication. In February 2007, the FDA
granted Fast Track designation for BioThrax as
a post-exposure prophylaxis against anthrax
infection. In September 2007, BARDA awarded
us up to $11.5 million in development funding
for this indication, $8.8 million of which was
paid in the fourth quarter of 2007.
• rPA Vaccine. We are developing a recombinant
form of the protective antigen protein as an anthrax
vaccine. This vaccine contains purified rPA for-
mulated with an alum adjuvant and is designed to
induce antibodies that neutralize anthrax toxins in
a manner similar to BioThrax. The vaccine candi-
date is based on development work at U.S. Army
Medical Research Institute of Infectious Disease, or
USAMRIID. Our rPA vaccine candidate has been the
subject of two research and development grants
totaling approximately $100 million from NIAID. The
vaccine candidate has completed one Phase II clini-
cal trial, but this trial did not achieve statistically
significant results due to product stability issues.
We believe that the stability issues have since been
resolved, and we do not believe that future trials
will be adversely affected by stability concerns.
BARDA has issued a request for proposal for a
recombinant protective antigen anthrax vaccine
for the SNS, which would provide for development
funding and the procurement of up to 25 million
doses of rPA vaccine. We have submitted a pro-
posal responding to this request, have been advised
that our proposal is in the competitive range, and
continue to negotiate the terms of a definitive con-
tract award with BARDA. BARDA has informed us
that it anticipates awarding an rPA contract to at
least one bidder by the end of the first half of 2009.
We anticipate this contract may be as large as
$400 million to $600 million.
• Advanced BioThrax Vaccine. We are develop-
ing an anthrax vaccine product candidate based
on BioThrax combined with an adjuvant, known
as CpG 7909, which we license from Pfizer, Inc.
We anticipate that this candidate would incorpo-
rate advanced characteristics, including one or
more of the following: reduced number of doses,
room temperature storage, enhanced immune
response, longer expiry dating or a novel deliv-
ery method. We have obtained additional U.S.
government funding to supplement the further
development of this vaccine candidate. The DoD’s
Defense Advanced Research Projects Agency, or
DARPA, previously funded a double-blind Phase I
clinical trial of BioThrax combined with CpG 7909
pursuant to a collaboration with us and Coley
Pharmaceuticals, which owned CpG 7909 before
its sale to Pfizer. That trial, which was completed
in 2005 and involved 69 healthy volunteers, was
designed to evaluate the safety and immunogenic-
ity of this product candidate compared to BioThrax
alone and to CpG 7909 alone. In this Phase I trial,
the product candidate was administered in three
doses by intramuscular injection at two week
23
intervals. In this trial, BioThrax combined with CpG
7909 elicited an enhanced immune response.
The results of a clinical trial are statistically signifi-
cant if they are unlikely to have occurred by chance.
We determined the statistical significance of the
clinical trial results based on a widely used, con-
ventional statistical method that establishes the P
value of the results. Under this method, a P value
of 0.05 or less represents statistical significance.
Immune responses observed in a group of vac-
cine trial participants can be compared with those
observed in other groups of trial participants or
with an assumed response rate. Immunogenicity
alone does not establish efficacy for purposes of
regulatory approval. Immunogenicity data only
provide indications of efficacy and are neither
required nor sufficient to enable a product candi-
date to proceed to Phase II clinical development.
Phase I clinical trials are required to establish the
safety of a product candidate, not its immunoge-
nicity, before Phase II clinical trials may begin.
The immunogenicity parameters for the Phase I
clinical trial of BioThrax combined with CpG 7909
were the mean peak antibody concentration and
the median time to achieve mean peak immune
response
in trial participants who received
BioThrax combined with CpG 7909 as compared
to trial participants who received BioThrax alone.
In this trial, the mean peak concentration of anti-
bodies to anthrax protective antigen in partici-
pants who received the product candidate was
approximately 6.3 times higher than in partici-
pants who received BioThrax alone. This result
was statistically significant, with a P value of less
than 0.001. Participants who received BioThrax
alone achieved a mean peak geometric anti-PA
IgG concentration approximately 42.5 days
after first injection. Participants who received
BioThrax combined with CpG 7909 achieved this
same mean antibody concentration approxi-
mately 21 days earlier. This result was statisti-
cally significant, with a P value of less than 0.001.
In this trial, there was a slightly higher frequency
of moderate injection site reactions and systemic
adverse events in the volunteers who received
the product candidate as compared to volunteers
who received BioThrax alone or CpG 7909 alone.
One volunteer withdrew from this trial because
of an adverse event. There were no serious
adverse events reported that the trial investiga-
tors considered related to the product candidate,
to BioThrax or to CpG 7909.
Anthrax Therapies
• Anthrax Immune Globulin Therapeutic. We are
developing a human anthrax immune globulin
therapeutic product as a treatment for patients
who present with symptoms of anthrax disease. We
expect that, if approved, this product would be pre-
scribed as a single-dose intravenous infusion either
as a monotherapy or in conjunction with a regi-
men of antibiotics. We are developing our anthrax
immune globulin therapeutic product candidate
using plasma produced by healthy donors who have
been immunized with BioThrax. We have engaged
Talecris Biotherapeutics, Inc. to fractionate, purify
and fill our anthrax immune globulin therapeutic
product candidate at its FDA-approved facilities. We
have manufactured two full-scale lots of this prod-
uct candidate under current good manufacturing
practices, or cGMP, using a validated and approved
process at Talecris. We plan to rely on the FDA’s ani-
mal rule to support approval of our anthrax immune
globulin therapeutic product candidate.
We currently are conducting efficacy studies of this
product candidate in infected rabbits, and we plan
to commence further non-clinical efficacy studies
in 2009. In March 2007, we filed an IND for a Phase I
clinical trial to evaluate the safety and pharmacoki-
netics of our anthrax immune globulin therapeutic
candidate in healthy human volunteers. We expect
to commence this clinical trial in 2009. NIAID has
provided us grant and contract funding of up to
$13.4 million for a combination of initiatives, includ-
ing studies designed to assess the tolerability,
pharmacokinetics and efficacy of this product can-
didate in non-clinical studies, the development and
validation of product assays, and a human clinical
trial to evaluate safety and pharmacokinetics. We
believe that favorable data from the non-clinical
efficacy studies and safety and pharmacokinetic
data from the human clinical trial would be suffi-
cient to support an application to the FDA for mar-
keting approval of this product candidate.
24
• Anthrax Monoclonal Antibody Therapeutic. In
addition to our anthrax immune globulin thera-
peutic product candidate, which is a polyclonal
antibody therapeutic, we are developing a mono-
clonal antibody therapeutic. This human monoclo-
nal antibody product candidate is being developed
as an intravenous treatment for patients who
present with symptoms of anthrax disease and is
being funded in part under a contract from NIAID
and BARDA to support efficacy testing in non-
clinical studies and the establishment of cGMP
manufacturing process. We intend to progress
the development of and pursue development
and procurement contracts for both our anthrax
immune globulin and monoclonal therapeu-
tic product candidates. We believe that anthrax
therapeutics would be eligible to be procured by
HHS under Project BioShield for inclusion in the
SNS prior to receiving marketing approval, pro-
vided that the product candidate is deemed to
be licensable.
Typhoid
Disease overview. Typhoid, also known as typhoid fever,
is caused by infection with the bacterium Salmonella
enterica (type typhi). Typhoid is characterized by fever,
headache, constipation, malaise, stomach pains,
anorexia and myalgia. Severe cases of typhoid can result
in confusion, delirium, intestinal perforation and death.
Typhoid is transmitted by consuming contaminated food
or drinks. Contamination usually results from poor
hygiene and sanitation. Typhoid is often endemic in
developing countries in which there is limited access to
treated water supplies and sanitation.
Prevalence, market opportunity and current treat-
ment. Typhoid fever continues to be a public health
problem in many developing countries with an esti-
mated 22 million cases occurring per year worldwide,
resulting in approximately 200,000 deaths annually.
Increasing multi-drug resistance of the typhoid bac-
terium reduces effective treatment options, increases
treatment costs and results in higher rates of seri-
ous complications and deaths. According to the CDC,
approximately 400 cases of typhoid are reported annu-
ally in the United States, of which approximately 70%
are contracted abroad. The CDC recommends that all
persons from the United States traveling to developing
countries consider receiving a typhoid vaccination, with
travelers to Asia, Africa and Latin America deemed to be
especially at risk. According to the U.S. Office of Travel
and Tourism, over 30 million people travel annually to
typhoid endemic areas. This travelers market repre-
sents our primary target market. Potential additional
markets include U.S. military personnel deployed in
regions where typhoid is endemic, as well as children
and adults living in these areas.
One oral typhoid vaccine and one injectable typhoid
vaccine are currently approved for administration in
both the United States and Europe and are primarily
sold for use in the travelers market. The approved oral
typhoid vaccine is available in liquid and capsule for-
mulations. Both formulations require multiple doses
to generate a protective immune response. The cap-
sule formulation requires a booster every five years
thereafter. The liquid formulation has been reported to
provide 77% of recipients in clinical trials with protec-
tion three years after vaccination. The approved inject-
able vaccine requires only a single dose. However, it
is not effectively immunogenic in children, requires
a booster dose every three years thereafter and was
effective in only 55% to 75% of recipients in clini-
cal trials. Both approved vaccines have good safety
profiles with relatively few adverse events reported.
Antibiotics are used to treat typhoid after infection and
usually lead to recovery commencing within four days.
Without antibiotic therapy, the CDC estimates that the
mortality rate for typhoid could be as high as 20%.
Although vaccines are available, the World Health
Organization, or WHO, has stated that improved vac-
cines against typhoid fever are desirable, especially
for children 2 years of age and older.
Typhella. We are developing Typhella, a live attenuated
typhoid vaccine, that contains deletions in two genes
of the Salmonella typhi bacterium designed to attenuate
virulence and replication. We have designed Typhella
to be administered in a single drinkable dose prior to
travel to countries where typhoid is endemic.
We have completed the following clinical trials of
Typhella in the United States and Europe:
• An open-label, non-placebo controlled, pilot study
conducted in the United Kingdom in nine healthy
adult volunteers. The purpose of this study was
to evaluate the safety and immunogenicity of our
vaccine candidate. In this study, Typhella was
25
immunogenic, eliciting both cell mediated and
humoral immune responses, and well tolerated.
• A double-blind, placebo controlled, single dose
escalating Phase I clinical trial conducted in the
United States in 60 healthy adult volunteers. The
purpose of this trial was to evaluate the safety, tol-
erability and immunogenicity of three dose levels
of our vaccine candidate. In this trial, Typhella was
immunogenic and well tolerated at all dose levels.
• An open-label, non-placebo controlled, single
dose Phase I clinical trial conducted in the United
States in 32 healthy adult volunteers. The pur-
pose of this trial was to evaluate the safety and
immunogenicity of two different presentations
of Typhella, one using bottled water and another
using tap water for reconstitution before admin-
istration. We vaccinated 16 subjects with each
presentation. Because the two presentations
were similarly immunogenic and both were well
tolerated by trial participants, we selected the
tap water presentation for further development
based on its relative convenience.
• A single-blind, placebo controlled Phase I clinical
trial of Typhella in Vietnam in 27 healthy adult vol-
unteers using the dose and regimen established
in our Phase I clinical trials in the United States.
The Wellcome Trust provided funding for the
Phase I trial in Vietnam. The purpose of the trial
was to evaluate the safety and immunogenicity of
Typhella when administered as a single oral dose
in adults living in an endemic area. The primary
immunogenicity endpoint for this trial was the
proportion of trial participants with an immune
response to Salmonella typhi following adminis-
tration of a single oral dose of Typhella. Based on
initial data from this trial, Typhella met the crite-
rion for immunogenicity, with approximately 68%
of subjects who received the vaccine candidate
mounting a humoral antibody response. Typhella
was well tolerated by trial participants, with no
serious adverse events reported.
• A single-blind randomized, placebo controlled,
Phase II clinical trial of Typhella in Vietnam in
151 healthy children between the ages of 5 and
14 years. A total of 101 children received Typhella
and 50 children received placebo. This was our
first trial involving a pediatric population. We con-
ducted this trial in collaboration with the Wellcome
Trust, Oxford University and the Hospital for
Tropical Diseases, Ho Chi Minh City, Vietnam. The
Wellcome Trust provided funding for this trial.
The purpose of this trial was to evaluate the safety
and immunogenicity of Typhella in children in an
endemic area. The immunogenicity parameter for
this trial was the percentage of trial participants
with an immune response to Salmonella typhi fol-
lowing administration of a single oral dose of
Typhella. In this trial, 93% of the children receiving
a vaccine dose developed an immune response as
measured by increases in serum Salmonella typhi
LPS-specific IgG antibody levels, which is sugges-
tive of systemic protective immunity, and 94% of
the children receiving a vaccine dose developed
an immune response as measured by increase in
serum Salmonella typhi LPS-specific IgA antibody
levels, which is suggestive of mucosal protective
immunity. In the aggregate, 97% of the children
receiving a vaccine dose developed an immune
response, which was statistically significantly
greater than the percentage of children receiving
placebo who developed an immune response.
Typhella was well tolerated by trial participants,
with no serious adverse events reported.
• A randomized, double blind, placebo controlled,
single dose, dose escalating Phase II clinical trial
conducted in the United States in 187 healthy adult
volunteers. The purpose of this trial was to deter-
mine the immunogenicity, safety and tolerability
of vaccine manufactured at a new facility at dose
levels across the range of the proposed manufac-
turing potency specification. The primary immuno-
genicity endpoint for this trial was the proportion
of trial participants with an immune response
to Salmonella typhi following administration of a
single oral dose of Typhella. Preliminary data
analysis suggests the vaccine was well tolerated
and capable of producing an immune response.
The clinical study report is being prepared .
In these six clinical trials, Typhella demonstrated immu-
nogenicity response levels following a single drinkable
dose similar to those seen with multiple doses of the cur-
rently approved oral vaccine. As a result of these trials,
we were able to establish the safety and immunogenicity
of a single dose regimen at an appropriate dose level in
populations in both endemic and non-endemic areas.
26
We are currently evaluating manufacturing alterna-
tives in countries in which we believe manufacturing
costs will be feasible, because we do not currently have
manufacturing resources, either internal or through a
contract manufacturer, to produce Typhella at compet-
itively viable costs. Once we have engaged a contract
manufacturer, the remainder of our planned clinical
development program for this vaccine candidate will
consist of the following:
• Phase II clinical trial. We plan to conduct a Phase
II clinical trial in India in children under five years of
age as a step towards conducting a Phase III clini-
cal trial in an area where the incidence of disease
is prevalent. The purpose of this Phase II trial is to
evaluate the safety and immunogenicity of Typhella
in this endemic population in preparation for our
planned Phase III clinical study.
• Disease surveillance study. We plan to conduct a
disease surveillance study in India to confirm that
a sufficient number of subjects will be included in
the Phase III trial. The Wellcome Trust has pro-
vided funding for this surveillance study.
• Phase III clinical trial. We plan to conduct a sin-
gle-blind Phase III clinical trial in India, where
typhoid is endemic. The purpose of this trial will
be to evaluate the efficacy of Typhella in children
who are likely to be exposed to the typhoid bacte-
rium. We expect to undertake the primary analy-
sis of the data from the trial after approximately
one year, which, if the results are favorable, we
plan to use to support the filing with the FDA of a
BLA for marketing approval of Typhella. We plan
to continue to monitor the incidence of typhoid in
the trial participants for several years after vacci-
nation. We are currently seeking external funding
to support this study.
• Tolerability and immunogenicity study. Concurrently
with our planned Phase III clinical trial in India,
we plan to conduct a Phase III clinical trial in the
United States or Europe in healthy volunteers.
The purpose of this trial will be to evaluate the
safety and immunogenicity of Typhella to sup-
port marketing approval in the United States and
Europe. It is not practicable to demonstrate clini-
cal efficacy in travelers from the United States or
Europe due to the prohibitively large number of
subjects that would be needed. We will seek to
establish an immune correlate of protection in
the Phase III efficacy trial to allow us to extrapo-
late efficacy to developed world populations. The
currently approved typhoid vaccines relied on
similar clinical trials for regulatory approval.
Tuberculosis
Disease overview. Tuberculosis, or TB, is an infection
with Myobacterium tuberculosis, which manifests pri-
marily as an illness of the respiratory system and is
spread by coughing, sneezing and associated respira-
tory actions. According to the WHO, TB is the world’s
second leading cause of death from infectious disease
in adults, after HIV/AIDS.
Prevalence, market opportunity and current treat-
ment. Approximately 2 billion people were infected with
Myobacterium tuberculosis worldwide in 2005, one third
of the world’s population. One of ten people infected
will develop the active form of the disease during their
lifetime. A majority of TB cases occur in individuals
between the ages of 25 to 54 years old. Between 1.6
and 2 million people die annually worldwide with more
than 8 million new cases developing each year. The
economic impact of TB in high-disease burden coun-
tries is significant. BCG, introduced in 1921, is currently
the only available vaccine against tuberculosis.
BCG is administered to infants throughout the devel-
oping world and in certain countries in the developed
world. However, BCG provides only variable protection
against pulmonary tuberculosis and is not sufficiently
effective in adults.
Standard TB treatment involves a six to nine month
treatment regimen with a combination of three or four
antibiotic agents. These drugs are reasonably effec-
tive but poorly tolerated. Low patient compliance has
contributed to the emergence of multi-drug resistant
TB strains, or MDR-TB, and extensively-drug resistant
strains, or XDR-TB. MDR-TB does not respond to the
standard treatment using first-line drugs, such as iso-
niazid and rifampicin. Treatment of MDR-TB can last up
to 2 years with drugs that produce more side effects
and are more expensive. According to the WHO, each
year an estimated 490,000 new MDR-TB cases occur,
and more than 130,000 deaths are recorded worldwide
as a result of MDR-TB infections. XDR-TB, an even
more deadly form of TB, is caused by bacteria resis-
tant to all of the most effective drugs, including, for
example, isoniazid, rifampicin, fluoroquinolone, and
27
any of the second-line anti-TB injectable drugs, such
as amikacin, kanamycin or capreomycin. As a result,
XDR-TB is extremely difficult to treat. There are an
estimated 40,000 new XDR-TB cases reported annually
worldwide. By March 2008, XDR-TB cases had been
confirmed in more than 45 countries and in all regions
of the world. The emergence of MDR-TB and XDR-TB
strains of Myobacterium tuberculosis complicates treat-
ing the infection, indicating that a vaccine may be the
most appropriate countermeasure for controlling TB.
Tuberculosis Vaccine. Our tuberculosis vaccine can-
didate uses the attenuated Modified Vaccinia virus
Ankara, or MVA, as a vaccine delivery platform to pres-
ent antigen 85A to the immune system. Antigen 85A is
a major antigen from Myobacterium tuberculosis, which
forms part of the antigen 85 complex. Antigen 85A is
highly conserved among all mycobacterial species and
is present in all strains of BCG, suggesting that anti-
gen 85A should elicit a strong immune response in
individuals previously vaccinated with BCG. The vector,
or carrier, MVA is a weakened strain of the smallpox
vaccine and a highly attenuated strain of Vaccinia virus
which does not replicate in mammalian cells. Another
strain of MVA has been administered to more than
120,000 individuals as part of the smallpox eradication
program and was found to be safe and well tolerated,
despite the deliberate vaccination of high risk groups.
Our tuberculosis vaccine has been designed to increase
the immune response and protective efficacy in individ-
uals previously vaccinated with BCG. The clinical devel-
opment of MVA85A is aimed towards the production of
an effective TB vaccine for infants, adolescents, and
HIV-infected adults to augment the immunity induced
by a previous BCG vaccination. We have licensed the
commercial rights to our tuberculosis vaccine from the
Oxford-Emergent Tuberculosis Consortium, or OETC.
To date, the MVA85A vaccine has been evaluated in
seven Phase I clinical trials. These trials were con-
ducted in an aggregate of 126 healthy adults (BCG-
naïve, BCG-vaccinated, or latently infected with TB) and
12 BCG vaccinated adolescents living in the UK, The
Gambia or South Africa. All trials evaluated the safety
and immunogenicity of various intradermal doses of
MVA85A, first in healthy adults, both BCG-vaccinated
and BCG-naïve, and then also in special populations
such as adolescents and TB/HIV-infected adults. The
key findings from these clinical trials were that the
MVA85A vaccine was well tolerated, with no significant
safety concerns, and previous vaccination with BCG did
not affect the safety profile. Additionally, MVA85A was
effective at increasing cellular immune responses to
antigen 85A in individuals vaccinated with BCG.
Ongoing Phase I trials are intended to investigate fur-
ther the safety and immunogenicity of MVA85A in special
populations such as adolescents and TB/HIV-infected
individuals. There are 5 trials currently being conducted
in adults. Additionally, two Phase II trials are also being
carried out in infants and children in sub-Saharan
Africa. In The Gambia, a Phase II open label, random-
ized dose selection and non-interference study intended
to involve approximately 471 infants is being conducted.
The purpose of this study is to evaluate the impact, if any,
of MVA85A vaccination when given at two dose levels on
the immunogenicity of EPI vaccines administered simul-
taneously to infants previously vaccinated with BCG is
underway. In South Africa, an open label, non-random-
ized placebo-controlled Phase II trial with approximately
168 subjects is ongoing to evaluate the safety and immu-
nogenicity of MVA85A in healthy children and infants
who received prior BCG vaccination.
A Phase IIb trial in infants is anticipated to start in South
Africa in the first half of 2009. This trial is planned to
include 2,784 infants in a double-blind, randomized
placebo-controlled evaluation of MVA85A/AERAS-
485 for safety, immunogenicity and prevention of TB
in BCG-vaccinated, HIV-negative infants. The trial is
planned to be conducted at a single site in South Africa
and infants will be followed both for the development of
tuberculosis and for serious adverse events.
Hepatitis B
Disease overview. Hepatitis B is a highly infectious
virus transmitted from person to person by contact
with blood and bodily fluids. Most hepatitis B infections
in adults result in acute hepatitis, with the immune
system eventually clearing the infection. However, in
approximately 8% to 10% of infected adults and a much
larger proportion of infected children, the immune sys-
tem fails to clear the virus, resulting in immune tol-
erance of the virus and chronic infection. In addition,
pregnant women suffering from hepatitis B can pass
the infection on to their babies during childbirth. Babies
born infected rarely clear the infection, with over 90%
becoming chronically infected. According to the WHO,
28
as many as 40% of people with chronic hepatitis B
infection develop serious liver disease, including cir-
rhosis and liver cancer.
Prevalence, market opportunity and current treat-
ment. Chronic infection with the hepatitis B virus is a
global problem, with an estimated 350 million chronically
infected individuals worldwide. The WHO estimates that
approximately one million people per year worldwide die
from complications of hepatitis B infection. Infection rates
are highest in the developing world, posing an infection
risk to travelers from industrialized countries. Infection
is less common in the United States and Europe. In the
United States, there are an estimated 1.2 million people
with chronic hepatitis B infection, resulting in approxi-
mately 4,000 to 5,000 deaths annually.
Prophylactic vaccines based on recombinant pro-
tein subunit preparations are effective in preventing
hepatitis B infection. Childhood vaccination with these
vaccines is common in industrialized countries and
in some of the developing world. Childhood immuni-
zation programs have reduced the number of chronic
carriers of hepatitis B infection by up to 90% in parts
of the world where hepatitis B is most common. In the
United States, infection rates for acute hepatitis B have
decreased by approximately 77% over the past 20 years.
However, these existing vaccines have not proven to
be effective in treating people with chronic hepatitis B
infection. As a result, there remains a significant num-
ber of people who are chronically infected with hepati-
tis B and require treatment to prevent the development
of liver disease and to reduce the risk of transmitting
the infection to others.
There is no vaccine currently on the market that is
licensed as a therapeutic treatment for chronic hepa-
titis B infection. Currently available therapies for this
patient population consist mainly of antiviral drugs and
immunotherapies, such as interferons. However, these
treatments are subject to a number of shortcomings.
Both of these treatments can only be used in a subset
of patients, and their efficacy is limited. In addition, the
use of antiviral drugs may lead to the development of
resistant forms of the virus, and interferons have side
effects that reduce patient compliance.
Hepatitis B Therapeutic Vaccine. We are developing
a live attenuated therapeutic vaccine for treatment of
patients with chronic hepatitis B infection. We have
designed our vaccine candidate to be administered in
multiple drinkable doses over several months. It may
require further booster doses. Because chronic carri-
ers have weak cellular immune responses to the hepa-
titis B virus, they cannot clear the virus. Our vaccine
candidate is intended to redirect the immune system
to make strong cellular responses to a hepatitis B anti-
gen, known as the hepatitis B core protein, in chronic
carriers, which we believe may lead to a suppression of
viral replication and associated liver damage.
Our vaccine candidate uses our proprietary spi-VEC™
(live attenuated Salmonella vaccine vector) oral deliv-
ery system technology to deliver the hepatitis B core
antigen to the human immune system. spi-VEC is based
on our live attenuated Salmonella typhi typhoid vaccine
and employs recombinant technology to insert the gene
for hepatitis B core into the live attenuated Salmonella
bacteria. The bacteria produce the antigen once inside
the patient. Because the gene for hepatitis B core is
inserted using recombinant technology into a vector
delivery system, we do not need to separately purify the
hepatitis B core antigen.
We have completed a preclinical program of pharma-
cology and toxicity studies of our hepatitis B therapeu-
tic vaccine candidate. In mice that were administered
our vaccine candidate, the hepatitis B core antigen was
produced and immune responses were elicited against
the antigen. In separate toxicology studies also con-
ducted in mice, our vaccine candidate was non-toxic.
In February 2004, we completed an open-label, dose
escalating Phase I clinical trial of our vaccine can-
didate in the United Kingdom in 30 healthy adult vol-
unteers to evaluate the safety and immunogenicity of
two dose levels of our vaccine candidate. The vaccine
candidate demonstrated immunogenicity and was well
tolerated by trial participants, with no serious adverse
events reported.
In the fourth quarter of 2006, we initiated a Phase II
clinical trial of our vaccine candidate in trial partici-
pants chronically infected with the hepatitis B virus in
the United Kingdom, which we subsequently expanded
to Serbia to increase the rate of participant recruitment.
In the second quarter of 2008, we ceased enrolling
patients in this trial as a result of recruiting difficul-
ties related to the standard of care in the developed
world because we administer our product candidate as
29
a monotherapy. As a result, we will not obtain statisti-
cally meaningful data from this trial. We are currently
seeking to identify alternative trial sites in endemic
areas of the world where we anticipate recruitment
rates will be higher.
Botulinum
Disease overview. Botulism is a frequently fatal dis-
ease caused by botulinum toxins produced by the
bacterium Clostridium botulinum. Clostridium botulinum
is widely distributed in soil and aquatic environments
throughout the world. Botulinum bacteria produce
seven distinct serotypes, each of which elicits a distinct
antibody response. Naturally occurring outbreaks of
botulism in humans have been reported from exposure
to four of the seven serotypes: A, B, E and F. Botulism
normally occurs when an individual consumes con-
taminated food containing botulinum toxin. Once
consumed, the toxin rapidly attacks nerve cells, result-
ing in paralysis of peripheral muscles, including the
muscles involved in respiration. Botulism can also be
contracted if botulinum bacteria contaminate wounds
or colonize the intestine of infants, which is referred
to as infant botulism. Botulinum toxins are among the
most potent and dangerous of biological weapons.
Exposure to very small quantities of botulinum toxin
can cause the rapid onset of life threatening paralytic
disease syndrome. It has been estimated that a single
gram of toxin evenly dispersed and inhaled could kill
more than one million people.
Prevalence, market opportunity and current treat-
ment. As with anthrax countermeasures, we believe
that the U.S. government and foreign, state and local
governments will be the principal potential customers
for botulinum countermeasures, including both vac-
cines and therapeutics. Because purified botulinum
toxin is stable and extremely potent when administered
in very small quantities, it has the potential to be used
as a biological weapon, either through deliberate con-
tamination of the food supply or drinking water or as
an aerosol.
Currently, there is no FDA-approved botulinum vaccine
on the market, although the DoD has provided develop-
ment funding to a competitor of ours for the development
of a recombinant botulinum vaccine that addresses two
of the seven serotypes of botulinum neurotoxin. These
two botulinum serotypes, A and B, are responsible for
approximately 85% of all cases of botulism. Because
of the rapid onset of symptoms following exposure to
the botulinum toxin, prophylactic vaccines, which take
several weeks to mount an effective protective immune
response, are not useful as post-exposure treatments
for botulism. In addition, antibiotics are not effective
post-exposure treatments since they work by killing the
botulinum bacteria that produce the toxin, but do not act
directly against the botulinum toxin itself. Currently, the
only FDA-approved treatment for botulism is a human
botulinum immune globulin product for the treatment
of infant botulism caused by type A or type B Clostridium
botulinum. The supply of this product is limited. The
product was derived from plasma taken from indi-
viduals who had been vaccinated with an experimental
pentavalent botulinum toxoid vaccine that is no longer
in production. In addition, the CDC manages a supply
of experimental botulinum immune globulin derived
from equine plasma. However, the experimental equine
immune globulin is subject to at least two shortcom-
ings. First, because the human body recognizes the
equine immune globulin as a foreign substance, its
efficacy may be limited. Second, the antibody immune
response against the equine immune globulin can lead
to potential severe side effects, including anaphylactic
shock, if the equine immune globulin is administered
more than once. To screen for sensitivity to the equine
immune globulin, patients are given small challenge
doses of the equine immune globulin before receiving a
full dose. HHS has awarded a development and supply
contract to a competitor of ours for development and
supply of a botulinum immune globulin derived from
equine plasma that addresses all seven serotypes of
botulinum neurotoxin.
Recombinant Botulinum Vaccine. We are developing a
recombinant protein subunit trivalent botulinum vac-
cine for protection against botulinum serotypes A, B
and E in collaboration with HPA. We hold an exclusive
license from HPA for use of recombinant technology in
the development of our vaccine candidate. HPA is also
providing us with process development expertise and
access to its facilities. We are designing this vaccine
candidate to be administered by intramuscular injec-
tion with an alum adjuvant in a three-dose regimen. Our
recombinant vaccine candidate is based on fragments
of the botulinum A, B and E toxins that we have selected
as antigens because we believe them to be non-toxic
and immunogenic.
30
We are producing these recombinant antigens in an E.
coli expression system. We believe that our technology
will allow us to develop stable monovalent and multiva-
lent vaccine products capable of producing neutralizing
antibody to all three toxin types. We have established a
small scale production process for botulinum serotypes
A, B, and E vaccines and have conducted preclinical
proof-of-concept studies of these vaccine candidates.
In these studies, the individual vaccines elicited anti-
bodies and provided protection against challenge with
the corresponding botulinum toxin. Additionally, a triva-
lent vaccine composed of the A, B and E individual vac-
cines was seen to elicit neutralizing antibody against all
three toxin types. We anticipate that the manufacture
of our recombinant vaccine in a cGMP facility will not
require the high level of containment that is required
for the production of conventional, non-recombinant
botulinum toxoid vaccines that involve cultivation of the
disease-causing organism.
Additionally, we have rights to develop a human botuli-
num immune globulin therapeutic product as intrave-
nous therapeutic for symptomatic botulinum exposure.
We believe that botulinum immune globulin has the
potential to provide immediate protection from the
effects of botulinum toxin.
We plan to rely on the FDA animal rule in connection with
the development of our recombinant botulinum vaccine
candidate. We have been awarded U.S. government grant
funding from NIAID to support the further development
of our recombinant botulinum vaccine candidate. We will
continue to assess, and may alter, our future develop-
ment plans for this product based on the U.S. govern-
ment’s interest in providing development funding for,
and procuring, botulinum countermeasures.
Chlamydia
Disease overview. Chlamydia is the most prevalent
sexually transmitted bacterial disease in the world.
It is caused by infection with the bacterium Chlamydia
trachomatis. Chlamydia trachomatis can cause urogenital
disorders such as uritheritis, cervicitis, pelvic inflam-
matory disease, ectopic pregnancy and infertility among
females and is the leading cause of non-gonococcal
uritheritis and epidemiditis in males. Chlamydia tracho-
matis also causes the ocular disease trachoma, which is
a form of vesicular conjunctivitis. Trachoma is the lead-
ing cause of preventable blindness worldwide.
Prevalence, market opportunity and current treatment.
The WHO estimates that approximately 92 million new
cases of Chlamydia trachomatis infection occur annually
worldwide, of which approximately four million occur
in North America. Chlamydia trachomatis infections are
the most commonly reported notifiable disease in the
United States, with an estimated 2.8 million Americans
becoming infected with Chlamydia trachomatis each
year. Epidemiological studies indicate that in the United
States Chlamydia trachomatis infections are most preva-
lent among young sexually active individuals between
the ages of 15 to 24. There is no vaccine currently on
the market for Chlamydia trachomatis. However, screen-
ing tests and effective antibiotic treatments have been
effective at containing Chlamydia trachomatis in the
United States and Europe. Although Chlamydia tracho-
matis infection can be treated with antibiotics, control
measures based on antimicrobial treatment alone are
difficult due to the incidence of infection, the percentage
of asymptomatic infections and deficiencies in diagnosis.
Chlamydia Vaccine. We are developing a recombinant
protein subunit Chlamydia vaccine for clinically rel-
evant strains of Chlamydia trachomatis, including strains
that cause ocular disease. We are designing our vaccine
candidate to be administered by injection with a novel
adjuvant in a three-dose regimen. We are currently
evaluating in-license opportunities for the adjuvant.
We have cloned our vaccine candidate and produced it
in E. coli. In preclinical studies, our vaccine candidate
protected against both upper reproductive tract dis-
ease and lower reproductive tract infection induced by
Chlamydia trachomatis.
Manufacturing
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 have incurred costs of approxi-
mately $75 million through December 2008 for the
building and associated capital equipment, as well as
for validation and qualification activities required for
regulatory approval and initiation of manufacturing.
Although we have made progress on qualification and
validation activities required for the commercial manu-
facture of BioThrax, we currently believe that we may
use the facility for the manufacture of our rPA vaccine
31
candidate in the event that we are awarded a devel-
opment and procurement contract for our rPA vac-
cine candidate from HHS. We designed the plant to be
campaignable subject to complying with appropriate
change-over procedures, and we may seek permission
from the FDA to use the facility for the manufacture
of both BioThrax and our rPA vaccine candidate. In the
event we do not get an award for the development and
procurement of our rPA vaccine candidate, we intend
to use the facility for the manufacture of BioThrax and
potentially additional products.
We also own two buildings in Frederick, Maryland
that are available to support our future manufactur-
ing requirements. We have incurred costs of approxi-
mately $4 million through December 2008 related to
initial engineering design and preliminary utility build
out of one of these buildings. Moving forward with our
plans for this building will be contingent on progress
of our existing development programs or the acquisi-
tion of new product candidates. 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. However, we may elect to lease or sell one or
both of these facilities to third parties.
We manufacture BioThrax at our facilities in Lansing,
Michigan using well established vaccine manufacturing
procedures. We currently rely on contract manufactur-
ers and other third parties to manufacture the supplies
for our other vaccine and therapeutic product candidates
we require for our preclinical studies and clinical trials.
We typically acquire these supplies on a purchase order
basis. We anticipate that we may use our existing plant
facilities in Michigan, including our recently commis-
sioned pilot plant and our planned new plant facilities
in Michigan to support both continued process devel-
opment and the manufacture of clinical supplies of our
product candidates. However, we also expect that we will
continue to use third parties for production of preclini-
cal and clinical supplies of some of our product candi-
dates. We believe that manufacturing our products and
product candidates independently will provide us cost
savings and greater control over the manufacturing and
regulatory approval and oversight processes as well as
accelerate product development timelines and allow us
to expand our base of manufacturing know-how that we
can then apply to the development and manufacture of
future product candidates.
Hollister-Stier Laboratories LLC performs the con-
tract filling operation for BioThrax at its FDA-approved
facility located in Spokane, Washington. Hollister-Stier
has agreed to meet all of our firm purchase orders for
contract filling of BioThrax based on a good faith annual
estimate that we provide prior to each calendar year.
In addition, Hollister-Stier has agreed to accommodate
fill requests in excess of our annual estimate, subject
to its available production capacity. Our contract with
Hollister-Stier expires December 31, 2010. We have
also entered into an agreement for contract filling
operations with JHP Pharmaceuticals, LLC which must
now be qualified and licensed by the FDA to fill BioThrax
at its facilities.
Talecris Biotherapeutics has agreed to perform plasma
fractionation and purification and contract filling of our
anthrax immune globulin therapeutic candidate for
preclinical, clinical and commercial use at its FDA-
approved facilities located in Melville, New York and
Clayton, North Carolina. Subject to limited exceptions,
we have agreed to obtain all manufacturing require-
ments for our anthrax immune globulin therapeutic can-
didate exclusively from Talecris. While our agreement
with Talecris remains in effect, Talecris has agreed not
to market, sell or acquire any competing product that
contains anthrax immune globulin as an active ingre-
dient. We have agreed to pay Talecris royalties on net
sales on a country-by-country basis for commercial
product manufactured by Talecris under the contract.
Our contract with Talecris expires December 31, 2014.
We have the option to extend the term for an additional
five-year period upon notice to Talecris at least 12
months prior to the expiration of the initial term. After
three years following initiation of commercial manu-
facturing, either party may terminate the contract upon
two years’ advance notice. We have the right to termi-
nate the contract, under specified circumstances, if we
discontinue our production of anthrax immune globu-
lin source plasma or the development of our anthrax
immune globulin therapeutic candidate. Talecris is in
the process of being acquired by CSL. We do not antici-
pate that this acquisition will have an adverse impact on
our relationship with Talecris.
We used a contract manufacturer for the supply of
Typhella for the Phase I and Phase II trials in Vietnam,
the United Kingdom and the U.S. We may use a differ-
ent contract manufacturer for the supply of this vaccine
32
candidate for future trials. We are in the process of iden-
tifying a new contract manufacturer for our monoclonal
anthrax antibody product candidate.
We also expect that we will rely on third parties for a
portion of the manufacturing process for commercial
supplies of other product candidates that we success-
fully develop, including fermentation for some of our
vaccine product candidates and contract fill and fin-
ish operations. The manufacture of biologic products
and the scale-up process necessary to manufacture
quantities of product sufficient for commercial launch
are complex. If we are unable to secure relationships
with third party contract manufacturers that can pro-
vide sufficient supplies for the commercial launch of
our product candidates on commercially attractive
terms, our ability to capture market share may be
adversely affected.
In addition, we rely on third parties for supplies and
raw materials used for the production of BioThrax and
our product candidates. We purchase these supplies
and raw materials from various suppliers in quantities
adequate to meet our needs. We believe that there are
adequate alternative sources of supply available for
most of our raw materials if any of our current suppli-
ers were unable to meet our needs.
Marketing and Sales
We currently market and sell BioThrax directly to the
U.S. government with a small, targeted marketing and
sales group. We plan to continue to do so and expect
that we will use a similar approach for sales to the
U.S. government for other biodefense product candi-
dates that we successfully develop. We may expand our
sales and marketing organization as we broaden our
sales activities of biodefense products at the state and
local level, where we expect there will be interest in
these products to protect emergency responders such
as police, fire and emergency medical personnel, and
other personnel whose occupation may cause them to
be at a high risk of exposure to biothreats.
several countries in Southeast Asia and Europe, and
anticipate engaging additional representatives.
We expect to increase our sales and marketing resources
to market and sell commercial products for which we
retain commercialization or co-commercialization
rights. We anticipate that our internal marketing and
sales organization will be complemented by selective
co-promotion and other arrangements with leading
pharmaceutical and biotechnology companies, espe-
cially in situations in which the collaborator has partic-
ular expertise or resources for the commercialization
of our products or product candidates or access to par-
ticular markets.
Competition
industries
The biotechnology and pharmaceutical
are characterized by rapidly advancing technologies,
intense competition and a strong emphasis on propri-
etary products. While we believe that our technolo-
gies, knowledge, experience, and resources provide
us with competitive advantages, we face potential
competition from many different sources, including
commercial pharmaceutical and biotechnology compa-
nies, academic institutions, government agencies and
private and public research institutions. Merck & Co.,
GlaxoSmithKline, Sanofi Pasteur, Novartis and Wyeth
generated over 90% of the total worldwide vaccine rev-
enues in 2007. The concentration of the industry reflects
a number of factors, including:
• the need for significant, long-term investment in
research and development;
• the importance of manufacturing capacity, capa-
bility and specialty know-how, such as techniques,
processes and biological starting materials; and
• the high regulatory burden for prophylactic
products, which generally are administered to
healthy people.
These factors have created a significant barrier to entry
into the vaccine industry.
We have established marketing and sales offices in
Munich, Germany and Singapore, and a joint venture
in Malaysia, to target sales of biodefense products to
foreign governments. We have augmented our inter-
national efforts by engaging third party marketing
representatives to identify potential opportunities to
sell BioThrax in the Middle East, India, Australia, and
Many of our competitors, including those named above,
have significantly greater financial resources and
expertise in research and development, manufacturing,
preclinical testing, conducting clinical trials, obtaining
regulatory approvals and marketing approved prod-
ucts than we do. These companies also compete with
us in recruiting and retaining qualified scientific and
33
management personnel, as well as in acquiring prod-
ucts, product candidates and technologies comple-
mentary to, or necessary for, our programs. Smaller or
more narrowly focused companies, including Crucell,
Cangene, Human Genome Sciences, Dor BioPharma,
Dynport Vaccine Company LLC, Elusys, Bavarian Nordic
and PharmAthene, may also prove to be significant com-
petitors, particularly through collaborative arrange-
ments with large and established companies or through
significant development or procurement contracts with
governmental agencies or philanthropic organizations.
Our biodefense product candidates face significant
competition for U.S. government funding for both
development and procurement of medical counter-
measures for biological, chemical and nuclear threats,
diagnostic testing systems and other emergency pre-
paredness countermeasures. In addition, we may not
be able to compete effectively if our products and prod-
uct candidates do not satisfy government procurement
requirements, particularly requirements of the U.S.
government with respect to biodefense products. Our
commercial opportunity could be reduced or elimi-
nated if our competitors develop and commercialize
products that are safer, more effective, have fewer side
effects, are more convenient or are less expensive than
any products that we may develop.
Any product candidate that we successfully develop
and commercialize is likely to compete with currently
marketed products, such as vaccines and therapeutics,
including antibiotics, and with other product candi-
dates that are in development for the same indications.
Specifically, the competition for BioThrax and our prod-
uct candidates includes the following:
• BioThrax. Although BioThrax is the only product
approved by the FDA for human use for the pre-
vention of anthrax infection, we face significant
potential competition for the supply of this vac-
cine to the U.S. government. Various agencies of
the U.S. government are providing funding to our
competitors for development of an anthrax vac-
cine based on recombinant protective antigen. In
addition, HPA manufactures an anthrax vaccine
for use by the government of the United Kingdom.
Other countries as well may have anthrax vac-
cines for use by or in development for their own
internal purposes.
• rPA vaccine. PharmAthene is currently developing
a recombinant protective antigen based anthrax
vaccine and has submitted a response to the same
BARDA request for proposal for the procurement
and development of an rPA vaccine to which we
have responded. PharmAthene has announced
that their proposal has been deemed to be techni-
cally acceptable and within the competitive range.
Panacea is also developing an rPA vaccine.
• Anthrax immune globulin and monoclonal thera-
peutic. Cangene is currently developing an anthrax
immune globulin therapeutic based on plasma
collected from military personnel who have
been vaccinated with BioThrax; Human Genome
Sciences is developing a monoclonal antibody to
Bacillus anthracis, referred to as ABthrax™, as a
post-exposure therapeutic for anthrax infection;
Elusys Therapeutics is developing a monoclonal
antibody to Bacillus anthracis, known as Anthim™,
as a pre-exposure and post-exposure prophylaxis
against anthrax infection, as well as an active
treatment of disease; and PharmAthene and
Medarex are collaborating to develop a human
antibody to Bacillus anthracis, known as Valortim™,
to protect human cells from damage by anthrax
toxins. The FDA has granted Fast Track desig-
nation and orphan drug status for ABthrax and
Valortim. HHS awarded development and pro-
curement contracts to Human Genome Sciences
and Cangene to supply their anthrax therapeutics
for evaluation of efficacy as a post-exposure ther-
apeutic for anthrax infection.
• Botulinum. In April 2005, the DoD provided addi-
tional funding to DynPort Vaccine Company LLC
for the continued development of a recombinant
bivalent botulinum vaccine for protection against
botulinum serotypes A and B. This vaccine is
called bivalent because it addresses two of the
seven serotypes of botulinum neurotoxin. In June
2006, HHS awarded a five-year development and
supply contract with a base value of $362 million
to Cangene for a heptavalent botulinum immune
globulin derived from equine plasma. The con-
tract provides for the supply of 200,000 doses of a
botulinum immune globulin for the SNS.
• Typhella (typhoid vaccine live oral ZH9). One oral
typhoid vaccine and one type of injectable typhoid
vaccine are currently approved and administered
34
in the United States and Europe. In addition, com-
bination vaccines are available for the prevention
of hepatitis A and typhoid infections. Antibiotics
typically are used to treat typhoid after infec-
tion. Vi-conjugable injectable vaccines are also
in development.
• Tuberculosis vaccine. The Aeras Global Tuberculosis
Vaccine Foundation is developing or supporting the
development of five tuberculosis vaccine candi-
dates, one of which is in a Phase II clinical trial, and
the rest of which are either in Phase I clinical trials
or close to commencing Phase I clinical trials. The
Aeras Global Tuberculosis Vaccine Foundation is
also the sponsor of the Phase IIb clinical trial of
our tuberculosis vaccine candidate.
• Hepatitis B therapeutic vaccine. Currently avail-
able therapies for this patient population consist
mainly of antiviral drugs and immunotherapies,
such as interferons. There are multiple follow on
antiviral immunotherapies as well as therapeutic
vaccines being developed by potential competitors.
• Chlamydia vaccine. There is no vaccine currently
on the market for chlamydia. Although we are not
aware of any competing chlamydia vaccine can-
didate in clinical development, competitors may
have chlamydia vaccine candidates in preclinical
development. Screening tests and targeted anti-
biotic treatments have been effective at contain-
ing chlamydia in the United States and Europe,
which may have the effect of decreasing demand
for a vaccine.
Intellectual Property and Licenses
Our success, particularly with respect to our commer-
cial business, depends in part on our ability to obtain
and maintain proprietary protection for our product
candidates, technology and know-how, to operate with-
out infringing the proprietary rights of others and to
prevent others from infringing our proprietary rights.
Our policy is to seek to protect our proprietary position
by, among other methods, filing U.S. and foreign pat-
ent applications related to our proprietary technology,
inventions, and improvements that are important to the
development of our business. U.S. patents generally
have a term of 20 years from the date of nonprovisional
filing. We also rely on trade secrets, know-how, continu-
ing technological innovation and in-licensing opportuni-
ties to develop and maintain our proprietary position.
As of February 27, 2009, we owned or licensed exclusively
a total of 34 U.S. patents and 43 U.S. patent applications
relating to our biodefense and commercial product can-
didates, as well as numerous foreign counterparts to
many of these patents and patent applications. Our pat-
ent portfolio includes patents and patent applications
with claims directed to compositions of matter, phar-
maceutical formulations and methods of use.
We consider the patent rights that we own or exclu-
sively licensed from USAMRIID relating to our rPA
vaccine product candidate, from OETC relating to our
tuberculosis vaccine product candidate and from HPA
relating to our recombinant botulinum vaccine candi-
date to be important.
We consider the following patents that we own or have
licensed exclusively to be most important to the protec-
tion of our commercial vaccine candidates that are in
clinical development.
• Typhella (typhoid vaccine). We hold three U.S.
patents relating to Typhella. These patents have
claims to the composition of matter of the vac-
cine candidate and methods of use of live attenu-
ated Salmonella typhi bacteria as vaccines for the
treatment and prevention of typhoid and for the
delivery of vaccine antigens. In addition, we have
two pending U.S. patent applications with claims
to additional compositions and methods of ther-
apy that are generally related to Typhella. Our
issued U.S. patents expire, and, if issued, our
U.S. patent applications would expire, between
2015 and 2020. We hold 93 foreign counter-
part patents to our issued U.S. patents relat-
ing to Typhella, including counterparts under
the European Patent Convention and in Japan,
that expire, and 33 foreign patent applications
that, if issued, would expire, between 2015 and
2020. Additional patents relating to Typhella and
delivery of vaccine antigens are discussed below
under “STM technology.”
• Hepatitis B therapeutic vaccine. Our hepatitis B
therapeutic vaccine candidate uses our propri-
etary spi-VEC oral delivery system technology
to deliver hepatitis B core antigen to the human
immune system. spi-VEC is based on our live
attenuated typhoid vaccine candidate and employs
recombinant technology to insert the gene for
35
hepatitis B core antigen into the live attenuated
Salmonella bacteria. As a result, the patents relat-
ing to Typhella also protect our hepatitis B thera-
peutic vaccine candidate. In addition, we hold one
U.S. patent with claims to the use of attenuated
Salmonella organisms for the delivery of hepatitis
B vaccine antigens, which expire in 2019. We also
have two pending U.S. patent applications relating
to our hepatitis B therapeutic vaccine candidate,
which if issued also would expire in 2019. We have
18 foreign counterparts to our issued U.S. patent
under the European Patent Convention that expire
in 2019, and four foreign patent applications relat-
ing to our hepatitis B therapeutic vaccine candi-
date that, if issued, would expire in 2019.
• STM technology. We own four U.S. patents with
claims to methods for the identification of viru-
lence genes using our signature tagged muta-
genesis, or STM, technology, which we used to
identify and develop the gene mutations that form
the basis of our typhoid vaccine and hepatitis B
therapeutic vaccine candidates. We also own
48 foreign counterpart patents, including coun-
terparts under the European Patent Convention
and in Japan. These patents relating to the STM
method will expire in 2015. We also hold 17 foreign
patent applications that, if issued would expire in
2015. Our rights under these patents are licensed
on a limited non-exclusive basis to third parties to
practice the STM method with respect to specific
microorganisms, not including Salmonella typhi or
hepatitis virus.
The patent positions of companies like ours are gen-
erally uncertain and involve complex legal and factual
questions. Our ability to maintain and solidify our pro-
prietary position for our technology will depend on our
success in obtaining effective claims and enforcing
those claims once granted. We do not know whether
any of our patent applications or those patent applica-
tions that we license will result in the issuance of any
patents. Our issued patents and those that may issue in
the future, or those licensed to us, may be challenged,
invalidated or circumvented, which could limit our abil-
ity to stop competitors from marketing related products
or the length of term of patent protection that we may
have for our products. In addition, our competitors may
independently develop similar technologies or dupli-
cate any technology developed by us, and the rights
granted under any issued patents may not provide us
with any meaningful competitive advantages against
these competitors. We may become subject to patent
interference proceedings or claims that our products
infringe or violate the intellectual property rights of
third parties. Furthermore, because of the extensive
time required for development, testing and regulatory
review of a potential product, it is possible that, before
any of our products can be commercialized, any related
patent may expire or remain in force for only a short
period following commercialization, thereby reducing
any advantage of the patent.
We also rely on trade secrets relating to manufactur-
ing processes and product development to protect our
business. Because we do not have patent protection for
BioThrax or for the label expansions and improvements
that we are pursuing for BioThrax, our only intellec-
tual property protection for BioThrax, aside from the
BioThrax trademark, is confidentiality regarding our
manufacturing capability and specialty know-how,
such as techniques, processes and biological starting
materials. However, these types of trade secrets can be
difficult to protect. We seek to protect this confidential
information, in part, with agreements with our employ-
ees, consultants, scientific advisors and contractors.
We also seek to preserve the integrity and confidential-
ity of our data and trade secrets by maintaining physi-
cal security of our premises and physical and electronic
security of our information technology systems. While
we have confidence in these individuals, organizations
and systems, agreements or security measures may
be breached, and we may not have adequate remedies
for any breach. In addition, our trade secrets may oth-
erwise become known or be independently discovered
by competitors. To the extent that our consultants or
contractors use intellectual property owned by others
in their work for us, disputes may arise as to the rights
in related or resulting know-how and inventions.
We are a party to a number of license agreements under
which we license patents, patent applications, and other
intellectual property. We enter into these agreements
to augment our own intellectual property. These agree-
ments impose various diligence and financial payment
obligations on us. We expect to continue to enter into
these types of license agreements in the future. The
only existing licenses that we consider to be material to
our current product portfolio or development pipeline
36
are our agreements with USAMRIID, OETC, and HPA,
which are described below. We also have a license
agreement with the Bavarian State Ministry of the
Environment, Public Health and Consumer Protection,
or StMUGV, relating to our MVA vector technology that
we may use in the development of future product can-
didates, which is also described below.
USAMRIID agreement. In connection with our acquisi-
tion of our rPA vaccine candidate in May 2008, we have
become a licensee under an October 2003 agreement
with USAMRIID pursuant to which we have exclusive
worldwide rights to develop, manufacture and com-
mercialize product candidates falling within the scope
of a valid claim of the licensed patent technology, for
human use as a vaccine for the prevention or treat-
ment of anthrax infection. The licensed patent technol-
ogy includes two U.S. patents that cover the strain of
B. anthrasis used to prepare our rPA vaccine candidate
and methods of making a recombinant protective anti-
gen vaccine. The patents expire in 2014. There are no
foreign counterpart patents or applications.
Under the license agreement, we are required to pay
USAMRIID an annual license fee, payments upon the
achievement of certain development and regulatory
milestones, and royalties on sales of licensed prod-
ucts on a product-by-product and country-by-country
basis, until the later of seven years from first commer-
cial sale of the first licensed product in that country
and the expiration of the last-to-expire licensed pat-
ent in that country. The license agreement requires us
to expend reasonable efforts and resources to carry
out the development and marketing of the inventions
described and claimed in the licensed patent technol-
ogy, and once licensed products are being utilized and
have been made available to the public, to continue to
make those licensed products available to the public.
We also bear responsibility for the preparation, filing,
prosecution and maintenance of patent applications
and patents included in the licensed patent technology.
OETC agreement. In July 2008, we entered into a tech-
nology licensing agreement with OETC pursuant to
which we obtained rights to develop, manufacture and
commercialize product candidates containing MVA85A
for the prevention or treatment of Mycobacterium tuber-
culosis in humans. Generally, our rights to manufac-
ture the licensed product and to commercialize it in
developed countries are exclusive. The licensed patent
portfolio includes one U.S. patent application which, if
issued as a patent, would expire in 2025. The licensed
patent portfolio also includes three foreign patents and
25 foreign patent applications which, if issued as pat-
ents, would expire in 2025.
Under the OETC license, we were required to pay OETC
a signing fee, and are required to make payments
upon the achievement of certain development, regu-
latory and sales milestones and royalties on sales of
the licensed product in developed countries. We must
also reimburse a portion of the patent costs incurred
by the University of Oxford and Isis Innovation Limited
in the past and reimburse OETC for future patent costs
in certain developed countries. We have also agreed
that in order to retain our commercial license rights,
if the planned Phase IIb trial of the licensed product
in infants is successful, we will meet all costs and
expenses of a Phase III clinical trial of the licensed
product in infants.
Under the OETC license, we are generally required
to do the following: use reasonable efforts to obtain
regulatory approvals for an infant indication, and, if so
approved, an adolescent indication, and thereafter an
indication for HIV infected adults; develop a scaled-up
manufacturing process that is cell-based and capable
of achieving certain price levels and dose quantities;
market a licensed product in countries in the developed
world for each indication for which regulatory approval
has been received; and attain a certain level of annual
sales of the licensed product in the developed world.
HPA agreements. In November 2004, we entered into
two separate license agreements with HPA for our
recombinant bivalent botulinum vaccine candidate and
a botulinum toxoid vaccine. We have scaled back our
development efforts with respect to the botulinum toxoid
vaccine pending the receipt of third party development
funding. Under the license agreements, we obtained the
exclusive, worldwide right to develop, manufacture and
commercialize pharmaceutical products that consist of
recombinant botulinum toxin components or botulinum
toxoid components for the prevention or treatment of
illness in humans caused by exposure to the botulinum
toxin, subject to HPA’s non-exclusive right to make, use
or sell recombinant botulinum products to meet public
health requirements in the United Kingdom.
37
The licensed patent portfolio includes three U.S. pat-
ents with claims to the composition of matter of recom-
binant components of Clostridium botulinum, and the use
of such components in vaccines for the treatment or
prevention of Clostridium botulinum infection or toxicity.
These patents expire in 2016. Additional composition of
matter and method of use claims are pending in seven
U.S. patent applications, which if issued as patents
also would expire in 2016. The licensed portfolio also
includes 31 foreign patents and 11 foreign applications,
which if issued would expire in 2016.
Under each license agreement, we are required to pay
HPA royalties on sales of the licensed product by us,
our affiliates or third party sublicensees in the major
market countries of the United States, United Kingdom,
France, Germany, Italy and Japan, and a separate roy-
alty on sales of the licensed product by us and our affili-
ates in any other country.
Under each license agreement, we are generally
obligated to use commercially reasonable efforts to
respond to applicable solicitations or procurement
proposals from, and to enter into contracts with, gov-
ernmental agencies in each of the major market coun-
tries with respect to the licensed product. We may
satisfy this obligation by filing an IND with respect to a
licensed product by November 2009. If we fail to file an
IND within that time period under either of the license
agreements, we are obligated to pay HPA an annual fee
until an IND has been filed.
In November 2004, we also entered into two sepa-
rate development agreements with HPA pursuant to
which HPA agreed to conduct specified tests, studies
and other development activities with respect to our
recombinant botulinum vaccine and a botulinum toxoid
product in accordance with mutually-agreed devel-
opment plans. We have paid minimum contractual
commitments of $1.0 million under each development
agreement to compensate HPA for this development
work. HPA also agreed to provide us with clinical sup-
plies of recombinant botulinum vaccine and botulinum
toxoid product for clinical trials.
The term of each development agreement lasts until
the development activities are completed. Each of the
development agreements automatically terminates if
the applicable license agreement is terminated. The
term of each license agreement lasts until the expiration
of all of our royalty obligations under the applicable
license agreement. We are obligated to pay royal-
ties under each license agreement, on a product-by-
product and country-by-country basis, until the later
of seven years from first commercial sale of the first
licensed product in that country and the expiration of
the last-to-expire licensed patent in that country. HPA
may terminate each license agreement if we termi-
nate the applicable development agreement without
cause before we have paid, or if HPA terminates such
development agreement due to our failure to pay the
minimum commitment amount set forth in such devel-
opment agreement.
MVA platform technology. In July 2006, in connec-
tion with our acquisition of ViVacs GmbH, or ViVacs,
a German limited liability company, we acquired a
license agreement with StMUGV that provides us the
non-exclusive, worldwide right to develop and produce
viruses and viral products, including recombinant viral
vectors, using MVA. Under the license agreement, we
are required to pay StMUGV a percentage of the net
revenue or license fees, that we receive from prod-
ucts developed using MVA that are used for research
or other purposes and a percentage of the license fees
that we receive from products developed using MVA
that are licensed as starting material for the produc-
tion of a smallpox vaccine.
The license agreement does not have a specified term.
In addition, StMUGV may terminate the license agree-
ment upon the insolvency or liquidation of our wholly
owned subsidiary, Emergent Product Development
GmbH, formerly ViVacs GmbH. Our MVA platform tech-
nology, which is based on these licensed rights, could
potentially be used as a viral vector for delivery of mul-
tiple vaccine antigens for different disease-causing
organisms using recombinant technology. We are cur-
rently exploring potential product candidates based on
our MVA platform, including a broadly cross protective
influenza vaccine candidate.
Government Regulation
The FDA and comparable regulatory agencies in state
and local jurisdictions and in foreign countries impose
substantial requirements for the preclinical and clini-
cal development, manufacture, distribution and mar-
keting of pharmaceutical and biological products.
These agencies and other federal, state and local
38
entities regulate research and development activities
and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, distribution, record-
keeping, approval, advertising, sale, promotion, import,
and export of our product and product candidates.
U.S. Government Regulation
In the United States, BioThrax and our product can-
didates are regulated by the FDA as biological prod-
ucts. Biologics are subject to regulation under the
Federal Food, Drug, and Cosmetic Act, or the FDCA,
the Public Health Service Act, or the PHSA, the regula-
tions promulgated under the FDCA and the PHSA and
other federal, state, and local statutes and regulations.
Violations of regulatory requirements at any stage
may result in various adverse consequences, includ-
ing delay in approving or refusal to approve a product.
Violations of regulatory requirements also may result
in enforcement actions, including withdrawal of prod-
uct approval, labeling restrictions, seizure of products,
fines, injunctions and civil and criminal penalties.
The process required by the FDA under these laws
before our product candidates may be marketed in the
United States generally involves the following:
• laboratory and preclinical tests;
• submission to the FDA of an IND, which must
become effective before clinical trials may begin;
• completion of human clinical trials and other
studies to establish the safety and efficacy of the
proposed product for each intended use;
• FDA review of facilities in which the product is
manufactured, processed, filled, packed and held
to determine compliance with cGMP require-
ments designed to assure the product’s contin-
ued quality; and
• submission to the FDA and approval of a New
Drug Application, or NDA, in the case of a drug,
or a BLA in the case of a biologic, containing pre-
clinical, nonclinical and clinical data, proposed
labeling, and information to demonstrate that
the product will be manufactured to appropriate
standards of identity, purity and quality.
The research, development and approval process
requires substantial time, effort and financial resources,
and approvals may not be granted on a timely or com-
mercially viable basis, if at all.
Preclinical Studies and the IND
Preclinical studies include laboratory evaluation of the
product candidate, its chemistry, formulation and sta-
bility, as well as animal studies to assess its potential
safety and efficacy. We submit the results of the pre-
clinical studies, together with manufacturing infor-
mation, analytical data and any available clinical data
or literature to the FDA as part of an IND, which must
become effective before we may begin human clinical
trials. The IND submission also contains clinical trial
protocols, which describe the design of the proposed
clinical trials. The IND becomes effective 30 days after
the FDA receives the filing, unless the FDA, within the
30-day time period, raises concerns or questions about
the conduct of the preclinical trials or the design of the
proposed clinical trials as outlined in the IND. In such
a case, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can begin.
In addition, an independent Institutional Review Board
charged with protecting the welfare of human subjects
involved in research at each medical center proposing
to conduct the clinical trials must review and approve
any clinical trial. Furthermore, study subjects must
provide informed consent for their participation in the
clinical trial.
Clinical Trials
Human clinical trials are typically conducted in three
sequential phases, which may overlap:
• In a Phase I clinical trial, the drug or biologic is
initially administered into healthy human sub-
jects or subjects with the target condition and
tested for safety, dosage tolerance, absorption,
distribution, metabolism and excretion.
• In a Phase II clinical trial, the drug or biologic is
administered to a limited subject population to
identify possible adverse effects and safety risks,
the efficacy of the product for specific targeted dis-
eases and dosage tolerance and optimal dosage.
• A Phase III clinical trial is undertaken if a Phase II
clinical trial demonstrates that a dosage range of
the drug or biologic is effective and has an accept-
able safety profile. In a Phase III clinical trial, the
drug or biologic is administered to an expanded
population, often at geographically dispersed
clinical trial sites, to further evaluate dosage and
clinical efficacy and to further test for safety.
39
Clinical trials must be conducted in compliance with
good clinical practice, or GCP, requirements. In addi-
tion, federal law now requires the listing, on a publicly-
available website, of registry and results information
for most clinical trials that we conduct. The federal
requirements for submission of results information
will be phased-in over the next two years. Some states
have similar clinical trial reporting laws.
must be registered with the FDA. The FDA generally
will not approve an application until the FDA conducts
a manufacturing inspection, approves the applicable
manufacturing process for the drug or biological prod-
uct and determines that the facility is in compliance
with cGMP requirements. If the manufacturing facili-
ties and processes fail to pass the FDA inspection, we
will not receive approval to market these products.
In the case of product candidates that are intended to
treat rare life-threatening diseases, such as infection
caused by exposure to the anthrax toxin, conducting
controlled clinical trials to determine efficacy may be
unethical or infeasible. Under regulations issued by
the FDA in 2002, often referred to as “the animal rule,”
approval of such products can be based on clinical data
from trials in healthy subjects that demonstrate ade-
quate safety and immunogenicity and efficacy data from
adequate and well controlled animal studies. Among
other requirements, the animal studies must estab-
lish that the biological product is reasonably likely to
produce clinical benefits in humans. Because the FDA
must agree that data derived from animal studies may
be extrapolated to establish safety and effectiveness
in humans, these studies add complexity and uncer-
tainty to the testing and approval process. In addition,
products approved under the animal rule are subject
to additional requirements including post-marketing
study requirements, restrictions imposed on market-
ing or distribution or requirements to provide informa-
tion to patients.
Marketing Approval
In the United States, if a product is regulated as a drug,
an NDA must be submitted and approved before com-
mercial marketing may begin. If the product is regulated
as a biologic, a BLA must be submitted and approved
before commercial marketing may begin. The NDA or
BLA must include a substantial amount of data and
other information concerning the safety and effective-
ness and, in the case of a biologic, purity and potency
of the product candidate. Both NDAs and BLAs must
contain data and information on the finished product,
including manufacturing, product stability and pro-
posed product labeling.
Each domestic and foreign manufacturing establish-
ment, including any contract manufacturers we may
decide to use, must be listed in the NDA or BLA and
The FDA may deny an NDA or BLA if the applicable reg-
ulatory criteria are not satisfied or may require addi-
tional clinical data. Even if additional clinical data is
submitted, the FDA may ultimately decide that the NDA
or BLA does not satisfy the criteria for approval. If the
FDA approves a product, it may limit the approved ther-
apeutic uses for the product as described in the prod-
uct labeling, require that contraindications, warning
statements or precautions be included in the product
labeling, require that additional studies be conducted
following approval as a condition of the approval,
impose restrictions and conditions on product distri-
bution, prescribing or dispensing in the form of a risk
management plan or risk evaluation and mitigation
strategy, or otherwise limit the scope of any approval
or limit labeling. Once issued, the FDA may withdraw
product approval if compliance with regulatory stan-
dards is not maintained or if problems occur after the
product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor
the effect of approved products that have been com-
mercialized. The FDA has the power to prevent or limit
further marketing of a product based on the results of
these post-marketing programs.
Fast Track Designation
In February 2007, the FDA granted Fast Track desig-
nation for BioThrax as a post-exposure prophylaxis
against anthrax infection. The FDA’s Fast Track pro-
grams, one of which is Fast Track designation, are
designed to facilitate the development and review
of new drugs and biologics that are intended to treat
serious or life-threatening conditions and that demon-
strate the potential to address unmet medical needs
for the conditions. Fast Track designation applies to
a combination of the product and the specific indica-
tion for which it is being studied. Thus, it is the devel-
opment program for a specific drug or biologic for a
specific indication that receives Fast Track designation.
The sponsor of a product designated as being in a Fast
40
Track drug development program may engage in early
communication with the FDA, including timely meetings
and early feedback on clinical trials. Products in Fast
Track drug development programs also may receive
priority review or accelerated approval and sponsors
may be able to submit portions of an application before
the complete application is submitted. The FDA may
notify a sponsor that its program is no longer classified
as a Fast Track development program if the Fast Track
designation is no longer supported by emerging data or
the designated drug development program is no longer
being pursued.
Ongoing Regulation
Any products manufactured or distributed by us pursu-
ant to FDA clearances or approvals are subject to per-
vasive and continuing regulation by the FDA, including:
• recordkeeping requirements;
• periodic reporting requirements;
• cGMP requirements related to all stages of manu-
facturing, testing, storage, packaging, labeling and
distribution of finished dosage forms of the product;
• reporting of adverse experiences with the drug or
biologic; and
• advertising and promotion restrictions.
The FDA’s rules for advertising and promotion require
in particular that we not promote our products for
unapproved uses and that our promotion be fairly bal-
anced and adequately substantiated. We must also
submit appropriate new and supplemental applications
and obtain FDA approval for certain planned changes to
the approved product, product labeling or manufactur-
ing process.
Drug and biologics manufacturers and their subcon-
tractors are required to register their establishments
with the FDA and state agencies. The cGMP require-
ments for biological products are extensive and
require considerable time, resources, and ongoing
investment to comply. The regulations require manu-
facturers to establish validated systems to ensure
that products meet high standards of sterility, purity
and potency. The requirements apply to all stages of
the manufacturing process, including the synthesis,
processing, sterilization, packaging, labeling, storage
and shipment of the biological product. The regulations
require investigation and correction of any deviations
from cGMP and impose documentation requirements
upon us and any third party manufacturers that we
may decide to use. Manufacturing establishments are
subject to periodic unannounced inspections by the
FDA and state agencies for compliance with cGMP.
The FDA is authorized to inspect manufacturing facili-
ties without a warrant at reasonable times and in a
reasonable manner. We or our present or future sup-
pliers may not be able to comply with cGMP and other
FDA regulatory requirements.
In addition, cGMP requirements are constantly evolv-
ing, and new or different requirements may apply in the
future. We, our collaborators or third party contract man-
ufacturers may not be able to comply with the applicable
regulations. After regulatory approvals are obtained, the
subsequent discovery of previously unknown problems,
or the failure to maintain compliance with existing or
new regulatory requirements, may result in:
• restrictions on the marketing or manufacturing
of a product;
• warning letters;
• withdrawal of the product from the market;
• refusal to approve pending applications or sup-
plements to approved applications;
• voluntary or mandatory product recall;
• fines or disgorgement of profits or revenue;
• suspension or withdrawal of regulatory approvals;
• refusal to permit the import or export of products;
• product seizure; and
•
injunctions or the imposition of civil or criminal
penalties.
BioThrax Lot Release and FDA Review
Because of the complex manufacturing processes for
most biological products, the FDA requires that each
product lot of an approved biologic, including vaccines,
undergo thorough testing for purity, potency, iden-
tity and sterility. Before a lot of BioThrax can be used,
we must submit a sample of the vaccine lot and a lot
release protocol to the FDA. The lot release protocol
documents reflect the results of our tests for potency,
safety, sterility and any additional assays mandated by
our BLA for BioThrax and a summary of relevant man-
ufacturing details. The FDA reviews the manufactur-
ing and testing information provided in the lot release
protocol and may elect to perform confirmatory testing
on lot samples that we submit. We cannot distribute a
lot of BioThrax until the FDA releases it. The length of
41
the FDA review process depends on a number of fac-
tors, including reviewer questions, license supplement
approval, reviewer availability, and whether our inter-
nal testing of product samples is completed before or
concurrently with FDA testing.
Regulation of Immune Globulin Products
Products derived from humans, including our immune
globulin therapeutic candidate, are subject to addi-
tional regulation. The FDA regulates the screening
and vaccination of human donors and the process of
collecting source plasma. FDA regulations require
that all donors be tested for suitability and provide
informed consent prior to vaccination or collection
of source plasma for the immune globulin. The vac-
cination and collection of source plasma may also be
subject to Institutional Review Board approval or to an
IND, depending on factors such as whether donors are
to be vaccinated according to the vaccine’s approved
schedule. The FDA also regulates the process of test-
ing, storage and processing of source plasma, which is
used to manufacture immune globulin candidates for
use in clinical trials and, after approval by the FDA, for
commercial distribution.
Legislation and Regulation Related to Bioterrorism
Counteragents and Pandemic Preparedness
Because some of our products or product candidates
are intended for the treatment of diseases that may
result from acts of bioterrorism or for pandemic pre-
paredness, they may be subject to the specific legisla-
tion and regulation described below.
Project BioShield
The Project BioShield Act of 2004 provides expedited
procedures for bioterrorism related procurement and
awarding of research grants, making it easier for HHS
to quickly commit funds to countermeasure projects.
Project BioShield relaxes procedures under the Federal
Acquisition Regulation for procuring property or ser-
vices used in performing, administering or supporting
biomedical countermeasure research and development.
In addition, if the Secretary of HHS deems that there
is a pressing need, Project BioShield authorizes the
Secretary to use an expedited award process, rather
than the normal peer review process, for grants, con-
tracts and cooperative agreements related to biomedi-
cal countermeasure research and development activity.
Under Project BioShield, the Secretary of HHS, with
the concurrence of the Secretary of the Department
of Homeland Security, or DHS, and upon the approval
of the President, can contract to purchase unapproved
countermeasures for the SNS in specified circum-
stances. Congress is notified of a recommendation
for a stockpile purchase after Presidential approval.
Project BioShield specifies that a company supply-
ing the countermeasure to the SNS is paid on deliv-
ery of a substantial portion of the countermeasure. To
be eligible for purchase under these provisions, the
Secretary of HHS must determine that there is suffi-
cient and satisfactory clinical results or research data,
including data, if available, from preclinical and clini-
cal trials, to support a reasonable conclusion that the
countermeasure will qualify for approval or licensing
within eight years. Project BioShield also allows the
Secretary of HHS to authorize the emergency use of
medical products that have not yet been approved by
the FDA. To exercise this authority, the Secretary of
HHS must conclude that:
• the agent for which the countermeasure is designed
can cause serious or life-threatening disease;
• the product may reasonably be believed to be
effective in detecting, diagnosing, treating or pre-
venting the disease;
• the known and potential benefits of the product
outweigh its known and potential risks; and
• there is no adequate alternative to the product
that is approved and available.
Although this provision permits the Secretary of HHS to
circumvent the FDA approval process, its use would be
limited to rare circumstances.
Safety Act
The Support Anti-Terrorism by Fostering Effective
Technologies Act, or Safety Act, enacted by the U.S.
Congress in 2002 creates product liability limitations
for qualifying anti-terrorism technologies for claims
arising from or related to an act of terrorism. In addi-
tion, the Safety Act provides a process by which an anti-
terrorism technology may be certified as an “approved
product” by the Department of Homeland Security and
therefore entitled to a rebuttable presumption that
the government contractor defense applies to sales
of the product. The government contractor defense,
under specified circumstances, extends the sovereign
42
immunity of the United States to government contrac-
tors who manufacture a product for the government.
Specifically, for the government contractor defense to
apply, the government must approve reasonably pre-
cise specifications, the product must conform to those
specifications and the supplier must warn the govern-
ment about known dangers arising from the use of the
product. Although sales of BioThrax are subject to the
protections of the Safety Act, our product candidates
may not qualify for the protections of the Safety Act or
the government contractor defense.
Public Readiness and Emergency Preparedness Act
The Public Readiness and Emergency Preparedness
Act, or PREP Act, enacted by Congress in 2005 provides
immunity for manufacturers from all claims under state
or federal law for “loss” arising out of the administration
or use of a “covered countermeasure.” However, injured
persons may still bring a suit for “willful misconduct”
against the manufacturer under some circumstances.
“Covered countermeasures” include security counter-
measures and “qualified pandemic or epidemic prod-
ucts,” including products intended to diagnose or treat
pandemic or epidemic disease, such as pandemic vac-
cines, as well as treatments intended to address condi-
tions caused by such products. For these immunities to
apply, the Secretary of HHS must issue a declaration
in cases of public health emergency or “credible
risk” of a future public health emergency. In October
2008, the Secretary of HHS issued a declaration that
BioThrax and our anthrax immune globulin therapeutic
have been included as covered countermeasures under
the PREP Act. We cannot predict whether Congress will
fund the relevant PREP Act compensation programs;
or whether the necessary prerequisites for immunity
would be triggered with respect to our product or prod-
uct candidates.
Foreign Regulation
In addition to regulations in the United States, we will
be subject to a variety of foreign regulations governing
clinical trials and commercial sales and distribution of
our products. Whether or not we obtain FDA approval for
a product, we must obtain approval of a product by the
comparable regulatory authorities of foreign countries
before we can commence clinical trials or marketing of
the product in those countries. The actual time required
to obtain clearance to market a product in a particular
foreign jurisdiction may vary substantially, based upon
the type, complexity and novelty of the pharmaceutical
product candidate and the specific requirements of that
jurisdiction. The requirements governing the conduct
of clinical trials, marketing authorization, pricing and
reimbursement vary from country to country.
In the European Union, our products are subject to
extensive regulatory requirements. As in the United
States, the marketing of medicinal products has for
many years been subject to the granting of marketing
authorizations by regulatory agencies. European Union
member states require both regulatory clearance
and a favorable ethics committee opinion prior to the
commencement of a clinical trial, whatever its phase.
Under European Union regulatory systems, we may
submit marketing authorization applications either
under a centralized or decentralized/mutual recogni-
tion procedure.
The centralized procedure provides for the grant of
a single marketing authorization that is valid for all
European Union member states. The centralized proce-
dure is currently mandatory for products developed by
means of a biotechnological process, including recom-
binant DNA technology, the controlled expression of
genes coding for biologically active proteins and mono-
clonal antibody methods, and new chemical entities
for the treatment of acquired immune deficiency syn-
drome, cancer, neurodegenerative disorder, diabetes,
auto-immune diseases and other immune dysfunctions
or viral diseases. The centralized process is optional
for medicines that constitute a “significant therapeutic,
scientific or technical innovation” or for which a cen-
tralized process is in the interest of patients.
The decentralized/mutual recognition procedures pro-
vide for mutual recognition of national approval deci-
sions. Under these procedures, the holder of a national
marketing authorization may submit an application
to a member state of its choice (the reference mem-
ber state, or RMS) and identify other member states
in which it also wishes to seek approval (concerned
member states, or CMS). The RMS reviews the appli-
cation and circulates an assessment report to each
CMS, which must then decide whether to accept the
RMS determination. If a member state does not accept
the RMS position, the disputed points are referred to
the Committee for Medicinal Products for Human
Use, or CHMP, within the European Medicines Agency,
43
or EMEA. The CHMP adopts an opinion, which the
European Commission uses as a basis for a decision
that is binding on all member states.
Unlike the United States, the European Union member
states do not have separate rules or review procedures
for biologics and vaccines. Regulators apply broadly
consistent principles and standards when reviewing
applications, although they accept that the nature of the
efficacy data supporting a vaccine application is likely
to differ from the data that would support applications
for the majority of therapeutic products. However,
there are special procedures for some types of vaccine
products. For example, influenza vaccines are subject
to accelerated review and approval each year following
the release by the WHO of the annual influenza strains.
European Union member states have the discretion
to require that marketing authorization holders sub-
mit samples of live vaccines or other immunological
products for examination and formal batch release by
a government control laboratory prior to release onto
the market.
Orphan Drugs
Under the Orphan Drug Act, special incentives exist for
sponsors to develop products for rare diseases or con-
ditions, which are defined to include those diseases or
conditions that affect fewer than 200,000 people in the
United States. A vaccine also can receive these incen-
tives if it is expected to be administered to fewer than
200,000 persons per year. Requests for orphan drug
designation must be submitted prior to submission of
an application for marketing authorization. Biologics
may qualify for designation as an orphan drug.
Products designated as orphan drugs are eligible
for special grant funding for research and develop-
ment, FDA assistance with the review of clinical trial
protocols, potential tax credits for research, reduced
filing fees for marketing applications and a special
seven-year period of market exclusivity after market-
ing approval. Orphan drug exclusivity prevents FDA
approval of applications by others for the same drug or
biologic intended for use for the designated orphan dis-
ease or condition. The FDA may approve a subsequent
application from another person if the FDA determines
that the application is for a different product or differ-
ent use, or if the FDA determines that the subsequent
product is clinically superior or that the holder of the
initial orphan drug approval cannot assure the avail-
ability of sufficient quantities of the drug or biologic
to meet the public’s need. The FDA also may approve
another application for the same drug or biologic that
has orphan exclusivity but for a different use, in which
case the competing drug or biologic could be prescribed
by physicians outside its FDA approval for the orphan
use notwithstanding the existence of orphan exclusiv-
ity. A grant of an orphan designation is not a guarantee
that a product will be approved.
The European Union operates an equivalent system to
encourage the development and marketing of medici-
nal products for rare diseases. Applications for orphan
designations are submitted to the EMEA and reviewed
by a Committee on Orphan Medicinal Products, or
COMP, comprising representatives of the member
states, patient groups and other persons. The final
decision is made by the European Commission.
A product can be designated as an orphan drug if it
is intended for either (i) a life-threatening or chroni-
cally debilitating condition affecting not more than 5
in 10,000 persons in the European Community when
the application is made or a life-threatening, seriously
debilitating; or (ii) a serious and chronic condition in
the European Community for which, without incen-
tives, it is unlikely that the marketing of the product
in the European Community would generate sufficient
return to justify the necessary investment. In either
case, the applicant must also demonstrate that there
exists no satisfactory method of diagnosis, preven-
tion or treatment of the condition in question that has
been authorized in the European Community or, if such
method exists, that the medicinal product will be of
significant benefit to those affected by that condition.
The COMP assesses the orphan status at both the time
of first designation and also in parallel with the review
of every marketing authorization application for an
orphan medicine.
After a marketing authorization has been granted in
the European Community for an orphan product, no
similar product may be approved for a period of ten
years. At the end of the fifth year, however, any member
state can initiate proceedings to restrict that period to
six years if it believes the criteria for orphan designa-
tion no longer apply, for example, because the preva-
lence of disease has increased or the manufacturer is
44
earning an unreasonable profit. In addition, competi-
tive products can be approved during the marketing
exclusivity period if they are not similar to the origi-
nal product or even if they are similar, are safer, more
effective or otherwise clinically superior to it.
Our tuberculosis vaccine product candidate has been
designated as an orphan drug.
Reimbursement and Pricing Controls
In many of the markets where we or our potential col-
laborators would commercialize a product following
regulatory approval, the prices of pharmaceutical
products are subject to direct price controls by law
and to reimbursement programs with varying price
control mechanisms.
In the United States, there is an increasing focus on
drug and biologic pricing in recent years. There are
currently no direct government price controls over pri-
vate sector purchases in the United States. However,
the Veterans Health Care Act establishes mandatory
price discounts for certain federal purchasers, includ-
ing the Veterans Administration, DoD, and the Public
Health Service; the discounts are based on prices
charged to other customers.
Under the Medicaid program (a joint federal/state
program that provides medical coverage to certain
low income families and individuals), pharmaceutical
manufacturers must pay prescribed rebates on speci-
fied drugs and biologics to enable them to be eligible for
reimbursement. Vaccines are generally exempt from
these rebate requirements, vaccines for Medicaid-
eligible children primarily provided through the Vaccines
for Children Program. Medicare (the federal program
that provides medical coverage for the elderly and dis-
abled) generally reimburses for physician-administered
drugs and biologics on the basis of the product’s aver-
age sales price, although the principal vaccines that are
reimbursed under Part B (Influenza, Pneumococcal and
Hepatitis B) are reimbursed based on average whole-
sale price. Outpatient drugs and other vaccines may be
reimbursed under Medicare Part D. Part D is adminis-
tered through private entities that attempt to negotiate
price concessions from pharmaceutical manufactur-
ers. Various states have adopted further mechanisms
that seek to control drug and biologic prices, including
by disfavoring higher priced products and by seeking
supplemental rebates from manufacturers. Managed
care has also become a potent force in the market place
that increases downward pressure on the prices of
pharmaceutical products.
Public and private health care payors control costs and
influence drug and biologic pricing through a variety of
mechanisms, including through negotiating discounts
with the manufacturers and through the use of tiered
formularies and other mechanisms that provide prefer-
ential access to particular products over others within a
therapeutic class. Payors also set other criteria to gov-
ern the uses of a drug or biologic that will be deemed
medically appropriate and therefore reimbursed or oth-
erwise covered. In particular, many public and private
health care payors limit reimbursement and coverage
to the uses that are either approved by the FDA or that
are supported by other appropriate evidence, such as
published medical literature, and appear in a recognized
compendium. Drug compendia are publications that
summarize the available medical evidence for particu-
lar drug products and identify which uses are supported
or not supported by the available evidence, whether or
not such uses have been approved by the FDA.
Most non-pediatric commercial vaccines are purchased
and paid for, or reimbursed by, managed care organiza-
tions, other private health plans or public insurers or paid
for directly by patients. In the United States, pediatric
vaccines are funded by a variety of federal entitlements
and grants, as well as state appropriations. The CDC cur-
rently distributes pediatric grant funding on a discretion-
ary basis under the Public Health Service Act. Federal
and state governments purchase the majority of all pedi-
atric vaccines produced in the United States, primarily
through the Vaccines for Children Program implemented
by the U.S. Congress in 1994. The Vaccines for Children
Program is designed to help pay for vaccinations to dis-
advantaged children, including uninsured children, chil-
dren on Medicaid and underinsured children who receive
vaccinations at federally qualified health centers.
Different pricing and reimbursement schemes exist in
other countries. In the European Community, govern-
ments influence the price of pharmaceutical products
through their pricing and reimbursement rules and
control of national health care systems that fund a large
part of the cost of those products to consumers. Some
jurisdictions operate positive and negative list systems
under which products may only be marketed once a
45
reimbursement price has been agreed. Other member
states allow companies to fix their own prices for medi-
cines, but monitor and control company profits. The
downward pressure on health care costs in general, par-
ticularly prescription drugs, has become very intense. As
a result, increasingly high barriers are being erected to
the entry of new products. In addition, in some countries
cross-border imports from low-priced markets exert a
commercial pressure on pricing within a country.
Regulations Regarding Government Contracting
Our status as a government contractor in the United
States and elsewhere means that we are also subject to
various statutes and regulations, including the Federal
Acquisition Regulation, which govern the procurement
of goods and services by agencies of the United States
and other countries. These governing statutes and
regulations can impose stricter penalties than those
normally applicable to commercial contracts, such
as criminal and civil damages liability and suspension
and debarment from future government contracting. In
addition, pursuant to various statutes and regulations,
our government contracts can be subject to unilateral
termination or modification by the government for con-
venience in the United States and elsewhere, detailed
auditing requirements and accounting systems, statu-
torily controlled pricing, sourcing and subcontracting
restrictions and statutorily mandated processes for
adjudicating contract disputes.
Vaccine Injury Compensation Program
Because the cost of vaccine related litigation had
reduced significantly the number of manufacturers
willing to sell childhood vaccines, the U.S. Congress
enacted the National Childhood Vaccine Injury Act,
or Vaccine Injury Act, in 1986. The Vaccine Injury
Compensation Program established under the Vaccine
Injury Act is a no-fault compensation program funded
by an excise tax on each dose of a covered vaccine
and is designed to streamline the process of seeking
compensation for those injured by childhood vaccines.
The Vaccine Injury Act requires all individuals injured
by certain vaccines to go through the compensation
program before pursuing other remedies. Although
claimants can reject decisions issued under the com-
pensation program and pursue subsequent legal action
through the courts, the Vaccine Injury Act determines
the circumstances under which a manufacturer of a
covered vaccine may be found liable in a civil action.
The Vaccine Injury Act may not reduce or limit our lia-
bility arising out of product liability claims.
Hazardous Materials and Select Agents
Our development and manufacturing processes involve
the use of hazardous materials, including chemicals,
bacteria, viruses and radioactive materials, and pro-
duce waste products. Accordingly, we are subject to
federal, state and local laws and regulations gov-
erning the use, manufacture, storage, handling and
disposal of these materials. In addition to complying with
environmental and occupational health and safety laws,
we must comply with special regulations relating to bio-
safety administered by the CDC, HHS and the DoD.
The Public Health Security and Bioterrorism Preparedness
and Response Act and the Agricultural Protection Act
require us to register with the CDC and the Department
of Agriculture our possession, use or transfer of select
biological agents or toxins that could pose a threat to
public health and safety, to animal or plant health or
to animal or plant products. This legislation requires
increased safeguards and security measures for these
select agents and toxins, including controlled access
inspections and the screening of entities and person-
nel, and establishes a comprehensive national data-
base of registered entities.
In particular, this legislation and related regulations
require that we:
• develop and implement biosafety, security and
emergency response plans;
• restrict access to select agents and toxins;
• provide appropriate training to our employees for
safety, security and emergency response;
• comply with strict requirements governing trans-
fer of select agents and toxins;
• provide timely notice to the government of any theft,
loss or release of a select agent or toxin; and
• maintain detailed records of information neces-
sary to give a complete accounting of all activities
related to select agents and toxins.
Other Regulations
In the United States and elsewhere, the research, man-
ufacturing, distribution, sale and promotion of drug and
biological products are subject to regulation by various
federal, state and local authorities in addition to the
FDA, including the Centers for Medicare and Medicaid
46
Services; other divisions of HHS, such as the Office of
Inspector General; the U.S. Department of Justice and
individual U.S. Attorney offices within the Department of
Justice and state and local governments. For example,
sales, marketing and scientific and educational grant
programs must comply with the anti-kickback and fraud
and abuse provisions of the Social Security Act, the
False Claims Act, the privacy provisions of the Health
Insurance Portability and Accountability Act and similar
state laws. Pricing and rebate programs must comply
with the Medicaid rebate requirements of the Omnibus
Budget Reconciliation Act of 1990 and the Veterans
Health Care Act of 1992. All of these activities are also
potentially subject to federal and state consumer pro-
tection and unfair competition laws. In addition, we
are subject to the Export Administration Regulations
implemented by the Bureau of Industry and Security
governing the export of BioThrax and technology for
the development and use of pathogens and toxins in
the development and manufacture of BioThrax and our
product candidates. In connection with our international
sales activity, we are also subject to export regulations
and other sanctions imposed by the Office of Foreign
Assets Control of the Department of the Treasury, the
antiboycott provisions of the Export Administration Act
and the Internal Revenue Code and the Foreign Corrupt
Practices Act. Outside the United States, advertising
and promotion of medicinal products, along with asso-
ciated commercial practices, are often subject to sig-
nificant government regulation by local authorities.
Personnel
As of December 31, 2008, we had 587 employees,
including 169 employees engaged in product devel-
opment, 269 employees engaged in manufacturing,
11 employees engaged in sales and marketing and
138 employees engaged in general and administra-
tive activities. We believe that our future success will
depend in part on our continued ability to attract, hire
and retain qualified personnel. None of our employees
are represented by a labor union or covered by collec-
tive bargaining agreements. We believe that our rela-
tions with our employees are good.
Available Information
We maintain a website at www.emergentbiosolutions.
com. We make available, free of charge on our web-
site, our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and all
amendments to those reports filed or furnished pursu-
ant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, as soon
as reasonably practicable after we electronically file
those reports with, or furnish them to, the Securities
and Exchange Commission, or SEC.
We also make available, free of charge on our website,
the reports filed with the SEC by our executive officers,
directors and 10% stockholders pursuant to Section 16
under the Exchange Act as soon as reasonably practi-
cable after copies of those filings are provided to us by
those persons. In addition, we intend to make available
on our website all disclosures that are required to be
posted by applicable law, the rules of the SEC or the
New York Stock Exchange listing standards regarding
any amendment to, or waive of, our code of business
conduct and ethics. The information contained on, or
that can be accessed through, our website is not a part
of, or incorporated by reference, in this annual report
on Form 10-K.
ITEM 1A. RISK FACTORS
Risks Related to Our Dependence on
U.S. Government Contracts
We have derived substantially all of our revenue from
sales of BioThrax under contracts with HHS or the DoD.
If HHS and the DoD demand for BioThrax is reduced, our
business, financial condition and operating results could
be materially harmed.
We have derived and expect for the foreseeable future
to continue to derive substantially all of our revenue
from sales of BioThrax, our FDA-approved anthrax
vaccine and only marketed product. In 2006, 2007
and 2008, we derived substantially all of our revenue
from our BioThrax contracts with HHS or the DoD. We
are currently party to two contracts with HHS to sup-
ply doses of BioThrax for placement into the SNS. We
are not currently party to a procurement contract with
the DoD, which currently procures doses of BioThrax
directly from the SNS. If the SNS priorities change, or if
the DoD dose requirements from the SNS are reduced,
our revenues could be substantially reduced.
Our existing and prior contracts with HHS and the
DoD do not necessarily increase the likelihood that we
will secure future comparable contracts with the U.S.
47
government. HHS has issued a Request For Proposals
for contracts to develop and procure a recombinant
protective antigen based anthrax vaccine which we
may not win. Additionally, procurement by HHS of a
recombinant protective antigen based anthrax vaccine
could reduce demand for BioThrax. The success of our
business and our operating results for the foresee-
able future are substantially dependent on the price
per dose, the number of doses and the timing of deliv-
eries for BioThrax sales to the U.S. government.
Our business may be harmed as a result of the govern-
ment contracting process, which is a competitive bidding
process that involves risks not present in the commercial
contracting process.
We expect that a significant portion of the business
that we will seek in the near future will be under gov-
ernment contracts or subcontracts awarded through
competitive bidding. Competitive bidding for govern-
ment contracts presents a number of risks that are
not typically present in the commercial contracting
process, including:
• the need to devote substantial time and attention
of management and key employees to the prepa-
ration of bids and proposals for contracts that
may not be awarded to us;
• the need to accurately estimate the resources
and cost structure that will be required to per-
form any contract that we might be awarded;
• the risk that the government will issue a request
for proposal to which we would not be eligible to
respond;
• the risk that third parties may submit protests to
our responses to requests for proposal that could
result in delays or withdrawals of those requests
for proposal; and
• the expenses that we might incur and the delays
that we might suffer if our competitors protest or
challenge contract awards made to us pursuant
to competitive bidding, and the risk that any such
protest or challenge could result in the resub-
mission of bids based on modified specifications,
or in termination, reduction or modification of the
awarded contract.
The U.S. government may choose to award future
contracts for the supply of anthrax vaccines and other
biodefense product candidates that we are developing
to our competitors instead of to us. If we are unable to
win particular contracts, we may not be able to oper-
ate in the market for products that are provided under
those contracts for a number of years. For exam-
ple, BARDA has issued a request for proposal for a
recombinant protective antigen anthrax vaccine for
the SNS. We have submitted a proposal responding to
this request for proposal. We expect that our ability to
secure an award will depend primarily on the technical
merits of our rPA vaccine candidate. The U.S. govern-
ment may purchase another company’s product can-
didate instead of our rPA vaccine candidate. If we are
unable to consistently win new contract awards over
an extended period, or if we fail to anticipate all of the
costs and resources that will be required to secure
such contract awards, our growth strategy and our
business, financial condition, and operating results
could be materially adversely affected. Purchases
by the U.S. government of an rPA vaccine candidate,
whether from us or another company, may reduce
demand for BioThrax, perhaps significantly.
Our U.S. government contracts for BioThrax require
ongoing funding decisions by the government. Reduced
or discontinued funding of these contracts could
cause our financial condition and operating results to
suffer materially.
Our principal customer for BioThrax is the U.S. govern-
ment. In addition, we anticipate that the U.S. government
will be the principal customer for any other biodefense
products that we successfully develop. Over its life-
time, a U.S. government program may be implemented
through the award of many different individual contracts
and subcontracts. The funding of some government
programs is subject to Congressional appropriations,
generally made on a fiscal year basis even though a
program may continue for several years. Our govern-
ment customers are subject to stringent budgetary con-
straints and political considerations. For example, the
sale of most supplied doses under our new contract with
HHS is subject to the annual appropriations process. If
levels of government expenditures and authorizations
for biodefense decrease or shift to programs in areas
where we do not offer products or are not developing
product candidates, our business, revenues and operat-
ing results may suffer.
48
The success of our business with the U.S. government
depends on our compliance with regulations and obliga-
tions under our U.S. government contracts and various
federal statutes and regulations.
Our business with the U.S. government is subject to
specific procurement regulations and a variety of other
legal compliance obligations. These laws and rules
include those related to:
• procurement integrity;
• export control;
• government security regulations;
• employment practices;
• protection of the environment;
• accuracy of records and the recording of costs; and
• foreign corrupt practices.
In addition, before awarding us any future contracts,
the U.S. government could require that we respond
satisfactorily to a request to substantiate our commer-
cial viability and industrial capabilities. Compliance
with these obligations increases our performance and
compliance costs. Failure to comply with these regu-
lations and requirements could lead to suspension or
debarment, for cause, from government contracting or
subcontracting for a period of time. The termination of
a government contract or relationship as a result of our
failure to satisfy any of these obligations would have a
negative impact on our operations and harm our repu-
tation and ability to procure other government con-
tracts in the future.
Our agreements with HHS to supply doses of BioThrax
to HHS for placement into the SNS provide that if we
receive FDA approval of an application to extend the
expiry dating of BioThrax from three years to four
years, HHS will increase the price per dose under the
agreements. The regulatory approval process is com-
plex and uncertain, and there is no guarantee that
we will receive approval of four-year expiry dating. If
approved, BioThrax will be the first vaccine to receive
FDA approval of four-year dating. If we do not receive
FDA approval of four-year expiry dating during the term
of either agreement, we will not be entitled to receive
the increased price per dose under that agreement and
our revenues and operating results may suffer.
The pricing under our fixed price government contracts
is based on estimates of the time, resources and expenses
required to perform those contracts. If our estimates are
not accurate, we may not be able to earn an adequate
return or may incur a loss under these contracts.
Our existing and prior contracts for the supply of
BioThrax with HHS and the DoD have been fixed price
contracts. We expect that our future contracts with the
U.S. government for BioThrax as well as contracts for
biodefense product candidates that we successfully
develop, such as our potential pending development
and procurement contract for rPA, also may be fixed
price contracts. Under a fixed price contract, we are
required to deliver our products at a fixed price regard-
less of the actual costs we incur and to absorb any
costs in excess of the fixed price. Estimating costs that
are related to performance in accordance with con-
tract specifications is difficult, particularly where the
period of performance is over several years. Our failure
to anticipate technical problems, estimate costs accu-
rately or control costs during performance of a fixed
price contract could reduce the profitability of a fixed
price contract or cause a loss.
Unfavorable provisions in government contracts, some
of which may be customary, may harm our business,
financial condition and operating results.
Government contracts customarily contain provisions
that give the government substantial rights and rem-
edies, many of which are not typically found in com-
mercial contracts, including provisions that allow the
government to:
• terminate existing contracts, in whole or in part,
for any reason or no reason;
• unilaterally reduce or modify contracts or sub-
contracts, including equitable price adjustments;
• cancel multi-year contracts and related orders
if funds for contract performance for any subse-
quent year become unavailable;
• decline to exercise an option to renew a contract;
• exercise an option to purchase only the minimum
amount specified in a contract;
• decline to exercise an option to purchase the
maximum amount specified in a contract;
• claim rights to products, including intellectual
property, developed under the contract;
• take actions that result in a longer development
timeline than expected;
49
• direct the course of a development program in a
manner not chosen by the government contractor;
• suspend or debar the contractor from doing busi-
ness with the government or a specific govern-
ment agency;
• pursue criminal or civil remedies under the False
Claims Act and False Statements Act; and
• control or prohibit the export of products.
Generally, government contracts, including our HHS
contracts for BioThrax, contain provisions permitting
unilateral termination or modification, in whole or in
part, at the government’s convenience. Under general
principles of government contracting law, if the gov-
ernment terminates a contract for convenience, the
terminated company may recover only its incurred or
committed costs, settlement expenses and profit on
work completed prior to the termination.
If the government terminates a contract for default, the
defaulting company is entitled to recover costs incurred
and associated profits on accepted items only and may
be liable for excess costs incurred by the government
in procuring undelivered items from another source.
One or more of our government contracts could be
terminated under these circumstances. Some govern-
ment contracts grant the government the right to use,
for or on behalf of the U.S. government, any technolo-
gies developed by the contractor under the government
contract. If we were to develop technology under a
contract with such a provision, we might not be able to
prohibit third parties, including our competitors, from
using that technology in providing products and ser-
vices to the government.
Legal proceedings challenging the U.S. government’s
use of BioThrax may be costly to defend and could limit
future purchases of BioThrax by the U.S. government.
Future legal proceedings could be costly to defend, and
the results could reduce demand for BioThrax by the
U.S. government. For example, a group of unnamed
military personnel filed a lawsuit in 2003 seeking to
enjoin the DoD from administering BioThrax on a man-
datory basis without informed consent of the recipient
or a Presidential waiver, and a federal court issued the
requested injunction in 2004. In 2005, the FDA issued
an order affirming the BioThrax license, and, as a
result, an appellate court ruled in February 2006 that
the injunction was dissolved. In October 2006, the DoD
announced that it was resuming a mandatory vaccina-
tion program for BioThrax for designated personnel
and contractors. In December 2006, the same coun-
sel who brought the prior lawsuit filed a new lawsuit
contending that the FDA’s 2005 final order should be
set aside and that BioThrax is not properly approved
for use in the DoD’s vaccination program. In February
2008, the federal district court in which that case was
pending dismissed the action, concluding that FDA did
not make a clear error of judgment in reaffirming the
safety and efficacy of BioThrax. In April 2008, the plain-
tiffs filed a notice of appeal of this decision, and that
appeal remains pending.
Although we are not a party to any lawsuits challenging
the DoD’s mandatory use of the vaccine, if a court were
to again enjoin the DoD’s use of BioThrax on a mandatory
basis, the amount of future purchases of BioThrax by the
U.S. government could be affected. Furthermore, con-
tractual indemnification provisions and statutory liabil-
ity protections may not fully protect us from all related
liabilities, and statutory liability protections could be
revoked or amended to reduce the scope of liability pro-
tection. In addition, lawsuits brought directly against
us by third parties, even if not successful, require us to
spend time and money defending the related litigation
that may not be reimbursed by insurance carriers or
covered by indemnification under existing contracts.
Risks Related to Our Financial Position
and Need for Additional Financing
We may not maintain profitability in future periods or on
a consistent basis.
We commenced operations in 1998, and the FDA
approved the manufacture of BioThrax at our reno-
vated facilities in Lansing in December 2001. Although
we were profitable for each of the last five fiscal years,
we have not been profitable for every quarter during
that time. Our profitability is substantially dependent on
revenues from BioThrax product sales. Revenues from
BioThrax product sales have fluctuated significantly in
recent quarters, and we expect that they will continue
to fluctuate significantly from quarter to quarter based
on the timing of our fulfilling orders from the U.S. gov-
ernment. We may not be able to achieve consistent
profitability on a quarterly basis or sustain or increase
profitability on an annual basis.
50
Our indebtedness may limit cash flow available to invest
in the ongoing needs of our business.
As of December 31, 2008, we had $57.2 million principal
amount of debt outstanding. We may seek to raise sub-
stantial external debt financing to provide additional
financial flexibility. Our leverage could have significant
adverse consequences, including:
• requiring us to dedicate a substantial portion of any
cash flow from operations to the payment of inter-
est on, and principal of, our debt, which will reduce
the amounts available to fund working capital,
capital expenditures, product development efforts
and other general corporate purposes;
increasing the amount of interest that we have to
pay on debt with variable interest rates if market
rates of interest increase;
increasing our vulnerability to general adverse
economic and industry conditions;
•
•
• limiting our flexibility in planning for, or reacting
to, changes in our business and the industry in
which we compete; and
• placing us at a competitive disadvantage com-
pared to our competitors that have less debt.
We may not have sufficient funds or may be unable to
arrange for additional financing to pay the amounts due
under our existing debt. In addition, a failure to com-
ply with the covenants under our existing debt instru-
ments could result in an event of default under those
instruments. In the event of an acceleration of amounts
due under our debt instruments as a result of an event
of default, we may not have sufficient funds or may be
unable to arrange for additional financing to repay our
indebtedness or to make any accelerated payments,
and the lenders could seek to enforce security inter-
ests in the collateral securing such indebtedness. The
covenants under our existing debt instruments and
the pledge of our existing assets as collateral limit our
ability to obtain additional debt financing.
We expect to require additional funding and may be
unable to raise capital when needed, which would harm
our business, financial condition and operating results.
We expect our development expenses to increase in
connection with our ongoing activities, particularly
as we conduct additional and later stage clinical tri-
als for our product candidates. We also expect our
commercialization expenses to increase in the future as
we seek to broaden the market for BioThrax and if we
receive marketing approval for additional products. We
also are committed to substantial capital expenditures
in connection with our facility expansion in Lansing and
may undertake additional facility projects in the future.
As of December 31, 2008, we had $91.5 million of cash
and cash equivalents. Our future capital requirements
will depend on many factors, including:
• the level and timing of BioThrax product sales
and cost of product sales;
• the acquisition of new facilities;
• the timing of, and the costs involved in, completion
of qualification and validation activities related
to our new manufacturing facility in Lansing,
Michigan and, if we proceed, the build out of our
manufacturing facilities 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 extent to which we lend money to third parties;
• 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 com-
panies, businesses, products and technologies;
• our ability to obtain development funding from
government entities and non-government and
philanthropic organizations; and
• our ability to establish and maintain collaborations.
Our committed external sources of funds consist of the
borrowing availability under our revolving line of credit
with Fifth Third Bank and grant and development fund-
ing of our anthrax immune globulin therapeutic product
candidate, anthrax monoclonal antibody therapeutic
candidate and advanced anthrax vaccine candidate.
To the extent our capital resources are insufficient to
meet our future capital requirements, we will need to
finance our cash needs through public or private equity
offerings, debt financings or corporate collaboration
51
and licensing arrangements. Difficult economic condi-
tions may make it difficult to obtain financing on attrac-
tive terms or at all. Lenders may be able to impose
covenants on us that could be difficult to satisfy, which
could put us at increased risk of defaulting on debt. If
financing is unavailable or lost, we could be forced to
delay, reduce the scope of or eliminate our research
and development programs or reduce our planned
commercialization efforts.
Our ability to borrow additional amounts under our loan
agreements is subject to our satisfaction of specified
conditions. Additional equity or debt financing, grants,
or corporate collaboration and licensing arrangements
may not be available on acceptable terms, if at all. If we
raise additional funds by issuing equity securities, our
stockholders may experience dilution. Debt financing,
if available, may involve agreements that include cov-
enants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capi-
tal expenditures or declaring dividends.
Any debt financing or additional equity that we raise
may contain terms, such as liquidation and other pref-
erences that are not favorable to us or our stockhold-
ers. If we raise additional funds through collaboration
and licensing arrangements with third parties, it may
be necessary to relinquish valuable rights to our tech-
nologies or product candidates or grant licenses on
terms that may not be favorable to us.
Risks Related to Manufacturing
and Manufacturing Facilities
We are in the process of expanding our manufacturing
facilities and entering into arrangements with contract
in completing
manufacturing organizations. Delays
facilities, or delays or failures in obtaining regulatory
approvals for new manufacturing facility projects or
new contract manufacturing partners, could limit our
potential revenues and growth.
We are currently evaluating alternatives for the manu-
facture of various product candidates. We may seek to
acquire one or more additional facilities or sign agree-
ments with contract manufacturing organizations. We
are spending significant amounts on our new 50,000
square foot manufacturing facility on our Lansing,
Michigan campus, which is designed to produce multiple
fermentation-based vaccines, subject to developing,
obtaining approval of, implementing and complying with
appropriate change-over procedures. We also own two
buildings in Frederick, Maryland that are available to
address our future manufacturing requirements and
have initiated initial engineering design and preliminary
utility build out for these facilities.
Constructing and preparing a facility for manufactur-
ing is a significant project. For example, the process
for qualifying and validating the new Lansing facility
for FDA licensure will be costly and time consuming,
may result in unanticipated delays and may cost more
than expected due to a number of factors, including
regulatory requirements. The costs and time required
to comply with cGMP regulations or similar regulatory
requirements for sales of our products outside the
U.S., may be significant. If qualification and validation
activities of our new facility in Lansing are delayed, we
may not be able to meet our obligations to the U.S. gov-
ernment, which may limit our opportunities for growth.
Costs associated with constructing, qualifying and vali-
dating manufacturing facilities could require us to raise
additional funds from external sources, and we may not
be able to do so on favorable terms or at all.
We may seek permission from the FDA to use our new
manufacturing facility in Lansing for the manufacture
of both BioThrax and our rPA vaccine candidate. This
could require approval from the FDA of change-over
procedures. If approval of such change over procedures
is delayed or not obtained, our ability to grow BioThrax
revenues could be limited.
BioThrax and our vaccine and immune-related thera-
peutic product candidates are complex to manufacture
and ship, which could cause us to experience delays in
revenues or shortages of products.
BioThrax and all our product candidates are biologics.
Manufacturing biologic products, especially in large
quantities, is complex. The products must be made
consistently and in compliance with a clearly defined
manufacturing process. Accordingly, it is essential
to be able to validate and control the manufacturing
process to assure that it is reproducible. Slight devia-
tions anywhere in the manufacturing process, includ-
ing maintaining master seed banks and preventing
drift, obtaining materials, seed growth, fermentation,
52
filtration, filling, labeling, packaging, storage and
shipping and quality control and testing, may result in
lot failures or manufacturing shut-down, delay in the
release of lots, product recalls, spoilage or regulatory
action. Success rates can vary dramatically at differ-
ent stages of the manufacturing process, which can
lower yields and increase costs. From time to time we
experience deviations in the manufacturing process
that may take significant time and resources to resolve
and if unresolved may affect manufacturing output
and could cause us to fail to satisfy customer orders or
contractual commitments, lead to a termination of one
or more of our contracts, lead to delays in our clinical
trials or result in litigation or regulatory action against
us, any of which could be costly to us and otherwise
harm our business.
FDA approval is required for the release of each lot.
We will not be able to sell any lots that fail to satisfy
the release testing specifications. We must provide
the FDA with the results of potency testing before
lots are released for sale. We have one mechanism
for conducting this potency testing that is reliant on
a unique animal strain for which we have no redun-
dancy. In developing redundancy, we may face signifi-
cant regulatory hurdles. In the event of a problem with
this strain, if we have not developed redundancy, we
would not be able to provide the FDA with required
potency testing.
In addition, under our contacts with HHS, we are
responsible for shipping. BioThrax and our product
candidates must be maintained at a prescribed temper-
ature range during shipping, and variations from that
temperature range could result in loss of product and
could adversely affect profitability. HHS has notified us
that we must develop new shipping protocols regarding
temperature controls during shipping before we may
make additional shipments of BioThrax. If approval
of those protocols is delayed, our revenues could be
reduced, perhaps dramatically. Delays, lot failures,
shipping deviations, spoilage or other loss during ship-
ping could cause us to fail to satisfy customer orders or
contractual commitments, lead to a termination of one
or more of our contracts, lead to delays in our clinical
trials or result in litigation or regulatory action against
us, any of which could be costly to us and otherwise
harm our business.
Disruption at, damage to or destruction of our manufac-
turing facilities could impede our ability to manufacture
BioThrax, which would harm our business, financial
condition and operating results.
We currently rely on our manufacturing facilities at a
single location in Lansing, Michigan for the production
of BioThrax. Any interruption in manufacturing opera-
tions at this location could result in our inability to sat-
isfy the product demands of our customers. A number
of factors could cause interruptions, including:
• equipment malfunctions or failures;
• technology malfunctions;
• work stoppages or slow downs;
• protests, including by animal rights activists;
• damage to or destruction of the facility;
• regional power shortages; or
• product tampering.
As our equipment ages, it will need to be replaced.
Replacement of equipment has the potential to intro-
duce variations in the manufacturing process that
may result in lot failures or manufacturing shut-down,
delay in the release of lots, product recalls, spoilage or
regulatory action. For example, in the fourth quarter of
2008, three lots that we intended to ship were delayed
in the completion of final testing, caused by the failure
of a piece of replacement equipment.
In addition, providers of bioterrorism countermeasures
could be subject to an increased risk of terrorist activi-
ties. For example, the U.S. government has designated
our Lansing facility as a facility requiring additional
security to protect against potential terrorist threats
to the facility. Any disruption that impedes our ability
to manufacture and ship BioThrax in a timely manner
could reduce our revenues and materially harm our
business, financial condition and operating results. We
do not carry business interruption insurance.
If the company on whom we rely for filling BioThrax vials
is unable to perform these services for us, our business
may suffer.
We have outsourced the operation for filling BioThrax into
vials to a single company, Hollister-Stier Laboratories
LLC. Our contract with Hollister-Stier expires on
December 31, 2010. We have not established internal
redundancy for our filling functions. We have identified
53
and contracted with an additional provider that we
believe can handle our filling needs. Before this party
may perform filling services for us, it must be qualified
and licensed by the FDA. Such qualification and licen-
sure may require use of a significant number of doses of
BioThrax for consistency lots and stability testing that
we may not be able to sell. If Hollister-Stier is unable to
perform filling services for us, we would need to obtain
FDA approval of our potential substitute filler, engage,
qualify and license an alternative filling company or
develop our own filling capabilities. Any new contract
filling company or filling capabilities that we acquire
or develop will need to obtain FDA approval for filling
BioThrax at its facilities. Identifying and engaging a new
contract filling company or developing our own filling
capabilities and obtaining FDA approval could involve
significant time and cost. As a result, we might not be
able to deliver BioThrax orders on a timely basis and
our revenues could decrease.
Our business may be harmed if we do not adequately
forecast customer demand.
The timing and amount of customer demand is difficult
to predict. We may not be able to scale-up our produc-
tion quickly enough to fill any new customer orders on
a timely basis. This could cause us to lose new busi-
ness and possibly existing business. For example, we
may not be able to scale-up manufacturing processes
for our product candidates to allow production of
commercial quantities at a reasonable cost or at all.
Furthermore, if we overestimate customer demand,
or choose to commercialize products for which the
market is smaller than we anticipate, we could incur
significant unrecoverable costs from creating excess
capacity. In addition, if we do not successfully develop
and commercialize any of our product candidates, we
may never require the production capacity that we
expect to have available.
If third parties do not manufacture our product candi-
dates or products in sufficient quantities and at an
acceptable cost or in compliance with regulatory require-
ments and specifications, the development and com-
mercialization of our product candidates could be
delayed, prevented or impaired.
We currently rely on third parties to manufacture the
supplies of our vaccine and immune-related therapeutic
product candidates that we require for preclinical and
clinical development, including our anthrax immune
globulin therapeutic, anthrax monoclonal therapeu-
tic, Typhella vaccine, tuberculosis vaccine, hepatitis B
therapeutic vaccine, and chlamydia vaccine candidates.
Any significant delay in obtaining adequate supplies of
our product candidates could adversely affect our abil-
ity to develop or commercialize these product candi-
dates. For example, the manufacturer of our anthrax
monoclonal therapeutic recently informed us it is dis-
continuing contract manufacturing operations and we
will need to secure alternative manufacture resources.
Although we recently commissioned a new pilot plant
manufacturing facility on our Lansing campus for pro-
duction of preclinical and clinical supplies of our prod-
uct candidates, we expect that we will continue to use
third parties for these purposes.
In addition, we expect that we will rely on third parties
for a portion of the manufacturing process for commer-
cial supplies of product candidates that we successfully
develop, including fermentation for some of our vaccine
product candidates, plasma fractionation and purifica-
tion for our anthrax immune globulin therapeutic prod-
uct candidate and contract fill and finish operations
and we rely on those manufacturers to comply with a
wide variety of rules and regulations. If our contract
manufacturers are unable to scale-up production to
generate enough materials for commercial launch, if
manufacturing is of insufficient quality, or if the costs
of manufacturing are prohibitively high, the success of
those products may be jeopardized. For example, we
are currently evaluating manufacturing alternatives for
Typhella in countries in which we believe manufacturing
costs will be economical. Our current and anticipated
future dependence upon others for the manufacture of
our product candidates may adversely affect our ability
to develop product candidates and commercialize any
products that receive regulatory approval on a timely
and competitive basis.
Third party manufacturers under short-term supply
agreements are not obligated to accept any purchase
orders we may submit. If any third party terminates
its agreement with us, based on its own business
priorities, or otherwise fails to fulfill our purchase
orders, we would need to rely on alternative sources
or develop our own manufacturing capabilities to sat-
isfy our requirements.
54
If alternative suppliers are not available or are delayed
in fulfilling our requirements, or if we are unsuccess-
ful in developing our own manufacturing capabilities,
we may not be able to obtain adequate supplies of our
product candidates on a timely basis. A change of man-
ufacturers would require review and approval from the
FDA and the applicable foreign regulatory agencies.
This review may be costly and time consuming. There
are a limited number of manufacturers that operate
under the FDA’s cGMP requirements and that are both
capable of manufacturing for us and willing to do so.
We currently rely on third parties for regulatory com-
pliance and quality assurance with respect to the sup-
plies of our product candidates that they produce for
us. We also will rely for these purposes on any third
party that we use for production of commercial sup-
plies of product candidates that we successfully
develop. Manufacturers are subject to ongoing, peri-
odic, unannounced inspection by the FDA and corre-
sponding state and foreign agencies or their designees
to ensure strict compliance with cGMP regulations and
other governmental regulations and corresponding
foreign standards.
We cannot be certain that our present or future manu-
facturers will be able to comply with cGMP regulations
and other FDA regulatory requirements or similar
regulatory requirements outside the U.S. We do not
control compliance by manufacturers with these regu-
lations and standards. If we or these third parties fail to
comply with applicable regulations, sanctions could be
imposed on us, which could significantly and adversely
affect supplies of our product candidates. The sanc-
tions that might be imposed include:
• fines, injunctions and civil penalties;
• refusal by regulatory authorities to grant market-
ing approval of our product candidates;
• delays, suspension or withdrawal of regulatory
approvals, including license revocation;
• seizures or recalls of product candidates or
products;
• operating restrictions; and
• criminal prosecutions.
If, as a result of regulatory requirements or otherwise,
we or third parties are unable to manufacture our
product candidates at an acceptable cost, our product
candidates may not be commercially viable.
Our use of hazardous materials, chemicals, bacteria and
viruses requires us to comply with regulatory require-
ments and exposes us to significant potential liabilities.
Our development and manufacturing processes involve
the use of hazardous materials, including chemicals,
bacteria, viruses and radioactive materials, and pro-
duce waste products. Accordingly, we are subject to
federal, state, local and foreign laws and regulations
governing the use, manufacture, distribution, storage,
handling, disposal and recordkeeping of these materi-
als. We are also subject to a variety of environmental
laws in Michigan regarding underground storage tanks.
One such tank on our Lansing campus has leaked in the
past. The State of Michigan removed the tank, contin-
ues to monitor the situation and has agreed to indem-
nify us for any resulting liabilities. In the event that
the State of Michigan does not indemnify us, or if our
insurance does not cover the exposure of any remedia-
tion that may be necessary, we could spend significant
amounts on remediation efforts. In addition to comply-
ing with environmental and occupational health and
safety laws, we must comply with special regulations
relating to biosafety administered by the CDC, HHS and
the DoD.
The Public Health Security and Bioterrorism
Preparedness and Response Act and the Agricultural
Protection Act require us to register with the CDC our
possession, use or transfer of select biological agents
or toxins that could pose a threat to public health and
safety, to animal or plant health or to animal or plant
products. This legislation requires increased safe-
guards and security measures for these select agents
and toxins, including controlled access and the screen-
ing of entities and personnel, and establishes a com-
prehensive national database of registered entities.
We also are subject to export control regulations
governing the export of BioThrax and technology and
materials used to develop and manufacture BioThrax
and our product candidates. These laws and regula-
tions may limit the countries in which we may conduct
development and manufacturing activities. If we fail to
comply with environmental, occupational health and
safety, biosafety and export control laws, we could be
held liable for fines, penalties and damages that result,
and any such liability could exceed our assets and
resources. In addition, we could be required to cease
55
immediately all use of a select agent or toxin, and we
could be prohibited from exporting our products, tech-
nology and materials or we could be suspended from
the right to do business with the U.S. government.
Our insurance policies may not adequately compensate
us for all liabilities that we may incur in the event of
unanticipated costs, exposing us to potential expense
and reduced profitability.
We hold a number of insurance policies in an effort to
protect ourselves against extraordinary or unantici-
pated costs. Our general liability and excess insurance
policies provide for coverage up to annual aggregate
limits of $12 million, with coverage of $1 million per
occurrence and $2 million in the aggregate for gen-
eral liability and $10 million per occurrence and in the
aggregate for excess liability. The general liability pol-
icy currently has a $15,000 per occurrence deductible.
Both policies exclude coverage for liabilities relating
to the release of pollutants. We do not currently hold
insurance policies expressly providing for coverage
relating to our use of hazardous materials other than
storage tank liability insurance for our Lansing facility
with a $2 million annual aggregate limit and a $25,000
per claim deductible. We hold product liability insur-
ance policies for each clinical trial that we are conduct-
ing, in amounts we deem appropriate to the product
candidate and the scope of the applicable trial.
These policies are subject to deductibles, exclusions
and coverage limitations. Additionally, we do not carry
business interruption insurance. Circumstances may
arise where we face liabilities that are not covered by
these policies, or where our coverage is not adequate,
which may expose us to significant liabilities and sig-
nificantly and adversely effect our business or finan-
cial position.
Risks Related to Product Development
Our business depends significantly on our success in
completing development and commercialization of our
product candidates at acceptable costs. If we are unable
to commercialize these product candidates, or experi-
ence significant delays or costs in doing so, our business
will be materially harmed.
We have invested a significant portion of our efforts and
financial resources in the development of our vaccines
and immune-related therapeutic product candidates.
In addition to BioThrax product sales, our ability to gen-
erate near term revenue is dependent on the success of
our development programs, on the U.S. government’s
interest in providing development funding for or pro-
curing our product candidates, on the interest of non-
governmental organizations in providing grant funding
for development of our product candidates and on the
commercial viability of those product candidates. The
commercial success of our product candidates will
depend on many factors, including accomplishing the
following in an economical manner:
• successful development, formulation and cGMP
scale-up of biological manufacturing that meets
FDA requirements;
• successful development of animal models by the
U.S. government;
• successful completion of non-clinical development,
including studies in approved animal models;
• the expense of filing, prosecuting, defending and
enforcing any patent claims and other intellectual
property rights;
• successful completion of clinical trials;
• receipt of marketing approvals from the FDA and
similar foreign regulatory authorities;
• a determination by the Secretary of HHS that our
biodefense product candidates should be pur-
chased for the SNS prior to FDA approval;
• establishing commercial manufacturing pro-
cesses of our own or arrangements with contract
manufacturers;
• manufacturing stable commercial supplies of
product candidates, including materials based on
recombinant technology;
• launching commercial sales of the product,
whether alone or in collaboration with others; and
• acceptance of the product by potential govern-
ment customers, physicians, patients, healthcare
payors and others in the medical community.
We will not be able to commercialize our product candidates
if our preclinical development efforts are not successful,
our clinical trials do not demonstrate safety or our clinical
trials or animal studies do not demonstrate efficacy.
Before obtaining regulatory approval for the sale of
our product candidates, we must conduct extensive
preclinical studies and clinical trials to establish proof
56
of concept, safety and efficacy of our product candi-
dates. Preclinical and clinical testing is expensive, dif-
ficult to design and implement, can take many years to
complete and the outcome of such trials is uncertain.
Success in preclinical testing and early clinical trials
does not ensure that later clinical trials or animal effi-
cacy studies will be successful, and interim results of a
clinical trial or animal efficacy study do not necessarily
predict final results.
For example, in December 2008 we and Sanofi Pasteur
determined that the joint efforts of our collaboration
had not identified a viable product candidate, which
effectively ended most material development activities
under our meningitis B product development program.
We expect to rely on FDA regulations known as the “ani-
mal rule” to obtain approval for our biodefense product
candidates. The animal rule permits the use of animal
efficacy studies together with human clinical safety
and immunogenicity trials to support an application for
marketing approval. These regulations are relatively
new, and we have limited experience in the application
of these rules to the product candidates that we are
developing. It is possible that results from these ani-
mal efficacy studies may not be predictive of the actual
efficacy of our vaccine and immune-related therapeutic
product candidates in humans. If we are not successful
in completing the development and commercialization
of our vaccine and immune-related therapeutic product
candidates, or if we are significantly delayed in doing
so, our business will be materially harmed.
A failure of one or more of our clinical trials or animal
efficacy studies can occur at any stage of testing. We
may experience numerous unforeseen events during,
or as a result of, preclinical testing and the clinical
trial or animal efficacy study process that could delay
or prevent our ability to receive regulatory approval or
commercialize our product candidates, including:
• regulators or institutional review boards may not
authorize us to commence a clinical trial or con-
duct a clinical trial at a prospective trial site;
• we may decide, or regulators may require us, to
conduct additional preclinical testing or clinical
trials, or we may abandon projects that we expect
to be promising, if our preclinical tests, clinical
trials or animal efficacy studies produce negative
or inconclusive results;
• we might have to suspend or terminate our clini-
cal trials if the participants are being exposed to
unacceptable health risks;
• regulators or institutional review boards may
require that we hold, suspend or terminate clini-
cal development for various reasons, including
noncompliance with regulatory requirements;
• the cost of our clinical trials could escalate and
become cost prohibitive;
• any regulatory approval we ultimately obtain may
be limited or subject to restrictions or post-ap-
proval commitments that render the product not
commercially viable;
• we may not be successful in recruiting a suffi-
cient number of qualifying subjects for our clinical
trials; and
• the effects of our product candidates may not be
the desired effects or may include undesirable
side effects or the product candidates may have
other unexpected characteristics.
For example, the standard of care for the treatment of
patients infected with hepatitis B impacted our ability
to recruit participants for our Phase II clinical trial in
the United Kingdom and Serbia, because we adminis-
ter our product candidate as a monotherapy, causing
us to cease enrollment in this trial. If we are unable to
recommence this trial in a region in which our enroll-
ment efforts are successful, we will be unable to prog-
ress the clinical program for this candidate. In addition,
because some of our current and future vaccine can-
didates contain live attenuated viruses, our testing
of these vaccine candidates is subject to additional
risk. For example, there have been reports of serious
adverse events following administration of live vaccine
products in clinical trials conducted by other vaccine
developers. Also, for some of our current and future
vaccine candidates, we expect to conduct clinical tri-
als in chronic carriers of the disease that our product
candidate seeks to prevent. There have been reports of
disease flares in chronic carriers following administra-
tion of live vaccine products.
If we are required to conduct additional clinical trials
or other testing of our product candidates beyond those
that we currently contemplate, if our clinical trials are
not well designed, if we are unable to successfully com-
plete our clinical trials or other testing, or if the results
of these trials or tests are not positive, we may:
57
• be delayed in obtaining marketing approval for
our product candidates;
• not be able to obtain marketing approval; or
• obtain approval for indications that are not as
broad as intended.
Our product development costs will also increase if
we experience delays in testing, are required to con-
duct additional testing, or experience delays in prod-
uct approval. Significant clinical trial delays also could
allow our competitors to bring products to market
before we do and impair our ability to commercialize
our products or product candidates.
Under the Project BioShield Act, the Secretary of HHS
can contract to purchase countermeasures for the
SNS prior to FDA approval of the countermeasure in
specified circumstances. Project BioShield also allows
the Secretary of HHS to authorize the emergency use
of medical products that have not yet been approved
by the FDA. However, our product candidates may
not be selected by the Secretary under this authority.
Moreover, this authority could result in increased com-
petition for our products and product candidates.
Risks Related to Commercialization
If we fail to achieve significant sales of BioThrax to cus-
tomers in addition to the U.S. government, our opportu-
nities for growth could be harmed.
An element of our business strategy is to establish
a market for sales of BioThrax to customers in addi-
tion to the U.S. government. These potential custom-
ers include foreign governments and state and local
governments, which we expect will be interested in
BioThrax to protect emergency responders such as
police, fire and emergency medical personnel, multi-
national companies, non-governmental organizations
and hospitals.
The market for sales of BioThrax to customers other
than the U.S. government is new and undeveloped,
and we may not be successful in generating meaning-
ful sales of BioThrax to these potential customers. To
date, we have made only modest sales to these cus-
tomers. In particular, we have supplied small amounts
of BioThrax directly to several foreign governments.
Foreign governments in the past have requested that
we submit an FDA certification of compliance. Until we
reach final resolution of the issues raised in connection
with the FDA’s March 2008 inspection described below
under “—Risks Related to Regulatory Approval—Our
products could be subject to restrictions or withdrawal
from the market and we may be subject to penalties
if we fail to comply with regulatory requirements or
experience unanticipated problems with our products,”
such a certification may be difficult to obtain, potentially
limiting our ability to make sales to foreign customers.
In 2006, 2007 and 2008, our sales of BioThrax to cus-
tomers other than the U.S. government represented a
small portion of our revenue. If we fail to significantly
increase our sales of BioThrax to these customers, our
business and opportunities for growth could be materi-
ally harmed.
Government regulations may make it difficult for us
to achieve significant sales of BioThrax to customers
other than the U.S. government. For example, many
foreign governments require licensure of BioThrax in
their jurisdiction before they will consider procuring
doses. Additionally, we are subject to export control
laws imposed by the U.S. government. Although there
are currently only limited restrictions on the export of
BioThrax and related technology, the U.S. government
may decide, particularly in the current environment of
elevated concerns about global terrorism, to increase the
scope of export prohibitions. These controls could limit
our sales of BioThrax to foreign governments and other
foreign customers. In addition, U.S. government demand
for anthrax vaccine may limit supplies of BioThrax avail-
able for sale to non-U.S. government customers. For
example, our efforts to develop domestic commercial
and international sales may be impeded by the DoD’s
right under the Defense Production Act to require us to
deliver doses that we do not currently anticipate.
Our ability to meet any potential increased demand that
develops for sales of BioThrax to customers other than
the U.S. government depends on our available produc-
tion capacity. We use substantially all of our current
production capacity at our facility in Lansing to manu-
facture BioThrax for sale to U.S. government custom-
ers. To prepare for the event that we do obtain significant
orders for BioThrax from customers other than the U.S.
government, we are exploring additional manufactur-
ing alternatives that would enable us to increase our
manufacturing capacity and, as a result, allow us to
increase sales of BioThrax to customers other than the
58
U.S. government. If we are unsuccessful in this effort,
our opportunities for growth could be limited.
Laws and regulations governing international opera-
tions may preclude us from developing, manufacturing
and selling certain product candidates outside of the
United States and require us to develop and implement
costly compliance programs.
As we continue to expand our operations outside of the
United States, we must comply with numerous laws and
regulations relating to international business opera-
tions. The creation and implementation of international
business practices compliance programs is costly and
such programs are difficult to enforce, particularly
where reliance on third parties is required.
The Foreign Corrupt Practices Act, or FCPA, prohibits
any U.S. individual or business from paying, offering,
or authorizing payment or offering of anything of value,
directly or indirectly, to any foreign official, political
party or candidate for the purpose of influencing any
act or decision of the foreign entity in order to assist
the individual or business in obtaining or retaining
business. The FCPA also obligates companies whose
securities are listed in the United States to comply with
certain accounting provisions requiring the company to
maintain books and records that accurately and fairly
reflect all transactions of the corporation, including
international subsidiaries, and to devise and maintain
an adequate system of internal accounting controls for
international operations. The anti-bribery provisions of
the FCPA are enforced primarily by the U.S. Department
of Justice. The SEC is involved with enforcement of the
books and records provisions of the FCPA.
Compliance with the FCPA is expensive and difficult, par-
ticularly in countries in which corruption is a recognized
problem. In addition, the FCPA presents particular chal-
lenges in the pharmaceutical industry, because, in many
countries, hospitals are operated by the government, and
doctors and other hospital employees are considered
foreign officials. Certain payments to hospitals in con-
nection with clinical studies and other work have been
deemed to be improper payments to government offi-
cials and have led to FCPA enforcement actions. China is
an example of one jurisdiction in which we are contem-
plating future expansion where we will need to exercise
caution to ensure our compliance with the FCPA.
Various laws, regulations and executive orders also
restrict the use and dissemination outside of the United
States, or the sharing with certain non-U.S. nationals,
of information classified for national security purposes,
as well as certain products and technical data relating
to those products. Our expanding presence outside of
the United States will require us to dedicate additional
resources to compliance with these laws, and these
laws may preclude us from developing, manufacturing,
or selling certain products and product candidates out-
side of the United States, which could limit our growth
potential and increase our development costs.
The failure to comply with laws governing international
business practices may result in substantial penalties,
including suspension or debarment from government
contracting. Violation of the FCPA can result in sig-
nificant civil and criminal penalties. Indictment alone
under the FCPA can lead to suspension of the right to
do business with the U.S. government until the pend-
ing claims are resolved. Conviction of a violation of
the FCPA can result in long term disqualification as a
government contractor. The termination of a govern-
ment contract or relationship as a result of our failure
to satisfy any of our obligations under laws governing
international business practices would have a negative
impact on our operations and harm our reputation and
ability to procure government contracts. The SEC also
may suspend or bar issuers from trading securities on
United States exchanges for violations of the FCPA’s
accounting provisions.
The commercial success of BioThrax and any products that
we may develop will depend upon the degree of market
acceptance by the government, physicians, patients,
healthcare payors and others in the medical community.
Any products that we bring to the market may not gain
or maintain market acceptance by potential govern-
ment customers, physicians, patients, healthcare pay-
ors and others in the medical community. In particular,
our biodefense vaccine and immune-related therapeu-
tic products and product candidates are subject to the
product criteria that may be specified by potential U.S.
government customers. The product specifications in
any government procurement request may prohibit or
preclude us from participating in the government pro-
gram if our products or product candidates do not sat-
isfy the stated criteria.
59
In addition, notwithstanding favorable findings regarding
the safety and efficacy of BioThrax by the FDA in its final
ruling in December 2005, the Government Accountability
Office, or GAO, reiterated concerns regarding BioThrax
in Congressional testimony in May 2006 that it had pre-
viously identified beginning in 1999. These concerns
include the then-licensed six-dose regimen and annual
booster doses, questions about the long-term and
short-term safety of the vaccine, including how safety
is affected by gender differences, and uncertainty about
the vaccine’s efficacy against inhalational anthrax.
The use of vaccines carries a risk of adverse health
effects. The adverse reactions that have been associ-
ated with the administration of BioThrax include local
reactions, such as redness, swelling and limitation of
motion in the inoculated arm, and systemic reactions,
such as headache, fever, chills, nausea and general
body aches. In addition, some serious adverse events
have been reported to the vaccine adverse event report-
ing system database maintained by the CDC and the FDA
with respect to BioThrax. The report of any adverse event
to the vaccine adverse event reporting system database
is not proof that the vaccine caused such event. Serious
adverse events, including diabetes, heart attacks, auto-
immune diseases, including Guillian Barre syndrome,
lupus, multiple sclerosis, lymphoma and death, have not
been causally linked to the administration of BioThrax.
If any products that we develop do not achieve an ade-
quate level of acceptance, we may not generate mate-
rial revenues from sales of these products. The degree
of market acceptance of our product candidates, if
approved for commercial sale, will depend on a number
of factors, including:
• the prevalence and severity of any side effects;
• the efficacy and potential advantages over alter-
native treatments;
• the ability to offer our product candidates for sale
at competitive prices;
• the relative convenience and ease of administration;
• the willingness of the target patient population to
try new products and of physicians to prescribe
these products;
• the strength of marketing and distribution sup-
port; and
• the sufficiency of coverage or reimbursement by
third parties.
Political or social factors, including related litigation,
may delay or impair our ability to market BioThrax and
our biodefense product candidates and may require us
to spend time and money to address these issues.
Products developed to treat diseases caused by or to
combat the threat of bioterrorism will be subject to
changing political and social environments. The politi-
cal and social responses to bioterrorism have been
highly charged and unpredictable. Political or social
pressures or changes in the perception of the risk that
military personnel or civilians could be exposed to bio-
logical agents as weapons of bioterrorism may delay or
cause resistance to bringing our products to market or
limit pricing or purchases of our products, which would
harm our business.
In addition, substantial delays or cancellations of pur-
chases could result from protests or challenges from
third parties. Furthermore, lawsuits brought against
us by third parties or activists, even if not success-
ful, require us to spend time and money defending the
related litigation. The need to address political and
social issues may divert our management’s time and
attention from other business concerns. For example,
between 2001 and 2006, members of the military and
various activist groups who oppose mandatory inocu-
lation with BioThrax petitioned the FDA and the fed-
eral courts to revoke the license for BioThrax and to
terminate the DoD program for the mandatory admin-
istration of BioThrax to military personnel. Although
the DoD has prevailed in those challenges to date, the
actions of these groups have created negative publicity
about BioThrax. Lawsuits or publicity campaigns could
limit the demand for BioThrax and our biodefense prod-
uct candidates and harm our future business.
We have a small marketing and sales group. If we are
unable to expand our sales and marketing capabilities
or enter into sales and marketing agreements with
third parties, we may be unable to generate product
sales revenue from sales to customers other than the
U.S. government.
To achieve commercial success for any approved prod-
uct, we must either develop a sales and marketing
organization or outsource these functions to third par-
ties. We currently market and sell BioThrax through a
small, targeted sales and marketing group. We plan to
60
continue to do so and expect that we will use a similar
approach for sales to the U.S. government of any other
biodefense product candidates that we successfully
develop. However, to increase our sales of BioThrax to
state and local governments and foreign governments
and create an infrastructure for future sales of other
biodefense products to these customers, we plan to
expand our sales and marketing organization, which
will be expensive and time consuming.
We may not be able to attract, hire, train and retain
qualified sales and marketing personnel to build a
significant or effective marketing and sales force for
sales of biodefense product candidates to customers
other than the U.S. government or for sales of our com-
mercial product candidates. If we are not successful in
our efforts to expand our internal sales and market-
ing capability, our ability to independently market and
sell BioThrax and any other product candidates that we
successfully develop will be impaired. If the commer-
cial launch of a product candidate for which we recruit
a sales force and establish marketing capabilities is
delayed as a result of FDA requirements or other rea-
sons, we would incur related expenses too early rela-
tive to the product launch. This may be costly, and our
investment would be lost if we cannot retain our sales
and marketing personnel.
We face substantial competition, which may result in
others developing or commercializing products before
or more successfully than we do.
The development and commercialization of new vaccine
and immune-related therapeutic products is highly com-
petitive. We face competition with respect to BioThrax,
our current product candidates and any products we
may seek to develop or commercialize in the future
from major pharmaceutical companies and biotechnol-
ogy companies worldwide. Potential competitors also
include academic institutions, government agencies,
and other public and private research institutions that
conduct research, seek patent protection and establish
collaborative arrangements for research, development,
manufacturing and commercialization.
Our competitors may develop products that are safer,
more effective, have fewer side effects, are more con-
venient or are less costly than any products that we may
develop. Our competitors may also obtain FDA or other
regulatory approval for their products more rapidly
than we may obtain approval for ours. We believe that
our most significant competitors in the area of vac-
cine and immune-related therapeutic are a number
of pharmaceutical companies that have vaccine pro-
grams, including Merck & Co., GlaxoSmithKline, Sanofi
Pasteur, Wyeth and Novartis, as well as smaller more
focused companies engaged in vaccine and immune-
related therapeutic development, such as Crucell,
Cangene, Human Genome Sciences, Dor BioPharma,
Dynaport Vaccine Company L.L.C., Elusys, Bavarian
Nordic and PharmAthene.
Any vaccine and immune-related therapeutic product
candidate that we successfully develop and commer-
cialize is likely to compete with currently marketed
products, including antibiotics, and with other product
candidates that are in development for the same indi-
cations. In many cases, the currently marketed prod-
ucts have well known brand names, are distributed
by large pharmaceutical companies with substantial
resources and have achieved widespread acceptance
among physicians and patients. In addition, we are
aware of product candidates of third parties that are
in development, which, if approved, would compete
against product candidates for which we intend to seek
marketing approval.
Although BioThrax is the only anthrax vaccine approved
by the FDA for the prevention of anthrax infection, the
government is funding the development of new prod-
ucts that could compete with BioThrax, and could
eventually procure those new products in addition
to, or instead of, BioThrax, potentially reducing our
BioThrax revenues. We also face competition for our
biodefense product candidates. For example, HHS has
awarded a development and SNS procurement con-
tract to a competitor for an anthrax immune globulin
therapeutic and is assisting this company in its pro-
duction efforts by providing it with BioThrax doses that
we delivered for placement into the SNS so that it can
immunize donors and obtain plasma for its anthrax
immune globulin therapeutic product candidate. HHS
has awarded another development and SNS procure-
ment contract to another competitor for a monoclonal
antibody to anthrax as a post-exposure therapeutic for
anthrax infection. Several companies have botulinum
vaccines in early clinical or preclinical development.
One oral typhoid vaccine and one injectable typhoid
vaccine are currently approved and administered in
61
the U.S. and Europe. The Aeras Global Tuberculosis
Vaccine Foundation is developing or supporting the
development of five tuberculosis vaccine candidates in
addition to ours, any of which could present competitive
risks. Numerous companies have vaccine candidates in
development that would compete with any of our com-
mercial product candidates for which we are seeking to
obtain marketing approval.
Many of our competitors have significantly greater finan-
cial resources and expertise in research and develop-
ment, manufacturing, preclinical testing, conducting
clinical trials, obtaining regulatory approvals and
marketing approved products than we do. Smaller or
early stage companies may also prove to be significant
competitors, particularly through competing for govern-
ment funding and through collaborative arrangements
with large and established companies. These competi-
tors also compete with us in recruiting and retaining
qualified scientific and management personnel, as
well as in acquiring products, product candidates and
technologies complementary to, or necessary for, our pro-
grams or advantageous to our business.
limiting or
Legislation and contractual provisions
restricting liability of manufacturers may not be ade-
quate to protect us from all liabilities associated with the
manufacture, sale and use of our products.
Provisions of our BioThrax contracts with the U.S.
government and federal legislation enacted to protect
manufacturers of biodefense and anti-terrorism coun-
termeasures may limit our potential liability related to
the manufacture, sale and use of BioThrax and our bio-
defense product candidates. However, these contrac-
tual provisions and legislation may not fully protect us
from all related liabilities.
The Public Readiness and Emergency Preparedness
Act, or PREP Act, which was signed into law in
December 2005, creates immunity for manufacturers
of biodefense countermeasures when the Secretary
of HHS issues a declaration for their manufacture,
administration or use. A PREP Act declaration is meant
to provide immunity from all claims under state or
federal law for loss arising out of the administration
or use of a covered countermeasure. Manufacturers
are not entitled to protection under the PREP Act in
cases of willful misconduct. Upon a declaration by the
Secretary of HHS, a compensation fund is created to
provide “timely, uniform, and adequate compensa-
tion to eligible individuals for covered injuries directly
caused by the administration or use of a covered coun-
termeasure.” The “covered injuries” to which the pro-
gram applies are defined as serious physical injuries
or death. Individuals are permitted to bring a willful
misconduct action against a manufacturer only after
they have exhausted their remedies under the compen-
sation program. However, a willful misconduct action
could be brought against us if any individuals exhausted
their remedies under the compensation program and
thereby expose us to liability. In October 2008, the
Secretary of HHS issued a PREP Act declaration identi-
fying BioThrax and our anthrax immune globulin thera-
peutic candidate as covered countermeasures. We do
not know, however, whether the PREP Act would pro-
vide adequate protection or survive anticipated legal
challenges to its validity.
In August 2006, the Department of Homeland Security
approved our application under the Support Anti-
Terrorism by Fostering Effective Technology Act, or
SAFETY Act, enacted by the U.S. Congress in 2002 for
liability protection for sales of BioThrax. The SAFETY
Act creates product liability limitations for qualifying
anti-terrorism technologies for claims arising from or
related to an act of terrorism. In addition, the SAFETY
Act provides a process by which an anti-terrorism tech-
nology may be certified as an “approved product” by the
Department of Homeland Security and therefore enti-
tled to a rebuttable presumption that the government
contractor defense applies to sales of the product. The
government contractor defense, under specified cir-
cumstances, extends the sovereign immunity of the
U.S. to government contractors who manufacture a
product for the government. Specifically, for the gov-
ernment contractor defense to apply, the government
must approve reasonably precise specifications, the
product must conform to those specifications and the
supplier must warn the government about known dan-
gers arising from the use of the product. Although we
are entitled to the benefits of the SAFETY Act, it may
not provide adequate protection from any claims made
against us.
In addition, although our prior contracts with DoD and
HHS provided that the U.S. government would indem-
nify us for any damages resulting from product liability
62
claims, our current contracts with HHS do not contain
such indemnification, and we may not be able to nego-
tiate similar indemnification provisions in future con-
tracts. Also, the U.S. government may not honor its
indemnification obligations. For example, although we
have invoiced the DoD for reimbursement of our costs
incurred with respect to the lawsuits filed against us
by current and former members of the U.S. military
claiming damages as the result of personal injuries
allegedly suffered from vaccination with BioThrax, the
DoD has not yet acted on our claim for indemnification
for defense costs associated with those claims.
Product liability lawsuits could cause us to incur sub-
stantial liabilities and require us to limit commercializa-
tion of any products that we may develop.
We face an inherent risk of product liability exposure
related to the sale of BioThrax and any other products
that we successfully develop and the testing of our
product candidates in clinical trials. For example, we
have been a defendant in lawsuits filed on behalf of mil-
itary personnel who alleged that they were vaccinated
with BioThrax by the DoD and claimed damages result-
ing from personal injuries allegedly suffered because
of the vaccinations. The plaintiffs in these lawsuits
claimed different injuries and sought varying amounts
of damages. Although we successfully defended these
lawsuits, we cannot insure that we will be able to do so
in the future.
Under our prior BioThrax contracts with the DoD and
HHS, the U.S. government indemnified us against
claims by third parties for death, personal injury and
other damages related to BioThrax, including reason-
able litigation and settlement costs, to the extent that
the claim or loss results from specified risks not cov-
ered by insurance or caused by our grossly negligent or
criminal behavior. As required under such contracts,
we have notified the DoD of personal injury claims that
have been filed against us as a result of the vaccina-
tion of U.S. military personnel with BioThrax and are
seeking reimbursement from the DoD for uninsured
costs incurred in defending these claims. The collec-
tion process can be lengthy and complicated, and there
is no guarantee that we will be able to recover these
amounts from the U.S. government.
If we cannot successfully defend ourselves against
future claims that our product or product candidates
caused injuries and if we are not entitled to indemnity
by the U.S. government, or if the U.S. government does
not honor its indemnification obligations, we will incur
substantial liabilities. Regardless of merit or eventual
outcome, product liability claims may result in:
• decreased demand for any product candidates or
products that we may develop;
injury to our reputation;
•
• withdrawal of clinical trial participants;
• withdrawal of a product from the market;
• costs to defend the related litigation;
• substantial monetary awards to trial participants
or patients;
• loss of revenue; and
• the inability to commercialize any products that
we may develop.
We currently have product liability insurance for cover-
age up to a $10 million annual aggregate limit with a
deductible of $75,000 per claim. The amount of insur-
ance that we currently hold may not be adequate to cover
all liabilities that may occur. Product liability insurance
is difficult to obtain and increasingly expensive. We may
not be able to maintain insurance coverage at a reason-
able cost and we may not be able to obtain insurance
coverage that will be adequate to satisfy any liability that
may arise. For example, from 2002 through February
2006, we were unable to obtain product liability insur-
ance for sales of BioThrax on commercially reasonable
terms. We do not believe that the amount of insurance
we have been able to obtain for BioThrax is sufficient
to manage the risk associated with the potential large
scale deployment of BioThrax as a countermeasure to
bioterrorism threats. We rely on statutory protections
in addition to insurance to mitigate our liability expo-
sure for BioThrax.
If we are unable to obtain adequate reimbursement from
governments or third party payors for any products that
we may develop or to obtain acceptable prices for those
products, our revenues will suffer.
Our revenues and profits from any products that we
successfully develop, other than with respect to sales
of our biodefense products under government con-
tracts, will depend heavily upon the availability of
adequate reimbursement for the use of such products
from governmental and other third party payors, both
63
in the U.S. and in other markets. Reimbursement by a
third party payor may depend upon a number of factors,
including the third party payor’s determination that use
of a product is:
• a covered benefit under its health plan;
• safe, effective and medically necessary;
• appropriate for the specific patient;
• cost-effective; and
• neither experimental nor investigational.
Obtaining a determination that a product is covered is a
time-consuming and costly process that could require
us to provide supporting scientific, clinical and cost-
effectiveness data for the use of our products to each
payor. We may not be able to provide data sufficient to
gain coverage.
Even when a payor determines that a product is cov-
ered, the payor may impose limitations that preclude
payment for some uses that are approved by the FDA
or comparable authorities but are determined by the
payor to not be medically reasonable and necessary.
Moreover, eligibility for coverage does not imply that any
product will be covered in all cases or that reimburse-
ment will be available at a rate that permits the health
care provider to cover its costs of using the product.
We expect that the success of some of our commer-
cial vaccine candidates for which we obtain market-
ing approval will depend on inclusion of those product
candidates in government immunization programs.
Most non-pediatric commercial vaccines are pur-
chased and paid for, or reimbursed by, managed care
organizations, other private health plans or public
insurers or paid for directly by patients. In the U.S.,
pediatric vaccines are funded by a variety of federal
entitlements and grants, as well as state appropria-
tions. Foreign governments also commonly fund pedi-
atric vaccination programs through national health
programs. In addition, with respect to some diseases
affecting the public health generally, particularly in
developing countries, public health authorities or
non-governmental, charitable or philanthropic orga-
nizations fund the cost of vaccines.
Federal legislation, enacted in December 2003, has
altered the way in which physician-administered drugs
and biologics covered by Medicare are reimbursed.
Under the new reimbursement methodology, physicians
are reimbursed based on a product’s “average sales
price.” This new reimbursement methodology has
generally led to lower reimbursement levels. The new
federal legislation also has added an outpatient pre-
scription drug benefit to Medicare, which went into
effect in January 2006. These benefits will be provided
primarily through private entities, which we expect will
attempt to negotiate price concessions from pharma-
ceutical manufacturers.
Certain products we may develop may be eligible for
reimbursement under Medicaid. If the state-specific
Medicaid programs do not provide adequate coverage
and reimbursement for any products we may develop, it
may have a negative impact on our operations.
The scope of coverage and payment policies varies
among third party private payors, including indemnity
insurers, employer group health insurance programs
and managed care plans. These third party carriers
may base their coverage and reimbursement on the
coverage and reimbursement rate paid by carriers
for Medicaid beneficiaries. Furthermore, many such
payors are investigating or implementing methods for
reducing health care costs, such as the establishment
of capitated or prospective payment systems. Cost con-
tainment pressures have led to an increased empha-
sis on the use of cost-effective products by health care
providers. If third party payors do not provide adequate
coverage or reimbursement for any products we may
develop, it could have a negative effect on our revenues
and results of operations.
Foreign governments tend to impose strict price con-
trols, which may adversely affect our revenues.
In some foreign countries, particularly the countries
of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control.
In these countries, pricing negotiations with govern-
mental authorities can take considerable time after the
receipt of marketing approval for a product. To obtain
reimbursement or pricing approval in some countries,
we may be required to conduct a clinical trial that com-
pares the cost-effectiveness of our product candidate
to other available therapies. If reimbursement of our
products is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, our business
could be adversely affected.
64
Legislation has been introduced into Congress that, if
enacted, would permit more widespread re-importa-
tion of drugs from foreign countries into the U.S., which
may include re-importation from foreign countries
where the drugs are sold at lower prices than in the
U.S. Such legislation, or similar regulatory changes,
could decrease the price we receive for any approved
products which, in turn, could adversely affect our
operating results and our overall financial condition.
If we fail to attract and keep senior management and key
scientific personnel, we may be unable to sustain or
expand our BioThrax operations or develop or to com-
mercialize our product candidates.
Our success depends on our continued ability to attract,
retain and motivate highly qualified managerial and
key scientific personnel. We consider Fuad El-Hibri,
chief executive officer and chairman of our Board of
Directors and Daniel J. Abdun-Nabi, president and
chief operating officer to be key to our BioThrax opera-
tions and our efforts to develop and commercialize our
product candidates. Both of these key employees are at
will employees and can terminate their employment at
any time. We do not maintain “key person” insurance on
any of our employees.
In addition, our growth will require us to hire a sig-
nificant number of qualified scientific and commercial
personnel, including clinical development, regulatory,
marketing and sales executives and field sales per-
sonnel, as well as additional administrative personnel.
There is intense competition from other companies
and research and academic institutions for qualified
personnel in the areas of our activities. If we cannot
continue to attract and retain, on acceptable terms,
the qualified personnel necessary for the continued
development of our business, we may not be able to
sustain our operations or grow.
Additional Risks Related to Sales of Biodefense
Products to the U.S. Government
Our business is subject to audit by the U.S. government
and a negative audit could adversely affect our business.
U.S. government agencies such as the Defense Contract
Audit Agency, or the DCAA, routinely audit and investi-
gate government contractors. These agencies review
a contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regu-
lations and standards.
The DCAA also reviews the adequacy of, and a con-
tractor’s compliance with, its internal control systems
and policies, including the contractor’s purchasing,
property, estimating, compensation and management
information systems. Any costs found to be improp-
erly allocated to a specific contract will not be reim-
bursed, while such costs already reimbursed must be
refunded. If an audit uncovers improper or illegal activ-
ities, we may be subject to civil and criminal penalties
and administrative sanctions, including:
• termination of contracts;
• forfeiture of profits;
• suspension of payments;
• fines; and
• suspension or prohibition from conducting busi-
ness with the U.S. government.
In addition, we could suffer serious reputational harm if
allegations of impropriety were made against us.
Laws and regulations affecting government contracts
make it more costly and difficult for us to successfully
conduct our business.
We must comply with numerous laws and regulations
relating to the formation, administration and perfor-
mance of government contracts, which can make it
more difficult for us to retain our rights under these
contracts. These laws and regulations affect how
we conduct business with federal, state and local
government agencies. Among the most significant
government contracting regulations that affect our
business are:
• the Federal Acquisition Regulations, and agency-
specific regulations supplemental to the Federal
Acquisition Regulations, which comprehensively
regulate the procurement, formation, administra-
tion and performance of government contracts;
• the business ethics and public integrity obliga-
tions, which govern conflicts of interest and the
hiring of former government employees, restrict
the granting of gratuities and funding of lob-
bying activities and incorporate other require-
ments such as the Anti-Kickback Act and Foreign
Corrupt Practices Act;
65
• export and import control laws and regulations; and
• laws, regulations and executive orders restricting
the use and dissemination of information classi-
fied for national security purposes and the expor-
tation of certain products and technical data.
In addition, qui tam lawsuits have been brought against
us in which the plaintiffs argued that we defrauded the
U.S. government by distributing non-compliant doses
of BioThrax. Although we ultimately prevailed in this lit-
igation, we spent significant time and money defending
the litigation. States, many municipalities and foreign
governments typically also have laws and regulations
governing contracts with their respective agencies.
These domestic and foreign laws and regulations affect
how we and our customers conduct business and, in
some instances, impose added costs on our business.
Any changes in applicable laws and regulations could
restrict our ability to maintain our existing contracts
and obtain new contracts, which could limit our ability
to conduct our business and materially adversely affect
our revenues and results of operations.
We rely on property and equipment owned by the U.S.
government in the manufacturing process for BioThrax.
We have the right to use certain property and equipment
that is owned by the U.S. government, referred to as gov-
ernment furnished equipment, or GFE, at our Lansing,
Michigan site in the manufacture of BioThrax. We have
the option to purchase all or part of existing GFE from
the government on terms to be negotiated with the gov-
ernment. If the government modifies the terms under
which we use the GFE in a manner that is unfavorable to
us, including substantially increasing the usage fee, or
we are unable to reach an agreement with the govern-
ment concerning the terms of the purchase of that part
of the GFE necessary for our business, our business
could be harmed. If the U.S. government were to termi-
nate or fail to extend all BioThrax supply contracts with
us, we potentially could be required to rent or purchase
that part of the GFE necessary for the continued produc-
tion of BioThrax in our current manufacturing facility.
Risks Related to Regulatory Approvals
If we are not able to obtain required regulatory approv-
als, we will not be able to commercialize our product
candidates, and our ability to generate revenue will be
materially impaired.
Our product candidates and the activities associ-
ated with their development and commercialization,
including their testing, manufacture, safety, efficacy,
recordkeeping, labeling, storage, approval, advertis-
ing, promotion, sale and distribution, are subject to
comprehensive regulation by the FDA and other regu-
latory agencies in the U.S. and by comparable authori-
ties in other countries. Failure to obtain regulatory
approval for a product candidate will prevent us from
commercializing the product candidate. We have lim-
ited experience in preparing, filing and prosecuting
the applications necessary to gain regulatory approv-
als and expect to rely on third party contract research
organizations and consultants to assist us in this pro-
cess. Securing FDA approval requires the submission
of extensive preclinical and clinical data, information
about product manufacturing processes and inspec-
tion of facilities and supporting information to establish
the product candidate’s safety and efficacy. Our future
products may not be effective, may be only moderately
effective or may prove to have significant side effects,
toxicities or other characteristics that may preclude
our obtaining regulatory approval or prevent or limit
commercial use.
In the U.S., BioThrax, our biodefense product candidates
and our commercial product candidates are regulated
by the FDA as biologics. To obtain approval from the FDA
to market our product candidates, we will be required
to submit to the FDA a biologics license application, or
BLA. Ordinarily, the FDA requires a sponsor to support
a BLA application with substantial evidence of the prod-
uct’s safety and effectiveness in treating the targeted
indication based on data derived from adequate and well
controlled clinical trials, including Phase III safety and
efficacy trials conducted in patients with the disease
or condition being targeted. However, our biodefense
product candidates require slightly different treatment.
Specifically, because humans are rarely exposed to
anthrax or botulinum toxins under natural conditions,
and cannot be intentionally exposed, statistically signifi-
cant effectiveness of our biodefense product candidates
cannot be demonstrated in humans, but instead must
be demonstrated, in part, by utilizing animal models
before they can be approved for marketing.
We intend to use the FDA animal rule in pursuit of FDA
approval for BioThrax as a post-exposure prophylaxis,
our anthrax immune globulin therapeutic candidate,
66
our recombinant botulinum vaccine candidate, our
rPA anthrax vaccine, our anthrax monoclonal antibody
therapeutic, and our advanced anthrax vaccine. We
cannot guarantee that FDA will permit us to proceed
with any of our products or product candidates under
the animal rule. Even if we are able to proceed pursu-
ant to the animal rule, FDA may decide that our data
are insufficient for approval and require additional
preclinical, clinical or other studies, refuse to approve
our products, or place restrictions on our ability to
commercialize those products.
The process of obtaining regulatory approvals is
expensive, often takes many years, if approval is
obtained at all, and can vary substantially based upon
the type, complexity and novelty of the product can-
didates involved. Changes in the regulatory approval
policy during the development period, changes in or
the enactment of additional statutes or regulations, or
changes in the regulatory review for a submitted prod-
uct application, may cause delays in the approval or
rejection of an application.
The FDA has substantial discretion in the approval pro-
cess and may refuse to accept any application or may
decide that our data are insufficient for approval and
require additional preclinical, clinical or other studies.
In addition, varying interpretations of the data obtained
from preclinical and clinical testing could delay, limit or
prevent regulatory approval of a product candidate.
Our products could be subject to restrictions or with-
drawal from the market and we may be subject to penal-
ties if we fail to comply with regulatory requirements or
experience unanticipated problems with our products.
Any vaccine and immune-related therapeutic product
for which we obtain marketing approval, along with the
manufacturing processes, post-approval clinical data,
labeling, advertising and promotional activities for
such product, will be subject to continual requirements
of and review by the FDA and other regulatory bodies.
As an approved product, BioThrax is subject to these
requirements and ongoing review.
These requirements include submissions of safety
and other post-marketing information and reports,
registration requirements, cGMP requirements relat-
ing to quality control, quality assurance and corre-
sponding maintenance of records and documents,
and recordkeeping. The FDA enforces its cGMP and
other requirements through periodic unannounced
inspections of manufacturing facilities. The FDA is
authorized to inspect manufacturing facilities without
a warrant or prior notice at reasonable times and in a
reasonable manner.
After we acquired BioThrax and related vaccine manu-
facturing facilities in Lansing in 1998 from the Michigan
Biologic Products Institute, we spent significant amounts
of time and money renovating those facilities before the
FDA approved a supplement to our manufacturing facility
license in December 2001. The State of Michigan had ini-
tiated renovations after the FDA issued a notice of intent
to revoke the FDA license to manufacture BioThrax in
1997. The notice of intent to revoke cited significant devi-
ations by the Michigan Biologic Products Institute from
cGMP requirements, including quality control failures.
In March 2007, the FDA notified us that our manufactur-
ing facility license is no longer subject to the notice of
intent to revoke.
After approving the renovated Lansing facilities in
December 2001, the FDA conducted routine, biannual
inspections of the Lansing facilities in September 2002,
May 2004 and May 2006. Following each of these inspec-
tions, the FDA issued inspectional observations on
Form FDA 483. We responded to the FDA regarding the
inspectional observations relating to each inspection
and, where necessary, implemented corrective action.
In December 2005, the FDA stated in its final order on
BioThrax that at that time we were in substantial com-
pliance with all regulatory requirements related to the
manufacture of BioThrax and that the FDA would con-
tinue to evaluate the production of BioThrax to assure
compliance with federal standards and regulations.
The FDA conducted a routine, biannual inspection
of the Lansing facility in March 2008. Following this
inspection, the FDA issued inspectional observations
on Form FDA 483. Some of the observations noted on
the Form FDA 483 were significant. All observations
from our 2008 inspection were closed out in November
2008. If in connection with this inspection or with any
future inspection the FDA finds that we are not in sub-
stantial compliance with cGMP requirements, or if the
FDA is not satisfied with the corrective actions we take
in connection with any such inspection, the FDA may
undertake enforcement action against us.
67
Even if regulatory approval of a product is granted, the
approval may be subject to limitations on the indicated
uses for which the product may be marketed or to the
conditions of approval, or contain requirements for
costly post-marketing testing and surveillance to moni-
tor the safety or efficacy of the product. Later discovery
of previously unknown problems with our products or
manufacturing processes, or failure to comply with
regulatory requirements, may result in:
• restrictions on the marketing or manufacturing
of a product;
• warning letters;
• withdrawal of the product from the market;
• refusal to approve pending applications or sup-
plements to approved applications;
• voluntary or mandatory product recall;
• fines or disgorgement of profits or revenue;
• suspension or withdrawal of regulatory approv-
als, including license revocation;
• shut down, or substantial limitations of the oper-
ations in, manufacturing facilities;
• refusal to permit the import or export of products;
• product seizure; and
•
injunctions or the imposition of civil or criminal
penalties.
We may not be able to obtain orphan drug exclusivity for
any or all our products. If our competitors are able to
obtain orphan drug exclusivity for their products that are
the same as our products, we may not be able to have
competing products approved by the applicable regula-
tory authorities for a significant period of time.
If one of our competitors obtains orphan drug exclusiv-
ity for an indication for a product that competes with
one of the indications for one of our product candidates
before we obtain orphan drug designation, and if the
competitor’s product is the same drug as ours, the
FDA would be prohibited from approving our product
candidate for the same orphan indication unless we
demonstrate that our product is clinically superior or
the FDA determines that the holder of the orphan drug
exclusivity cannot assure the availability of sufficient
quantities of the drug. None of our products or prod-
uct candidates has been designated as orphan drugs
and there is no guarantee that the FDA will grant such
designation in the future. Even if we obtain orphan drug
exclusivity for one or more indications for one of our
product candidates, we may not be able to maintain it.
For example, if a competitive product that is the same
drug or biologic as our product is shown to be clinically
superior to our product, any orphan drug exclusivity we
may have obtained will not block the approval of that
competitive product.
The Fast Track designation for BioThrax as a post-
exposure prophylaxis against anthrax infection may not
actually lead to a faster development or regulatory
review or approval process.
We have obtained a Fast Track designation from the FDA
for BioThrax as a post-exposure prophylaxis against
anthrax infection. However, we may not experience a
faster development process, review or approval com-
pared to conventional FDA procedures. The FDA may
withdraw our Fast Track designation if the FDA believes
that the designation is no longer supported by data from
our clinical development program. Our Fast Track des-
ignation does not guarantee that we will qualify for or
be able to take advantage of the FDA’s expedited review
procedures or that any application that we may submit
to the FDA for regulatory approval will be accepted for
filing or ultimately approved.
Failure to obtain regulatory approval in international
jurisdictions could prevent us from marketing our prod-
ucts abroad.
We intend to have some or all of our products mar-
keted outside the U.S. To market our products in the
European Union and many other foreign jurisdictions,
we may need to obtain separate regulatory approv-
als and comply with numerous and varying regulatory
requirements. With respect to some of our product
candidates, we expect that a future collaborator will
have responsibility to obtain regulatory approvals out-
side the U.S., and we will depend on our collaborators
to obtain these approvals. The approval procedure var-
ies among countries and can involve additional testing.
The time required to obtain approval may differ from
that required to obtain FDA approval.
The foreign regulatory approval process may include all
of the risks associated with obtaining FDA approval. We
may not obtain foreign regulatory approvals on a timely
basis, if at all. Approval by the FDA does not ensure
approval by regulatory authorities in other countries
or jurisdictions, and approval by one foreign regulatory
68
authority does not ensure approval by regulatory
authorities in other foreign countries or jurisdictions or
by the FDA. We and our collaborators may not be able
to obtain regulatory approvals to commercialize our
products in any market.
Risks Related to Our Dependence
on Third Parties
We may not be successful in maintaining and establish-
ing collaborations, which could adversely affect our abil-
ity to develop and commercialize our product candidates
domestically and internationally.
For each of our product candidates, we plan to evalu-
ate the merits of retaining commercialization rights for
ourselves or entering into collaboration arrangements
with leading pharmaceutical or biotechnology compa-
nies or non-governmental organizations. We expect
that we will selectively pursue collaboration arrange-
ments in situations in which the collaborator has par-
ticular expertise or resources for the development or
commercialization of our products and product candi-
dates or for accessing particular markets.
If we are unable to reach agreements with suitable
collaborators, we may fail to meet our business objec-
tives for the affected product or program. We face, and
will continue to face, significant competition in seek-
ing appropriate collaborators. Moreover, collabora-
tion arrangements are complex and time consuming
to negotiate, document and implement. We may not be
successful in our efforts to establish and implement
collaborations or other alternative arrangements, or
the arrangements that we establish may not turn out
to be productive or beneficial for us. The terms of any
collaboration or other arrangements that we establish
may not be favorable to us.
Any collaboration that we enter into may not be success-
ful. For example, based on preclinical studies performed
under a license agreement that we entered into with
Sanofi Pasteur, both parties determined that the joint
efforts had not identified a promising meningitis B vaccine
candidate and we mutually terminated the collaboration.
Additionally, the success of our collaboration arrange-
ments will depend heavily on the efforts and activities of
our collaborators. It is likely that our collaborators will
have significant discretion in determining the efforts and
resources that they will apply to these collaborations.
The risks that we are subject to in our current collabo-
rations, and anticipate being subject to in future col-
laborations, include the following:
• our collaboration agreements are likely to be for
fixed terms and subject to termination by our col-
laborators in the event of a material breach by us;
• our collaborators may have the first right to main-
tain or defend our intellectual property rights
and, although we may have the right to assume
the maintenance and defense of our intellectual
property rights if our collaborators do not do so,
our ability to maintain and defend our intellectual
property rights may be compromised by our col-
laborators’ acts or omissions;
• our collaborators may utilize our intellectual prop-
erty rights in such a way as to invite litigation that
could jeopardize or invalidate our intellectual prop-
erty rights or expose us to potential liability; or
• our collaborators may decide not to continue to work
with us in the development of product candidates.
Collaborations with pharmaceutical companies and
other third parties often are terminated or allowed to
expire by the other party. Such terminations or expi-
rations could adversely affect us financially and could
harm our business reputation.
If third parties on whom we rely for clinical trials do not
perform as contractually required or as we expect, we
may not be able to obtain regulatory approval for or
commercialize our product candidates and as a result,
our business may suffer.
We do not have the ability to independently conduct the
clinical trials required to obtain regulatory approval
for our products. We depend on independent clinical
investigators, contract research organizations and
other third party service providers to conduct the clini-
cal trials of our product candidates and expect to con-
tinue to do so. We rely heavily on these third parties for
successful execution of our clinical trials, but do not
exercise day-to-day control over their activities. We are
responsible for ensuring that each of our clinical trials
is conducted in accordance with the general investi-
gational plan and protocols for the trial. Moreover, the
FDA requires us to comply with standards, commonly
referred to as Good Clinical Practices, for conducting,
recording and reporting the results of clinical trials to
69
assure that data and reported results are credible and
accurate and that the rights, integrity and confidential-
ity of trial participants are protected.
Our reliance on third parties that we do not control does
not relieve us of these responsibilities and require-
ments. Third parties may not complete activities on
schedule, or may not conduct our clinical trials in
accordance with regulatory requirements or our stated
protocols. The failure of these third parties to carry
out their obligations could delay or prevent the devel-
opment, approval and commercialization of our prod-
uct candidates. In addition, we encourage government
entities and non-government organizations to conduct
studies of, and pursue other development efforts for,
our product candidates.
We expect to rely on data from clinical trials conducted
by third parties seeking marketing approval for our
product candidates. For example, our BLA supplement
for a label expansion of BioThrax for a regimen of fewer
doses is based on the interim trial report provided to us
by the CDC from its ongoing clinical trial. We currently
are awaiting the final data from the CDC trial. These
government entities and non-government organiza-
tions have no obligation or commitment to us to conduct
or complete any of these studies or clinical trials and
may choose to discontinue these development efforts
at any time. In addition, government entities depend
on annual Congressional appropriations to fund these
development efforts. In prior years, there has been
some uncertainty whether Congress would choose to
fund the CDC trial. Although the trial has been funded
to date, Congress may not continue to fund the comple-
tion of all study reports.
Risks Related to Our Intellectual Property
Protection of our intellectual property rights could be costly,
and if we fail to do so, our business could be harmed.
Our success, particularly with respect to our commer-
cial business, will depend in large part on our ability
to obtain and maintain protection in the U.S. and other
countries for the intellectual property covering or
incorporated into our technology and products. This
protection is very costly. The patent situation in the field
of vaccine and immune-related therapeutic and other
pharmaceuticals generally is highly uncertain and
involves complex legal and scientific questions.
We may not be able to obtain additional issued patents
relating to our technology or products. Even if issued,
patents may be challenged, narrowed, invalidated
or circumvented, which could limit our ability to stop
competitors from marketing similar products or limit
the length of term of patent protection we may have for
our products. Changes in patent laws or administrative
patent office rules or changes in interpretations of pat-
ent laws in the U.S. and other countries may diminish
the value of our intellectual property or narrow the
scope of our patent protection.
Our patents also may not afford us protection against
competitors with similar technology. Because patent
applications in the U.S. and many foreign jurisdictions
are typically not published until 18 months after fil-
ing, or in some cases not at all, and because publica-
tions of discoveries in the scientific literature often lag
behind actual discoveries, neither we nor our licensors
can be certain that we or they were the first to make
the inventions claimed in issued patents or pend-
ing patent applications, or that we or they were the
first to file for protection of the inventions set forth in
these patent applications. In addition, patents gener-
ally expire, regardless of their date of issue, 20 years
from the earliest claimed non-provisional filing date.
As a result, the time required to obtain regulatory
approval for a product candidate may consume part or
all of the patent term. We are not able to accurately
predict the remaining length of the applicable pat-
ent term following regulatory approval of any of our
product candidates.
Our collaborators and licensors may not adequately
protect our intellectual property rights. These third
parties may have the first right to maintain or defend
our intellectual property rights and, although we may
have the right to assume the maintenance and defense
of our intellectual property rights if these third par-
ties do not do so, our ability to maintain and defend our
intellectual property rights may be compromised by
the acts or omissions of these third parties.
For example, under our licenses with HPA relating to
our recombinant botulinum vaccine candidate, HPA is
responsible for prosecuting and maintaining patent
rights, although we have the right to support the con-
tinued prosecution or maintenance of the patent rights
if HPA fails to do so. In addition, we have the first right
70
to pursue claims against third parties for infringement
of the patent rights and assume the defense of any
infringement claims that may arise.
If we are unable to in-license any intellectual property
necessary to develop, manufacture or sell any of our
product candidates, we will not be successful in devel-
oping or commercializing such product candidate.
We expect that we may need to in-license various
components or technologies, including, for example,
adjuvants and novel delivery systems, for some of
our current or future product candidates. We may be
unable to obtain the necessary licenses on acceptable
terms, or at all. If we are unable to obtain such licenses,
we could be prevented or delayed from continuing fur-
ther development or from commercially launching the
applicable product candidate.
If we fail to comply with our obligations in our intellec-
tual property licenses with third parties, we could lose
license rights that are important to our business.
We are a party to a number of license agreements and
expect to enter into additional license agreements in
the future. For example, we consider our license from
the Oxford-Emergent Tuberculosis Consortium to our
tuberculosis vaccine candidate to be material to our
business. Our existing licenses impose, and we expect
future licenses will impose, various diligence, mile-
stone payment, royalty, insurance and other obliga-
tions on us. If we fail to comply with these obligations,
the licensor may have the right to terminate the license,
in which event we might not be able to market any prod-
uct that is covered by the licensed patents.
If we are unable to protect the confidentiality of our pro-
prietary information and know-how, the value of our
technology and products could be adversely affected.
In addition to patented technology, we rely upon
unpatented proprietary technology, processes and
know-how, particularly as to our proprietary manu-
facturing processes. Because we do not have patent
protection for BioThrax or the label expansions and
improvements that we are pursuing for BioThrax, our
only intellectual property protection for BioThrax, other
than the BioThrax trademark, is confidentiality regarding
our manufacturing capability and specialty know-how,
such as techniques, processes and biological starting
materials. However, these types of trade secrets can be
difficult to protect. We seek to protect this confidential
information, in part, with agreements with our employ-
ees, consultants and third parties.
These agreements may be breached, and we may not
have adequate remedies for any such breach. In addition,
our trade secrets may otherwise become known or be
independently developed by competitors. If we are unable
to protect the confidentiality of our proprietary informa-
tion and know-how, competitors may be able to use this
information to develop products that compete with our
products, which could adversely impact our business.
If we infringe or are alleged to infringe intellectual
property rights of third parties, it will adversely affect
our business.
Our development and commercialization activities, as
well as any product candidates or products resulting
from these activities, may infringe or be claimed to
infringe patents and other intellectual property rights
of third parties under which we do not hold licenses or
other rights. Third parties may own or control these
patents and intellectual property rights in the U.S. and
abroad. These third parties could bring claims against
us or our collaborators that would cause us to incur
substantial expenses and, if successful against us,
could cause us to pay substantial damages. Further, if a
patent infringement or other similar suit were brought
against us or our collaborators, we or they could be
forced to stop or delay development, manufacturing or
sales of the product or product candidate that is the
subject of the suit.
As a result of patent infringement or other similar claims,
or to avoid potential claims, we or our collaborators may
choose or be required to seek a license from the third
party and be required to pay license fees or royalties or
both. These licenses may not be available on acceptable
terms, or at all. Even if we or our collaborators were
able to obtain a license, the rights may be non-exclusive,
which could result in our competitors gaining access to
the same intellectual property. Ultimately, we could be
prevented from commercializing a product, or be forced
to cease some aspect of our business operations, if, as a
result of actual or threatened patent infringement claims,
we or our collaborators are unable to enter into licenses
on acceptable terms or if an injunction is granted against
us. This could harm our business significantly.
71
There has been substantial litigation and other pro-
ceedings regarding patent and other intellectual prop-
erty rights in the biotechnology and pharmaceutical
industries. For example, Bavarian Nordic sued Acambis
for patent infringement and other claims arising out of
Acambis’ manufacture of the modified vaccinia Ankara
virus, or MVA, as a smallpox vaccine for biodefense
use by the U.S. government. We have a strain of MVA
that we are evaluating as a platform technology and a
tuberculosis vaccine candidate that is based on another
strain of MVA, both of which are distinct from the
Acambis strain. Bavarian Nordic claimed that its pat-
ents broadly covered the manufacture of MVA-based
biological products and that Bavarian Nordic had rights
in the biological materials used by Acambis. That litiga-
tion was terminated by a settlement and consent order
filed by the parties with the U.S. International Trade
Commission, or ITC, in August 2007 and subsequently
published in the U.S. Federal Register. According to the
published terms of the consent order, Acambis agreed
not to import or sell within the U.S. its ACAM 3000 vac-
cine product, and further agreed not to challenge the
validity or enforceability of certain Bavarian Nordic
patents. Bavarian Nordic sued Oxford BioMedica PLC,
Oxford BioMedica Ltd. and Biomedica Inc., collectively
Oxford BioMedica, alleging that Oxford BioMedica has
infringed certain Bavarian Nordic U.S. patents by mak-
ing, using, and importing, and inducing others to use,
Oxford BioMedica’s experimental drug TroVax® which
is an MVA-based therapeutic cancer vaccine. The origi-
nal lawsuit against Oxford BioMedica was dismissed in
January 2009. However, Bavarian Nordic has recently
filed a new lawsuit against Oxford BioMedica that
remains outstanding. Bavarian Nordic also has filed
legal proceedings against the Bavarian State Ministry
of the Environment, Public Health and Consumer
Protection, or StMUGV, in which Bavarian Nordic is
challenging StMUGV’s ownership rights to the MVA in
its possession. We have licensed from StMUGV rights
to materials and technology related to MVA. Our MVA
platform technology, which has the potential to be used
as a viral vector for delivery of certain vaccine antigens
for different disease-causing organisms, is based on
these rights.
Our ability to use our MVA platform technology, or to
develop and manufacture MVA-based products such
as our tuberculosis product candidate, could be nega-
tively affected by pending or future patent infringement
litigation or other legal actions brought by Bavarian
Nordic or other parties challenging our rights to use
MVA materials or technology. To protect our interests,
we have filed oppositions in the European Patent Office
against four of Bavarian Nordic’s patents covering
certain aspects of the MVA technology. We are also
party to a trademark invalidation proceeding in a for-
eign trademark office and may in the future become
party to additional trademark invalidation or interfer-
ence proceedings. The cost to us of any patent litiga-
tion or other proceeding, even if resolved in our favor,
could be substantial. Some of our competitors may be
able to sustain the costs of such litigation or proceed-
ings more effectively than we can because of their sub-
stantially greater financial resources. Uncertainties
resulting from the initiation and continuation of patent
litigation or other proceedings could have a material
adverse effect on our ability to compete in the market-
place. Patent litigation and other proceedings may also
absorb significant management time.
Risks Related to Our Acquisition Strategy
Our strategy of generating growth through acquisitions
may not be successful.
Since our inception we have pursued an acquisition
strategy to build our business. We commenced oper-
ations in September 1998 through an acquisition of
rights to BioThrax, vaccine manufacturing facilities at
a multi-building campus on approximately 12.5 acres in
Lansing and vaccine development and production know-
how from the Michigan Biologic Products Institute. We
acquired a significant portion of our pipeline of vac-
cine and therapeutic product candidates through our
acquisition of ViVacs GmbH in 2006 and Microscience
Limited in 2005 and our acquisition of substantially all
of the assets of Antex Biologics, Inc. in 2003.
In the future, we may be unable to license or acquire suit-
able products or product candidates from third parties
for a number of reasons. In particular, the licensing and
acquisition of pharmaceutical and biological products is
a competitive area. A number of more established com-
panies are also pursuing strategies to license or acquire
products in the vaccine and immune-related therapeutic
field. These established companies may have a competi-
tive advantage over us due to their size, cash resources
and greater clinical development and commercialization
72
capabilities. Other factors that may prevent us from
licensing or otherwise acquiring suitable products and
product candidates include the following:
Operational risks that could harm our existing opera-
tions or prevent realization of anticipated benefits from
these transactions include:
• we may be unable to license or acquire the rel-
evant technology on terms that would allow us to
make an appropriate return on the product;
• companies that perceive us to be their competitor
may be unwilling to assign or license their prod-
uct rights to us; or
• we may be unable to identify suitable products or
product candidates within our areas of expertise.
In addition, we expect competition for acquisition can-
didates in the vaccine and immune-related therapeu-
tic field to increase, which may result in fewer suitable
acquisition opportunities for us as well as higher acqui-
sition prices. If we are unable to successfully obtain
rights to suitable products and product candidates, our
business, financial condition and prospects for growth
could suffer.
If we fail to successfully manage any acquisitions, our
ability to develop our product candidates and expand our
product candidate pipeline may be harmed.
As part of our business strategy, we intend to continue
to seek to obtain marketed products and development
stage product candidates through acquisitions and
licensing arrangements with third parties. The failure
to adequately address the financial, operational or legal
risks of these transactions could harm our business.
Financial aspects of these transactions that could alter
our financial position, reported operating results or
stock price include:
• use of cash resources;
• higher than anticipated acquisition costs and
expenses;
• potentially dilutive issuances of equity securities;
• the incurrence of debt and contingent liabilities,
impairment losses or restructuring charges;
• large write-offs and difficulties in assessing the
relative percentages of in-process research and
development expense that can be immediately
written off as compared to the amount that must
be amortized over the appropriate life of the
asset; and
• amortization expenses related to other intangible
assets.
• challenges associated with managing an increas-
ingly diversified business;
• prioritizing product portfolios;
• disruption of our ongoing business;
• difficulty and expense in assimilating and inte-
grating the operations, products, technology,
information systems or personnel of the acquired
company;
• diversion of management’s time and attention
•
from other business concerns;
inability to maintain uniform standards, controls,
procedures and policies;
• the assumption of known and unknown liabilities
of the acquired company, including intellectual
property claims;
• challenges and costs associated with reductions
in work force; and
• subsequent loss of key personnel.
If we are unable to successfully manage and integrate
our acquisitions, our ability to develop new products and
continue to expand our product pipeline may be limited.
Risks Related to Our Common Stock
Fuad El-Hibri, chief executive officer and chairman of
our Board of Directors, has substantial control over us,
including through his ability to control the election of
the members of our Board of Directors, and could delay
or prevent a change of control.
Mr. El-Hibri has the ability to control the election of the
members of our Board of Directors through his owner-
ship interests among our significant stockholders. As
of February 27, 2009, Mr. El-Hibri was the beneficial
owner of approximately 46% of our outstanding com-
mon stock. Because Mr. El-Hibri has significant influ-
ence over the election of the members of our board,
and because of his substantial control of our capital
stock, Mr. El-Hibri will likely have the ability to delay or
prevent a change of control of us that may be favored by
other directors or stockholders and otherwise exercise
substantial control over all corporate actions requiring
board or stockholder approval, including any amend-
ment of our certificate of incorporation or by-laws. The
control by Mr. El-Hibri may prevent other stockholders
73
from influencing significant corporate decisions and
may result in conflicts of interest that could cause our
stock price to decline.
Provisions in our corporate charter documents and
under Delaware law may prevent or frustrate attempts
by our stockholders to change our management and
hinder efforts to acquire a controlling interest in us.
Provisions of our certificate of incorporation and by-laws
may discourage, delay or prevent a merger, acquisition or
other changes in control that stockholders may consider
favorable, including transactions in which stockholders
might otherwise receive a premium for their shares. These
provisions may also prevent or frustrate attempts by our
stockholders to replace or remove our management.
These provisions include:
• the classification of our directors;
• limitations on changing the number of directors
then in office;
• limitations on the removal of directors;
• limitations on filling vacancies on the board;
• limitations on the removal and appointment of the
chairman of our Board of Directors;
• advance notice requirements for stockholder
nominations for election of directors and other
proposals;
• the inability of stockholders to act by written con-
sent;
• the inability of stockholders to call special meet-
ings; and
• the ability of our Board of Directors to designate
the terms of and issue new series of preferred
stock without stockholder approval.
The affirmative vote of holders of our capital stock rep-
resenting at least 75% of the voting power of all out-
standing stock entitled to vote is required to amend or
repeal the above provisions of our certificate of incor-
poration. The affirmative vote of either a majority of the
directors present at a meeting of our Board of Directors
or holders of our capital stock representing at least 75%
of the voting power of all outstanding stock entitled to
vote is required to amend or repeal our by-laws.
In addition, Section 203 of the General Corporation Law
of Delaware prohibits a publicly held Delaware corpo-
ration from engaging in a business combination with
an interested stockholder, generally a person which
together with its affiliates owns or within the last three
years has owned 15% or more of our voting stock, for
a period of three years after the date of the transaction
in which the person became an interested stockholder,
unless the business combination is approved in a pre-
scribed manner. Accordingly, Section 203 may discour-
age, delay or prevent a change in control of us.
Our stockholder rights plan could prevent a change in
control of us in instances in which some stockholders
may believe a change in control is in their best interests.
Under a rights agreement that establishes our stock-
holder rights plan, we issue to each of our stockholders
one preferred stock purchase right for each outstand-
ing share of our common stock. Each right, when exer-
cisable, will entitle its holder to purchase from us a unit
consisting of one one-thousandth of a share of series A
junior participating preferred stock at a purchase price
of $150 in cash, subject to adjustments.
Our stockholder rights plan is intended to protect
stockholders in the event of an unfair or coercive offer
to acquire us and to provide our Board of Directors
with adequate time to evaluate unsolicited offers. The
rights plan may have anti-takeover effects. The rights
plan will cause substantial dilution to a person or group
that attempts to acquire us on terms that our Board of
Directors does not believe are in our best interests and
those of our stockholders and may discourage, delay or
prevent a merger or acquisition that stockholders may
consider favorable, including transactions in which
stockholders might otherwise receive a premium for
their shares.
Our stock price is volatile and purchasers of our com-
mon stock could incur substantial losses.
Our stock price has been, and is likely to continue to
be, volatile. From November 15, 2006, when our com-
mon stock first began trading on the New York Stock
Exchange, through February 27, 2009, our common
stock has traded as high as $27.00 per share and
as low as $4.40 per share. The stock market in general
and the market for biotechnology companies in partic-
ular have experienced extreme volatility that has often
been unrelated to the operating performance of par-
ticular companies. The market price for our common
stock may be influenced by many factors, including:
74
• the success of competitive products or technologies;
• results of clinical trials of our product candidates
or those of our competitors;
• decisions and procurement policies by the U.S.
government affecting BioThrax and our biode-
fense product candidates;
• regulatory developments in the U.S. and foreign
We currently intend to retain our future earnings, if any,
to fund the development and growth of our business.
Our current and any future debt agreements that we
enter into may limit our ability to pay dividends. As a
result, capital appreciation, if any, of our common stock
will be the sole source of gain for our stockholders for
the foreseeable future.
countries;
• developments or disputes concerning patents or
other proprietary rights;
• the recruitment or departure of key personnel;
• variations in our financial results or those of com-
panies that are perceived to be similar to us;
• market conditions in the pharmaceutical and
biotechnology sectors and issuance of new or
changed securities analysts’ reports or recom-
mendations;
• general economic, industry and market condi-
tions; and
• the other factors described in this “Risk Factors”
section.
A significant portion of our total outstanding shares may
be sold into the market in the near future. This could
cause the market price of our common stock to drop
significantly, even if our business is doing well.
Sales of a substantial number of shares of our common
stock in the public market could occur at any time. These
sales or the perception in the market that the holders of a
large number of shares intend to sell shares, could reduce
the market price of our common stock. Moreover, hold-
ers of an aggregate of approximately 13.7 million shares
of our common stock outstanding as of December 31,
2008 have the right to require us to register these shares
of common stock under specified circumstances.
We do not anticipate paying any cash dividends in the
foreseeable future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The following table sets forth general information regarding our materially important properties:
Location
Lansing, Michigan
Frederick, Maryland
Use
Manufacturing operations
facilities, office space and
laboratory space
Future manufacturing
facilities and office and
laboratory space
Segment
Biodefense
Approximate
Square Feet Owned/Leased
264,000
Owned
Biodefense/Commercial
290,000
Owned
Gaithersburg, Maryland
Office and laboratory space
Biodefense/ Commercial
Rockville, Maryland
Office space
Biodefense/Commercial
Wokingham, England
Office and laboratory space
Commercial
36,000
23,000
29,000
Lease expires 2009
Lease expires 2016
Leases expire 2016
Munich, Germany
Office and laboratory space
Commercial
5,000
Lease expires 2009
75
Lansing, Michigan. We own a multi-building campus
on approximately 12.5 acres in Lansing, Michigan that
includes facilities for bulk manufacturing of BioThrax,
including fermentation, filtration and formulation, as
well as for raw material storage and in-process and
final product warehousing. It also includes our new
50,000 square foot manufacturing facility which we
financed in part with a term loan from a commercial
leader. The facility serves as collateral for this financial
obligation. The campus is secured through perimeter
fencing, limited and controlled ingress and egress and
24-hour on-site security personnel. We acquired these
facilities in 1998 from the Michigan Biologic Products
Institute. In December 2001, the FDA approved a sup-
plement to our manufacturing facility license for the
manufacture of BioThrax at the renovated facilities.
Frederick, Maryland. We own two buildings of approxi-
mately 145,000 square feet each on a 15-acre site in
Frederick, Maryland. We financed the purchase of these
buildings with a forgivable loan from the Department
of Business and Economic Development of the State
of Maryland and mortgage loans from commercial
lenders. These buildings serve as collateral for these
financing obligations.
We are considering building out this site for product
development and a portion of our potential future prod-
uct manufacturing requirements and are in the prelim-
inary phase of establishing plans to do so. We expect
that we would complete the build out of this site in
several stages. Our preliminary plans contemplate
a build out of one of the two buildings on this site to
accommodate laboratory space, product develop-
ment, pilot plant initial product launch capabilities and
administrative office space. We have incurred costs
of approximately $4 million through December 2008
related to initial engineering design and preliminary
utility build out of these facilities. 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.
Moving forward with these plans will be contingent on
progress of our existing development programs or the
acquisition of new product candidates. If we proceed
with this project, we expect the costs to be substan-
tial and to likely require external sources of funds to
finance the project. We may elect to lease or sell one or
both of these facilities to third parties.
Other. We lease three separate product development
facilities. Our facility in Gaithersburg, Maryland is
approximately 36,000 square feet and contains a com-
bination of laboratory and office space. Our facility in
Wokingham, England consists of approximately 29,000
square feet in two buildings, and contains a combination
of laboratory and office space. Our facility in Munich,
Germany is approximately 5,000 square feet and con-
tains a combination of laboratory and office space. Our
facility in Rockville, Maryland contains approximately
23,000 square feet of office space, including our execu-
tive offices.
ITEM 3. LEGAL PROCEEDINGS
Litigation against Protein Sciences Corporation. In
July 2008, we filed a lawsuit against Protein Sciences
Corporation, or PSC, Daniel D. Adams, PSC’s Chief
Executive Officer, and Manon M.J. Cox, PSC’s Chief
Operating Officer, in the Supreme Court of the State of
New York asserting claims related to a letter of intent, a
loan agreement, and an asset purchase agreement that
PSC and the Company entered into in 2008. On September
12, 2008, a stipulation of discontinuance was filed with
the court regarding the claims against Mr. Adams and
Ms. Cox, and, on October 3, 2008, we filed a separate
suit against Mr. Adams and Ms. Cox in the United States
District Court for the District of Connecticut, alleging
fraud and unfair trade practices and seeking compensa-
tory and punitive damages. On September 12, 2008, we
filed an amended complaint against PSC, which remains
pending in the New York state court, alleging fraud,
breach of the letter of intent, loan agreement, and asset
purchase agreement, breach of the duty of good faith
and fair dealing, unjust enrichment, and unfair business
practices. We are seeking from PSC money damages of
no less than $13 million, punitive damages, declaratory
judgment that we have no further funding obligations to
PSC, injunctive relief to protect the collateral for our loan,
and other appropriate relief. PSC has moved to dismiss
the New York action, and Mr. Adams and Ms. Cox have
moved to dismiss the Connecticut action. Those motions
remain pending. PSC, Mr. Adams, and Ms. Cox have not
yet asserted any counterclaims against us, but PSC
has stated that it may assert counterclaims for “among
other things, breach of contract, intentional misrepre-
sentations, tortious interference with business rela-
tions and unfair trade practices,” which would include a
$1.5 million reverse break-up fee under the asset pur-
chase agreement as a setoff to the loan.
76
Between March 2008 and June 2008, we provided PSC
with $10 million in funding under a loan agreement
between the parties to enable PSC to continue opera-
tions through June 24, 2008, the anticipated closing
date of the asset purchase transaction. Under the loan
agreement, PSC was obligated to repay the $10 million
principal plus interest and costs of collection the ear-
lier of December 31, 2008, or an event of default under
the loan agreement. In the lawsuit against PSC, we
allege that an event of default occurred under the loan
agreement and that the loan was due and payable as
of June 2008. Subsequent to filing the lawsuit, we dis-
cussed with PSC a potential alternative transaction. In
connection with those discussions, effective December
31, 2008, we and PSC entered into a forbearance agree-
ment, pursuant to which we agreed not to foreclose
on the collateral or to pursue other remedies relat-
ing to the loan prior to January 26, 2009. On January
5, 2009, we notified PSC that we would not be pursu-
ing the proposed alternative transaction. On January
6, 2009, we issued a press release stating that we had
ended all activities related to our planned acquisition
of PSC and that we would pursue full repayment of the
$10 million loan, which is secured by substantially all
of PSC’s assets, and settlement of the outstanding liti-
gation. Since January 26, 2009, when the forbearance
period expired, we have been negotiating the terms of
an extended forbearance agreement with PSC, but, as
of the date of this report, have not been successful in
reaching such an agreement. If we are unsuccessful in
reaching an agreement, we intend to seek to enforce
our rights, which may include initiating a foreclosure
action with respect to the collateral for the loan.
BioThrax product liability litigation. Between 2001
and 2003, over 100 individual plaintiffs filed a series of
lawsuits in which they claimed damages resulting from
personal injuries allegedly caused by vaccination with
BioThrax by the DoD. In April 2006, the U.S. District
Court for the Western District of Michigan entered
summary judgment in our favor in four consolidated
lawsuits brought by approximately 120 claimants. The
District Court’s ruling in these consolidated cases was
based on two grounds. First, the District Court found
that we were entitled to protection under a Michigan
state statute that provides immunity for drug manu-
facturers if the drug was approved by the FDA and its
labeling is in compliance with FDA approval, unless the
plaintiffs establish that the manufacturer intentionally
withheld or misrepresented information to the FDA and
the drug would not have been approved, or the FDA
would have withdrawn approval, if the information had
been accurately submitted. Second, the District Court
found that we were entitled to the immunity afforded by
the government contractor defense, which, under spec-
ified circumstances, extends the sovereign immunity of
the United States to government contractors who man-
ufacture a product for the government. Specifically,
the government contractor defense applies when the
government approves reasonably precise specifica-
tions, the product conforms to those specifications and
the supplier warns the government about known risks
arising from the use of the product. The District Court
found that we established each of those factors.
In 2005 and 2006, we were named as a defendant in
three federal lawsuits, each filed on behalf of a single
plaintiff, claiming different injuries caused by DoD’s
immunization with BioThrax. Each plaintiff sought a
different amount of damages. The plaintiff in the first
case alleged that the vaccine caused erosive rheu-
matoid arthritis and requested damages in excess of
$1 million. The plaintiff in the second case alleged that
the vaccine caused Bell’s palsy and other related con-
ditions and requested damages in excess of $75,000.
The plaintiff in the third case alleged that the vaccine
caused a condition that originally was diagnosed as
encephalitis related to a gastrointestinal infection and
caused him to fall into a coma for many weeks and
requested damages in excess of $10 million. Each of
these lawsuits has been dismissed with prejudice, and
no BioThrax product liability cases remain pending.
We believe that we are entitled to indemnification under
our prior contract with the DoD for legal fees associ-
ated with the BioThrax product liability cases brought
by military personnel.
Insurance coverage litigation. On December 26, 2006,
we were named as a defendant in a lawsuit brought by
Evanston Insurance Company in the U.S. District Court
for the Western District of Michigan captioned Evanston
Insurance Company v. BioPort Corporation and Robert C.
Myers. Evanston issued a general liability policy to us
in 2000, and we made a claim for coverage under that
policy for defense and indemnity costs incurred as a
result of the claims asserted in the BioThrax product
liability litigation discussed above and the thimerosal
77
litigation discussed below. In its complaint, Evanston
asserted a number of purported bases for the court
to void or reduce its obligation to defend or indemnify
us, including a claim that we failed to disclose on our
insurance application our alleged knowledge of “inci-
dents, conditions, circumstances, effects or suspected
defects which may result in claims.” Evanston sought
rescission or reformation of the policy to exclude a
duty to defend or indemnify us for the claims asserted
in the BioThrax product liability litigation and the
thimerosal litigation. Evanston also sought a refund of
the approximately $331,000 that it had reimbursed us
for defense costs. In October 2008, the litigation with
Evanston was resolved, and the lawsuit was dismissed
with prejudice.
Mil Vax litigation. In 2003, six unidentified plaintiffs
filed suit in the U.S. District Court for the District of
Columbia against the U.S. government seeking to enjoin
the Anthrax Vaccine Immunization Program adminis-
tered under MilVax under which all military person-
nel were required to be vaccinated with BioThrax.
In October 2004, the District Court enjoined the DoD
from administering BioThrax to military personnel on
a mandatory basis without their informed consent or
a Presidential waiver. This ruling was based in part on
the District Court’s finding that the FDA, as part of its
review of all biological products approved prior to 1972,
had not properly issued a final order determining that
BioThrax is safe and effective and not misbranded. In
December 2005, the FDA issued a final order deter-
mining that BioThrax is safe and effective and not mis-
branded. In February 2006, the U.S. Court of Appeals for
the District of Columbia, on appeal of the injunction by
the government, ruled that the injunction had dissolved
by its own terms as a result of the FDA’s final order. In
October 2006, the DoD announced that it was resuming
a mandatory vaccination program for BioThrax for des-
ignated military personnel and emergency DoD civilian
personnel and contractors.
In December 2006, the same counsel who represented
the plaintiffs in the 2003 litigation filed a new lawsuit
against the government in the same federal court, on
behalf of unnamed service members and the DoD civil-
ian employees or contractors and purportedly on behalf
of a class of similarly situated individuals. The suit con-
tends on various grounds that the FDA’s 2005 final order
should be set aside as substantively and procedurally
flawed and that BioThrax is not properly approved for
use in the DoD’s vaccination program. The plaintiffs
seek a declaration that BioThrax is improperly licensed
and is not approved for use against inhalation anthrax,
an order vacating the FDA’s 2005 final order, and an
injunction prohibiting the DoD from using BioThrax in a
mandatory vaccination program. In February 2008, the
federal court in which that case was pending dismissed
the action, concluding that FDA did not make a clear
error of judgment in reaffirming the safety and efficacy
of BioThrax. In April 2008, the plaintiffs filed a notice of
appeal of this decision, and that appeal remains pend-
ing. Although we are not a party to the lawsuits chal-
lenging DoD’s mandatory anthrax vaccination program,
if the District Court were to enjoin the mandatory use
of BioThrax by DoD, the amount of future purchases of
BioThrax by the U.S. government could be affected.
Other. We are, and may in the future become, subject
to other legal proceedings, claims and litigation aris-
ing in the ordinary course of our business in connection
with the manufacture, distribution and use of our prod-
ucts and product candidates. For example, Emergent
BioDefense Operations Lansing Inc., or EBOL, is a
defendant, along with many other vaccine manufactur-
ers, in a series of lawsuits that have been filed in various
state and federal courts in the United States alleging
that thimerosal, a mercury-containing preservative
used in the manufacture of some vaccines, caused
personal injuries, including brain damage, central
nervous system damage and autism. No specific dol-
lar amount of damages has been claimed. EBOL is
currently a named defendant in 40 lawsuits pending in
two jurisdictions: three in California and 37 in Illinois.
The products at issue in these lawsuits are pediatric
vaccines. Because we are not currently and have not
historically been in the business of manufacturing or
selling pediatric vaccines, we do not believe that we
manufactured the pediatric vaccines at issue in the
lawsuits. Under a contractual obligation to the State of
Michigan, we manufactured one batch of vaccine suit-
able for pediatric use. However, the contract required
the State to use the vaccine solely for Michigan public
health purposes. We no longer manufacture any prod-
ucts that contain thimerosal.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
None.
78
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information and Holders
Our common stock trades on the New York Stock
Exchange under the symbol “EBS.” The following table
sets forth the high and low sales prices per share of our
common stock during each quarter of the years ended
December 31, 2008 and 2007:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year Ended December 31, 2008
$11.14
$ 9.17
High
$ 8.22
$ 4.93
Low
Year Ended December 31, 2007
$14.85
$17.75
High
$ 8.33
$10.50
Low
$15.17
$ 9.62
$26.40
$11.22
$12.67
$ 7.67
$10.70
$ 4.40
As of February 27, 2009, the closing price per share of
our common stock on the New York Stock Exchange was
$19.31 and we had 22 holders of record of our common
stock. This number does not include beneficial owners
whose shares are held by nominees in street name.
Dividend Policy
We have not declared, or paid any cash dividends on
our common stock since becoming a publicly traded
company in November 2006. We currently intend to
retain all of our future earnings to finance the growth
and development of our business. We do not intend to
pay cash dividends to our stockholders in the foresee-
able future.
Recent Sales of Unregistered Securities
None.
Use of Proceeds
On November 20, 2006, we completed an initial pub-
lic offering of 5,000,000 shares of our common stock
pursuant to a registration statement on Form S-1 (File
No. 333-136622), which was declared effective by the
SEC on November 14, 2006. We received net proceeds
from the offering of approximately $54.2 million, after
deducting underwriting discounts and commissions
and other offering expenses.
Through December 31, 2008, we have used all of the
net proceeds from our initial public offering. We used
approximately $27.2 million of the net proceeds from
the offering to fund development of our product candi-
dates, comprised of approximately $4.2 million for label
expansions and improvements for BioThrax, approxi-
mately $2.3 million for an advanced anthrax vaccine
candidate, approximately $6.0 million for our anthrax
immune globulin therapeutic candidate, approximately
$8.5 million for Typhella and approximately $6.2 million
for our hepatitis B therapeutic vaccine candidate. We
used approximately $27.0 million of the net proceeds
from the offering to fund a portion of the construction,
installation, validation and qualification activities costs
for our new manufacturing facility in Lansing. We did
not use any of the net proceeds from the offering to
make payments, directly or indirectly, to any director or
officer of ours, or any of their associates, to any person
owning 10 percent or more of our common stock or to
any affiliate of ours.
ITEM 6. SELECTED CONSOLIDATED
FINANCIAL DATA
You should read the following selected consolidated
financial data together with our consolidated finan-
cial statements and the related notes included in this
annual report on Form 10-K and the “Management’s
Discussion and Analysis of Financial Condition and
Results of Operations” section of this annual report.
We have derived the consolidated statement of opera-
tions data for the years ended December 31, 2008, 2007
and 2006 and the consolidated balance sheet data as
of December 31, 2008 and 2007 from our audited con-
solidated financial statements, which are included in
this annual report on Form 10-K. We have derived the
consolidated statements of operations data for the
years ended December 31, 2005 and 2004 and the con-
solidated balance sheet data as of December 31, 2006,
2005 and 2004 from our audited consolidated finan-
cial statements, which are not included in this annual
report on Form 10-K. Our historical results for any
prior period are not necessarily indicative of results to
be expected in any future period.
79
(in thousands, except share and per share data)
2008
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)
Minority interest in subsidiary
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
$
169,124
9,430
178,554
34,081
59,470
55,076
—
—
—
148,627
29,927
1,999
(47)
134
2,086
724
32,737
12,055
20,682
0.69
0.68
29,835,134
30,458,098
$
$
$
Year Ended December 31,
2006
2007
2005
2004
$
169,799 $
13,116
182,915
40,309
53,958
55,555
—
—
—
149,822
33,093
2,809
(71)
156
2,894
—
35,987
13,051
$
$
$
22,936 $
0.79 $
0.77 $
147,995 $
4,737
152,732
127,271
3,417
130,688
$
81,014
2,480
83,494
24,125
45,501
44,601
477
—
—
114,704
38,028
846
(1,152)
293
(13)
—
38,015
15,222
31,603
18,381
42,793
26,575
—
(10,000)
109,352
21,336
485
(767)
55
(227)
—
21,109
5,325
15,784
0.77
0.69
20,533,471
22,751,733
30,102
10,117
30,323
—
(3,819)
—
66,723
16,771
65
(241)
6
(170)
—
16,601
5,129
11,472
$
0.61
$
$
0.56
18,919,850
20,439,252
22,793 $
0.99 $
0.93 $
28,995,667
29,663,127
23,039,794
24,567,302
(in thousands)
Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Total long-term liabilities
Total stockholders’ equity
2008
2007
As of December 31,
2006
2005
2004
$
91,473
98,658
290,788
37,418
199,349
$
105,730 $
76,418 $
88,649
273,508
46,688
171,159
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
80
ITEM 7. 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 finan-
cial information included elsewhere in this annual report on
Form 10-K. Some of the information contained in this discus-
sion and analysis or set forth elsewhere in this annual report
on Form 10-K, including information with respect to our
plans and strategy for our business and related financing,
includes forward-looking statements that involve risks and
uncertainties. You should review the “Special Note Regarding
Forward Looking Statements” and “Risk Factors” sections
of this annual report for a discussion of important factors
that could cause actual results to differ materially from the
results described in or implied by the forward-looking state-
ments contained in the following discussion and analysis.
Overview
Product Portfolio
We are a biopharmaceutical company focused on the
development, manufacture and commercialization of
vaccine and immune-related therapeutic that assist
the body’s immune system to prevent or treat disease.
For financial reporting purposes, we operate in two
business segments, biodefense and commercial.
Our biodefense segment focuses on vaccines and thera-
peutics for use against biological agents that are poten-
tial weapons of bioterrorism or biowarfare. Our product
candidates in this segment are focused on two specific
biological agents: anthrax and botulinum. Within our
anthrax product portfolio, we manufacture and market
BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine
licensed by the U.S. Food and Drug Administration, or
FDA, for the prevention of anthrax infection. In addition
to BioThrax, we are developing a recombinant protective
antigen anthrax, or rPA, vaccine, an advanced BioThrax
vaccine, an anthrax immune globulin therapeutic and a
recombinant anthrax monoclonal antibody therapeutic.
Within our botulinum product portfolio, we are develop-
ing a recombinant botulinum vaccine.
Our commercial segment focuses on vaccines and
therapeutics for use against infectious diseases and
other medical conditions that have resulted in signifi-
cant unmet or underserved public health needs. Our
product candidates in this segment include a typhoid
vaccine, a tuberculosis vaccine, a hepatitis B therapeu-
tic vaccine and a chlamydia vaccine.
Our biodefense segment has generated net income
for each of the last five fiscal years. Our commercial
segment has generated revenue through development
contracts and grant funding. None of our commercial
product candidates has received marketing approval
and, therefore, our commercial segment has not gen-
erated any product sales revenues. As a result, our
commercial segment has incurred a net loss for each
of the last five fiscal years.
Product Sales
We have derived substantially all of our product sales
revenues from BioThrax sales to the U.S. Department
of Health and Human Services, or HHS, and U.S.
Department of Defense, or DoD, and expect for the
foreseeable future to continue to derive substantially
all of our product sales revenues from the sales of
BioThrax to the U.S. government. Our total revenues
from BioThrax sales were $169.1 million and $169.8 mil-
lion for the years ended December 31, 2008 and 2007,
respectively. We are focused on increasing sales of
BioThrax to U.S. government customers, expanding the
market for BioThrax to other customers domestically
and internationally and pursuing label expansions and
improvements for BioThrax.
81
Contracts and Grants
We seek to advance development of our product candidates through external funding arrangements. We may slow
down development programs or place them on hold during periods that are not covered by external funding. We
have received external funding awards for the following development programs:
Product or Product Candidate
BioThrax post-exposure prophylaxis
Advanced BioThrax vaccine
Funding Source
HHS
Biomedical Advanced Research and Development Authority and
National Institute of Allergy and Infectious Disease
Anthrax immune globulin therapeutic
National Institute of Allergy and Infectious Diseases
Anthrax monoclonal antibody therapeutic
Biomedical Advanced Research and Development Authority and
National Institute of Allergy and Infectious Disease
Typhella vaccine
The Wellcome Trust
Recombinant botulinum vaccine
National Institute of Allergy and Infectious Diseases
Additionally, our tuberculosis vaccine candidate is
indirectly supported by grant funding provided to The
University of Oxford by The Wellcome Trust and Aeras
Global Tuberculosis Vaccine Foundation.
We continue to actively pursue additional government
sponsored development contracts and grants and to
encourage both governmental and non-governmental
agencies and philanthropic organizations to provide
development funding or to conduct clinical studies of
our product candidates.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based on our financial state-
ments, which have been prepared in accordance with
accounting principles generally accepted in the U.S. The
preparation of these financial statements requires us to
make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates
and judgments, including those related to accrued
expenses, fair value of stock-based compensation and
income taxes. We based our estimates on historical
experience and on various other assumptions that we
believe to be reasonable under the circumstances, the
results of which form the basis for making judgments
about the carrying values of assets and liabilities and
the reported amounts of revenues and expenses that
are not readily apparent from other sources. Actual
results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies
affect our more significant judgments and estimates
used in the preparation of our financial statements.
Revenue Recognition
We recognize revenues from product sales 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 con-
tinuing performance on our part if four basic criteria
have been met:
• there is persuasive evidence of an arrangement;
• delivery has occurred or title has passed to our
customer based on contract terms;
• the fee is fixed and determinable and no further
obligation exists; and
• collectibility is reasonably assured.
We have generated BioThrax sales revenues under U.S.
government contracts with HHS and the DoD. Under
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
82
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
contracts 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 a collaboration agreement that we entered into
with Sanofi Pasteur in May 2006 for our meningitis B
vaccine candidate, we received an upfront license fee
and were entitled to additional payments for develop-
ment work under the collaboration. 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 license fee
and the development work under our agreement with
Sanofi Pasteur should be accounted for as a single unit
of accounting. We recognized amounts received under
this agreement over the estimated development period
as we perform services. We recorded the amount of
the upfront license fee as deferred revenue. Prior to
the termination of this agreement in December 2008,
we recognized this revenue over the estimated devel-
opment period under the contract, estimated at seven
years. Under the collaboration agreement, we were
entitled to payments up to specified levels for develop-
ment work we performed on behalf of Sanofi Pasteur.
We invoiced Sanofi Pasteur monthly in arrears, and
recognized revenue in the period in which the associ-
ated costs were incurred.
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 contracts and grants revenue and the associated
costs as research and development expense. We issue
invoices and recognize revenue upon incurring the
reimbursable costs.
Accounts Receivable
Accounts receivable are stated at invoice amounts and
consist primarily of amounts due from HHS and the
DoD as well as amounts due under reimbursement
contracts with other government entities and non-
government and philanthropic organizations. Because
the collection history for receivables from these enti-
ties indicate that collection is likely, we do not currently
record an allowance for doubtful accounts.
Inventories
Inventories are stated at the lower of cost or market,
with cost being determined using a standard cost
method, which approximates average cost. Average
cost consists primarily of material, labor and manu-
facturing 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.
Income Taxes
We account for income taxes in accordance with
Statement of Financial Accounting Standards, or 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 basis 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
on the balance sheet. Our deferred tax assets include
the unamortized portion of in-process research and
83
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, primar-
ily the United Kingdom. The amount of the deferred tax
assets on our balance sheet reflects our expectations
regarding our ability to use our net operating losses to
offset future taxable income. The applicable tax rules
in particular jurisdictions limit our ability to use net
operating losses as a result of ownership changes. In
particular, we believe that these rules will significantly
limit our ability to use net operating losses generated
by Microscience Limited, or Microscience, and Antex
Biologics, Inc., or Antex, prior to our acquisition of
Microscience in June 2005 and our acquisition of sub-
stantially all of the assets of Antex in May 2003.
We review our deferred tax assets on a quarterly basis
to assess our ability to realize the benefit from these
deferred tax assets. If we determine that it is more
likely than not that the amount of our expected future
taxable income will not be sufficient to allow us to fully
utilize our deferred tax assets, we increase our 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 recording
a benefit from income taxes on our income statement,
which increases net income or reduces net loss for that
period and increases our deferred tax assets on our
balance sheet.
We account for uncertainty in income taxes in accor-
dance with Financial Accounting Standards Board, or
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 recognition 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.
Stock-based Compensation
We adopted SFAS No. 123 (revised 2004), Share-Based
Payment, or SFAS No. 123(R), on January 1, 2006. SFAS
No. 123(R) requires all share-based payments to
employees, including grants of employee stock options,
to be recognized in the income statement based on their
estimated grant date fair values.
We value our share-based payment transactions using
the Black-Scholes valuation model. We measure the
amount of compensation cost based on the fair value
of the underlying equity award on the date of grant. We
recognize compensation cost over the period that an
employee provides service in exchange for the award.
The effect of SFAS No. 123(R) on net income (loss) and
net income (loss) per share in any period is not neces-
sarily representative of the effects in future years due
to, among other things, the vesting period of the stock
options and the fair value of additional stock option
grants in future years.
Financial Operations Overview
Revenues
Between May 2005 and February 2007, we supplied 10.0
million doses of BioThrax to HHS for inclusion in the
Strategic National Stockpile, or SNS, under a base con-
tract for 5.0 million doses for a fixed price of $123 million
and a contract modification for an additional 5.0 million
doses for a fixed price of $120 million. We completed
delivery of all doses to HHS under the base contract and
the contract modification 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 agreement
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 those
specific doses. This discounted price does not apply to the
final 13.25 million doses under the contract. The firm fixed
price for the 18.75 million doses, including the discount,
is $400 million in the aggregate. Through December 31,
2008, we have delivered approximately 13.8 million doses
84
under this contract. If we receive FDA approval of our
pending supplement to our biologics license applica-
tion, or BLA, 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 13.25 million
doses sold under this contract. 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 such 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 approxi-
mately $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. In December 2006, based on data gener-
ated from our ongoing stability studies, we submitted a
supplement to our BLA for BioThrax to extend the expiry
dating. We have received a complete response from the
FDA which posed a number of questions. In responding
to those questions, we submitted a separate supplement
in December 2008 and submitted a response to the FDA’s
complete response in February 2009. We believe that our
application will be approved in 2009.
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 pro-
vides for HHS to pay us up to $11.5 million in milestone
payments in connection with us advancing a program
to obtain a post-exposure prophylaxis indication for
BioThrax. These funds are payable upon achievement
of specific program milestones. In October 2007, we
achieved the initial milestone and invoiced HHS for
$8.8 million. We received this payment from HHS and
revenue was recognized in November 2007.
On September 30, 2008, we entered into an agreement
with HHS to supply up to an additional 14.5 million
doses of BioThrax to HHS for placement into the SNS.
The term of the agreement is from September 30, 2008
through September 30, 2011. Delivery of doses under the
agreement will commence immediately following the
anticipated completion of deliveries under our current
18.75 million dose supply contract with HHS, currently
anticipated in September 2009, and continue through
September 2011. Funds for the procurement of the first
5.7 million doses of BioThrax have been committed.
Procurement of the remaining 8.8 million doses will be
funded through the annual appropriations process for
the SNS. If the FDA approves our pending application to
extend the shelf life of BioThrax from three years to four
years, and if four-year dated lots of BioThrax are avail-
able at the time of delivery of a particular lot or ship-
ment, we must deliver four-year dated product to the
SNS. In the event the FDA has not approved four-year
expiry dating at the time of such delivery, we may instead
deliver three-year dated product to the SNS. Four-year
dated product will be invoiced at a higher price than
three-year dated product. The total purchase price for
the 14.5 million doses will be between $362.7 million
and $402.8 million, depending on product dating. Under
the agreement, we have agreed to provide all shipping
services related to delivery of doses into the SNS over
the term of the agreement, for which HHS has agreed to
pay us approximately $1.9 million. We will invoice HHS
under the agreement upon acceptance of each delivery
of BioThrax doses to the SNS.
Pursuant to two supply agreements for BioThrax with
the DoD, we have supplied approximately 10 million
doses of BioThrax for immunization of military person-
nel from 1997 through 2007. As a result of an October
2007 Presidential Directive that outlines the U.S.
government’s objective to enhance coordination and
cooperation among federal agencies with respect to
countermeasure procurement and stockpile manage-
ment, the DoD is procuring additional doses of BioThrax
to satisfy ongoing requirements for its active immuni-
zation program directly from the SNS. Consequently,
we are not currently party to a procurement contract
with the DoD.
In September 2007, we received a development con-
tract from National Institute of Allergy and Infectious
Disease, or 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 the
terms of the development contract, we are using the
funds to conduct various studies on this product can-
didate, including non-clinical efficacy studies and clini-
cal trials. In July 2008, we were awarded two grants
from NIAID, totaling over $4.5 million, to support devel-
opment of our recombinant botulinum vaccine and
advanced anthrax vaccine candidates. In September
2008, we received a $24 million development contract
85
from NIAID and Biomedical Advanced Research and
Development Authority, or BARDA, to fund continued
development of our anthrax monoclonal antibody ther-
apeutic candidate, and a development contract with
NIAID and BARDA, valued at up to approximately $30
million, to fund development of our advanced BioThrax
vaccine candidate.
In May 2006, we entered into a collaboration agree-
ment with Sanofi Pasteur, which was amended in
June 2008, under which we granted Sanofi Pasteur an
exclusive, worldwide license under a proprietary tech-
nology to develop and commercialize a meningitis B
vaccine candidate and received a $3.8 million upfront
license fee. This agreement also provided for pay-
ments for development work under the collaboration.
In December 2008, we and Sanofi Pasteur determined
that the joint efforts on this collaboration had not iden-
tified a promising product candidate, and we mutually
terminated the collaboration. Upon termination we
recognized as revenue the unamortized portion of the
upfront license fee.
On December 5, 2008, we entered into an agreement
with Pfizer Inc. whereby Pfizer acquired from us tech-
nology, materials and related documentation per-
taining to our Pertussis, or whooping cough, product
candidate. Under the terms of the agreement, Pfizer
paid $1.8 million for all Pertussis technology, product
material, data, technical and scientific information,
intellectual property, know-how, expertise and trade
secrets, as well as standard operating procedures,
batch records, historical manufacturing records and
regulatory documentation relating to the technology. In
addition, Pfizer will pay us a future milestone payment
of up to $750,000, pending the results of ongoing work
with the technology.
Our revenue, operating results and profitability have
varied, and we expect that they will continue to vary on
a quarterly basis, primarily because of the timing of our
fulfilling orders for BioThrax and work done under new
and existing contracts and grants.
Cost of Product Sales
The primary expense that we incur to deliver BioThrax
to our customers is manufacturing costs, which are
primarily fixed costs. These fixed manufacturing costs
consist of facilities, utilities and salaries and personnel-
related expenses for indirect manufacturing support
staff. Variable manufacturing costs for BioThrax con-
sist 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 in the period those doses were
manufactured. We calculate the average manufactur-
ing cost per dose in the period of manufacture by divid-
ing the actual costs of manufacturing in such period
by the number of units produced in that period. In
addition to the fixed and variable manufacturing costs
described above, the average manufacturing cost per
dose depends on the efficiency of the manufacturing
process, utilization of available manufacturing capacity
and the production yield for the period of production.
Research and Development Expenses
We expense research and development costs as incurred.
Our research and development expenses consist primar-
ily of:
• salaries and related expenses for personnel;
• fees to professional service providers for, among
other things, preclinical and analytical testing,
independently monitoring our clinical trials and
acquiring and evaluating data from our clinical
trials and non-clinical studies;
• costs of contract manufacturing services for
clinical trial material;
• costs of materials used in clinical trials and
research and development;
• depreciation of capital assets used to develop our
products; and
• operating costs, such as the operating 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 our product pipeline will
increase as our product development activities con-
tinue based on ongoing advancement of our product
candidates, and as we prepare for regulatory submis-
sions and other regulatory activities. We expect that the
magnitude of any increase in our research and devel-
opment spending will be dependent upon such factors
as the results from our ongoing preclinical studies and
86
clinical trials, the size, structure and duration of any
follow on clinical programs that we may initiate, costs
associated with manufacturing our product candidates
on a large scale basis for later stage clinical trials,
and our ability to use or rely on data generated by gov-
ernment agencies, such as the ongoing studies with
BioThrax being conducted by the Centers for Disease
Control and Prevention, or CDC.
In July 2008, we entered into a joint venture with the
University of Oxford and certain University of Oxford
researchers to conduct clinical trials in the advance-
ment of a vaccine candidate for tuberculosis, resulting
in the formation of the Oxford-Emergent Tuberculosis
Consortium. As part of this arrangement, we have
entered into a license agreement with the joint venture
pursuant to which we obtained rights to develop, manu-
facture and commercialize pharmaceutical compositions
intended to prevent or treat Mycobacterium tuberculosis in
humans in developed countries. We anticipate contribut-
ing approximately $20 million to the joint venture over
the next three years to support a Phase IIb proof of con-
cept study in humans, primarily in the form of services
to be performed by our personnel on behalf of the joint
venture. The University of Oxford’s contributions include
support from the Wellcome Trust and the Aeras Global
Tuberculosis Vaccine Foundation for the Phase IIb clini-
cal trial in the form of cash and services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist
primarily of salaries and other related costs for per-
sonnel serving the executive, sales and marketing,
business development, finance, accounting,
infor-
mation technology, legal and human resource func-
tions. Other costs include facility costs not otherwise
included in cost of product sales or research and
development expense and professional fees for legal
and accounting services. We currently market and sell
BioThrax directly to HHS with a small, targeted market-
ing and sales group. As we seek to broaden the market
for BioThrax and if we receive marketing approval for
additional products, we expect that we will increase our
spending for marketing and sales activities.
Total Other Income (Expense)
Total other income (expense) consists primarily of
interest income and interest expense. We earn inter-
est income on our cash and cash equivalents, and we
incur interest expense on our indebtedness. We capi-
talize 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 facility. Our
total interest cost will increase in future periods as
compared to prior periods as a result of the term loan
that we entered into in June 2007, as well as any bor-
rowings under our revolving line of credit. In addition,
some of our existing debt arrangements provide for
increasing amortization of principal payments in future
periods. See “Liquidity and Capital Resources—Debt
Financing” for additional information.
Results of Operations
Year Ended December 31, 2008 Compared
to Year Ended December 31, 2007
Revenues
Product sales revenues decreased by $675,000, or
0.4%, to $169.1 million for 2008 from $169.8 million
for 2007. This decrease in product sales revenues
was primarily due to a 16% decrease in the number of
doses of BioThrax delivered, offset by an 18% increase
in the average sales price per dose attributable to a
discounted price provided to HHS due to the limited
remaining shelf life for certain doses delivered in the
third and fourth quarters of 2007. Product sales rev-
enues in 2008 consisted of BioThrax sales to HHS of
$167.6 million and aggregate international and other
sales of $1.5 million. Product sales revenues in 2007
consisted of BioThrax sales to HHS of $141.6 million,
sales to the DoD of $26.2 million and aggregate inter-
national and other sales of $2.0 million.
Contracts and grant revenues decreased by $3.7 mil-
lion, or 28%, to $9.4 million in 2008 from $13.1 million in
2007. Contracts and grants revenues for 2008 consisted
of $4.4 million from the Sanofi Pasteur collaboration,
related to recognition upon termination of the collabora-
tion in December 2008 of deferred revenue associated
with the upfront payment received in 2006 as well as
development service revenue, $3.2 million in develop-
ment contract and grant revenue from NIAID and other
governmental agencies, and $1.8 million from the sale of
technology rights and related materials and documen-
tation pertaining to our Pertussis technology. Contracts
and grants revenues for 2007 consisted of a milestone
87
payment of $8.8 million from HHS in connection with our
advancing a program to obtain a post-exposure prophy-
laxis indication for BioThrax, $3.1 million from the Sanofi
Pasteur collaboration, related to recognition of deferred
revenue associated with the upfront payment received
in 2006 as well as development service revenue, and
$1.2 million in grant revenue from the NIH and the
Wellcome Trust.
Cost of Product Sales
Cost of product sales decreased by $6.2 million, or
15%, to $34.1 million for 2008 from $40.3 million for
2007. This decrease was attributable to a 16% decrease
in the number of doses of BioThrax delivered.
Research and Development Expenses
Research and development expenses increased by
$5.5 million, or 10%, to $59.5 million for 2008 from
$54.0 million for 2007. This increase reflects additional
personnel and contract service costs, and includes
increased expenses of $1.6 million on product candi-
dates that are categorized in the biodefense segment,
$3.5 million on product candidates categorized in the
commercial segment, and $436,000 in other research
and development expenses, which are in support of
technology platforms and central research and devel-
opment activities.
The increase in spending on biodefense product candi-
dates, detailed in the table below, was primarily attrib-
utable to the timing of development efforts on various
programs as we completed various studies and pre-
pared for subsequent studies and trials, coupled with
increased spending on product candidates that we
acquired during the year. The spending for BioThrax
enhancements was related to preparing for and con-
ducting clinical and non-clinical efficacy studies to
support applications for marketing approval of these
enhancements. The spending for the recombinant pro-
tective antigen anthrax vaccine was related primarily to
the purchase of this vaccine candidate from VaxGen in
May 2008 and continued advancement of this product
candidate. The increase in spending in our advanced
anthrax vaccine program resulted from feasibility
studies and formulation development of product candi-
dates, including our advanced BioThrax vaccine candi-
date. The decrease in spending in our anthrax immune
globulin therapeutic candidate was primarily due to
the timing of costs related to plasma collection. The
spending for the anthrax monoclonal therapeutic can-
didate was primarily due to the purchase of this vaccine
candidate and related technology in March 2008 and
continued advancement of this product candidate. The
decrease in spending for our botulinum vaccine candi-
dates resulted from enhanced spending in 2007 from
advancing this program to the process development
stage and the manufacture of clinical trial material,
coupled with lower spending in 2008 and going forward
as we have scaled back our development efforts on our
botulinum toxoid vaccine candidate pending the receipt
of third party development funding.
The increase in spending on commercial product can-
didates, detailed in the table below, primarily reflects
additional personnel and contracted services. The
increase in spending for Typhella resulted from the
manufacture of clinical material and initiating and con-
ducting a Phase IIb study in the U.S., which commenced
in the second quarter of 2008. The decrease in spend-
ing for our hepatitis B therapeutic vaccine candidate
resulted from the cessation of new patient enrollment
from our ongoing Phase II clinical trial in the United
Kingdom and Serbia as a result of patient recruiting
difficulties because we administer our product candi-
date as a montherapy. The spending for our group B
streptococcus vaccine candidate resulted from prepar-
ing for Phase I clinical trials for two of the protein com-
ponents of the vaccine candidate. We have decided not
to proceed with these trials and, as a result, we expect
that spending for our group B streptococcus vaccine
candidate will be significantly reduced in the future.
The spending for our tuberculosis vaccine candidate
related to the formation of our joint venture with the
University of Oxford in July 2008 and preparation for
a Phase IIb clinical trial. The decrease in spending for
our chlamydia vaccine candidate, which is in preclinical
development, is related to slowing development while
seeking external funding.
The increase in other research and development
expenses was primarily attributable to spending asso-
ciated with the development of technology platforms.
We continue to assess, and may alter, our future devel-
opment plans for our products based on the interest
of the U.S. government or non-governmental and phil-
anthropic organizations in providing funding for further
development or procurement.
88
Our principal research and development expenses for
2008 and 2007 are shown in the following table:
(in thousands)
Biodefense:
Year Ended
December 31,
2007
2008
BioThrax enhancements
Recombinant protective antigen
anthrax vaccine
Advanced anthrax vaccines
Anthrax immune globulin therapeutic
Anthrax monoclonal therapeutic
Botulinum vaccines
Total biodefense
$ 6,039 $ 5,175
6,563
3,660
6,126
1,062
2,871
26,321
—
2,719
7,717
—
9,133
24,744
Commercial:
Typhella
Hepatitis B therapeutic vaccine
Group B streptococcus vaccine
Tuberculosis vaccine
Chlamydia vaccine
Meningitis B vaccine
Total commercial
Other
Total
15,431
3,010
6,539
2,145
1,220
1,313
29,658
3,491
9,641
5,370
6,790
—
3,146
1,212
26,159
3,055
$59,470 $53,958
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased
by $479,000, or 1%, to $55.1 million for 2008 from $55.6 mil-
lion for 2007. The decrease in selling, general and admin-
istrative expenses was driven by the recovery of approx-
imately $2.1 million from the DoD and our insurance
company in previously expensed legal fees associated
with BioThrax litigation, partially offset by an increase of
approximately $1.8 million in our headquarters and staff
organization to support the overall growth of our busi-
ness. The increase related to the growth of our business
is primarily attributable to the addition of personnel and
increased legal and other professional services for our
headquarters organization. The majority of the expense
is attributed to the biodefense segment, in which selling,
general and administrative expenses for 2008 remained
consistent with 2007 at $43.0 million. Selling, general
and administrative expenses related to our commercial
segment decreased by $330,000, or 3%, to $12.2 million
for 2008 from $12.5 million for 2007.
Total Other Income (Expense)
Total other income decreased by $806,000, or 28%, to
income of $2.1 million for 2008 from income of $2.9 million
for 2007. This increase resulted primarily from a
decrease in interest income of $810,000 as a result of
lower investment return on average invested cash bal-
ances related to a decline in interest rates.
Minority Interest in Subsidiary
Minority interest in subsidiary of $724,000 in 2008
resulted from the formation of our joint venture with
the University of Oxford in July 2008. This amount rep-
resents the portion of the loss incurred by the joint ven-
ture in 2008 that is attributable to Oxford.
Income Taxes
Provision for income taxes decreased by $1.0 million,
or 8%, to $12.1 million for 2008 from $13.1 million for
2007. The provision for income taxes for 2008 resulted
primarily from our income before provision for income
taxes of $32.7 million and an effective annual tax rate of
37%. The provision for income taxes for 2007 resulted
primarily from our income before provision for income
taxes of $36.0 million and an effective annual tax rate
of 36%. The increase in the effective annual tax rate is
due primarily to a reduction in state valuation allow-
ances in 2007 related to the expected utilization of net
operating losses, partially offset by a reduction in state
and local taxes in 2008. The provision for income taxes
also reflects research and development tax credits of
$819,000 for 2008 and $880,000 for 2007.
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 certain doses delivered in the
third and fourth quarters of 2007. Product sales rev-
enues 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 mil-
lion. Product sales revenues in 2006 consisted of
BioThrax sales to HHS of $109.8 million, sales to the
DoD of $37.4 million and aggregate international and
other sales of $763,000.
89
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 con-
sisted of a milestone payment of $8.8 million from HHS
in connection with our advancing a program to obtain
a post-exposure prophylaxis indication for BioThrax,
$3.1 million from the Sanofi Pasteur collaboration,
related to recognition of deferred revenue associated
with the upfront payment received in 2006 as well as
development service revenue, and $1.2 million in grant
revenue from the NIH and the Wellcome Trust. Contracts
and grant revenues for 2006 consisted of $3.2 million
in upfront and development program revenue from the
Sanofi Pasteur collaboration and $1.5 million in grant
revenue from the Wellcome Trust.
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 pro-
duction 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 mil-
lion, 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 catego-
rized in the biodefense segment, $3.7 million on prod-
uct candidates categorized in the commercial segment,
and $2.2 million in other research and development
expenses, which are in support of technology platforms
and central research and development activities.
The increase in spending on candidates in the biode-
fense and commercial segments, detailed in the table
below, was attributable to increased efforts on various
programs as we completed various studies and began
subsequent studies and trials. The spending for BioThrax
enhancements is related to preparing for and conducting
animal efficacy studies to support applications for mar-
keting approval of these enhancements. The spending for
the advanced anthrax vaccine programs resulted from
feasibility studies and formulation development of prod-
uct candidates. The spending for our anthrax immune
globulin therapeutic candidate development program
related primarily to costs associated with the plasma
collection and fractionation program. The spending for
the botulinum vaccine programs resulted from advanc-
ing this program to the process development stage and
the manufacture of clinical trial material. We continue to
assess, and may alter, our future development plans for
our products based on the interest of the U.S. govern-
ment or other non-governmental organizations in pro-
viding funding for further development or procurement.
The spending in 2007 for Typhella resulted from the
ongoing Phase II study in Vietnam, which commenced
in the first quarter of 2007. The spending in 2006 for
Typhella resulted from ongoing work for the Phase
I clinical trial in Vietnam, which we completed in the
second quarter of 2006. The spending in 2007 for our
hepatitis B therapeutic vaccine candidate resulted
from preparing 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. Both our chlamydia and meningitis B vac-
cine candidates are in preclinical development.
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:
Year Ended
December 31,
2006
2007
BioThrax enhancements
Advanced anthrax vaccines
Anthrax immune globulin therapeutic
Botulinum vaccines
Total biodefense
$ 5,175 $ 7,232
1,088
7,373
6,526
22,219
2,719
7,717
9,133
24,744
Commercial:
Typhella
Hepatitis B therapeutic vaccine
Group B streptococcus vaccine
Chlamydia vaccine
Meningitis B vaccine
Total commercial
Other
Total
9,641
5,370
6,790
3,146
1,212
26,159
3,055
9,642
4,058
3,759
1,991
2,975
22,425
857
$53,958 $45,501
90
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 over-
all 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 orga-
nization and an increase of $2.1 million in sales and mar-
keting 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 mil-
lion 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-
in-process research and development of
chased
$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.
Liquidity and Capital Resources
Sources of Liquidity
We require cash to meet our operating expenses and
for capital expenditures, acquisitions and principal and
interest payments on our debt. We have funded our cash
requirements from inception through December 31,
2008 principally with a combination of revenues from
BioThrax product sales, debt financings and facilities
and equipment leases, revenues under our collabora-
tion agreement with Sanofi Pasteur, development fund-
ing 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, 2008.
As of December 31, 2008, we had cash and cash equiva-
lents of $91.5 million.
91
Cash Flows
The following table provides information regarding our
cash flows for the years ended December 31, 2008,
2007 and 2006.
(in thousands)
Net cash provided by
(used in):
Operating activities(1)
Investing activities
Financing activities
Total net cash provided
Year Ended December 31,
2007
2008
2006
$ 7,588
(30,813)
8,968
$ 54,790
(43,969)
18,491
$ (4,258)
(41,446)
85,828
(used in)
$(14,257) $ 29,312
$ 40,124
(1)
Includes the effect of exchange rate changes on cash and cash
equivalents.
Net cash provided by operating activities of $7.6 mil-
lion in 2008 resulted principally from our net income of
$20.7 million, partially offset by an increase in accounts
receivable of $6.0 million due to amounts billed pri-
marily to HHS in December 2008 that were collected
in 2009 and a decrease in income taxes payable of
$6.7 million due to the timing of payment of the 2007
income tax liability and estimated tax payments related
to the 2008 income tax liability.
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
$24.5 million due to amounts billed primarily to HHS
in December 2006 that were collected in 2007, par-
tially offset by amounts billed in December 2007 and
outstanding at year end, a decrease in inventory of
$7.8 million 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, off-
set by an increase in accounts receivable of $40.8 million
due from HHS and the DoD reflecting amounts billed in
December 2006 that were still outstanding at year end,
and an 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 used in investing activities for the years ended
December 31, 2008, 2007 and 2006 resulted principally
from the purchase of property, plant and equipment and,
in 2008, the issuance of a note receivable in the amount
of $10 million. Capital expenditures in 2008 include
$13.1 million in construction and related costs for our
new manufacturing facility in Lansing, Michigan and
approximately $7.7 million in infrastructure invest-
ments and other equipment. Capital expenditures in
2007 relate primarily to $30.3 million for construc-
tion of our new building in Lansing, and approximately
$13.7 million in infrastructure investments and other
equipment. Capital expenditures in 2006 relate primar-
ily to $25.7 million for construction of our new building
in Lansing, $10.2 million related to the acquisition of
our second facility in Frederick, Maryland, and approxi-
mately $5.3 million in infrastructure investments and
other equipment.
Net cash provided by financing activities of $9.0 mil-
lion in 2008 resulted primarily from $60.0 million in
proceeds from borrowings under our revolving line
of credit with Fifth Third Bank, $5.0 million from the
release of restricted cash related to our continuing
compliance with the debt covenants specified in our
HSBC term loan, $1.3 million related to excess tax ben-
efits from the exercise of stock options, and $3.4 million
in proceeds from stock option exercises, partially off-
set by $60.8 million in principal payments on long-term
indebtedness, including $56.8 million in payments on
our revolving line of credit with Fifth Third Bank.
Net cash provided by financing activities of $18.5 mil-
lion in 2007 resulted primarily from $15.3 million
in additional proceeds from a term loan with HSBC
related to financing a portion of the costs related to the
construction of our new building in Lansing, $17.9 mil-
lion in proceeds from borrowings under our revolving
line of credit with Fifth Third Bank, $6.0 million related
to excess tax benefits from the exercise of stock
options, and $2.5 million in proceeds from stock option
exercises, partially offset by $18.0 million in princi-
pal payments on long-term indebtedness, including
92
$15.0 million 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 million
in proceeds related to financing a portion of the costs
related to the construction of our new building in
Lansing, $8.5 million in proceeds from notes payable
related to the financing of the purchase of our Frederick
facility in April 2006, and $8.9 million in proceeds from
our revolving line of credit.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2008:
(in thousands)
Contractual obligations:
Long-term indebtedness including
current portion
Operating lease obligations
Contractual settlement liabilities
Total contractual obligations
Total
2009
Payments Due by Period
2011
2012
2010
2013 After 2013
$25,683
11,073
—
$36,756
$6,248
1,972
—
$8,220
$3,792
1,317
—
$5,109
$15,643
1,300
—
$16,943
$
—
1,268
—
$1,268
$
—
1,288
—
$1,288
$
—
3,928
—
$3,928
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 con-
tractual 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 devel-
oped, type and number of components of each prod-
uct 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, 2008, we had $57.2 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;
• $6.4 million outstanding under a mortgage loan
from PNC Bank used to finance the remain-
ing portion of the purchase price for the first
Frederick facility;
• $7.8 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;
• $25.5 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
• $15.0 million outstanding under a $15.0 million
revolving line of credit with Fifth Third Bank. This
balance was repaid in February 2009.
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
93
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. 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.
• 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 cov-
enants restricting our activities. Our term loan with
HSBC Realty Credit Corporation limits the ability of
Emergent BioDefense Operations to incur indebted-
ness and liens, sell assets, make loans, advances or
guarantees, enter into mergers or similar transac-
tions and enter into transactions with affiliates. Our
line of credit with Fifth Third Bank limits the ability
of Emergent BioDefense Operations to incur indebt-
edness and liens, sell assets, make loans, advances
or guarantees, enter into mergers or similar transac-
tions, enter into transactions with affiliates and amend
the terms of any government contract.
The facilities, software and other equipment that we
purchased with the proceeds of our loans from PNC
Bank, the State of Maryland and HSBC Realty Credit
Corporation serve as collateral for these loans. Our
line of credit with Fifth Third Bank is secured by
accounts receivable under our HHS and DoD contracts.
Our term loan with HSBC Realty Credit Corporation is
secured by substantially all of Emergent BioDefense
Operations’ assets, other than accounts receivable
under our HHS and DoD contracts. The covenants
under our existing debt instruments and the pledge
of our existing assets as collateral limit our ability to
obtain additional debt financing.
Under our mortgage loan from PNC Bank, we began
to make monthly principal payments beginning in
November 2006. A residual principal repayment of
approximately $5.0 million is due upon maturity in
October 2011. Interest is payable monthly and accrues
at an annual rate of 6.625% through October 2009.
In October 2009, the interest rate is scheduled to be
adjusted to a fixed annual rate equal to 3.20% over the
yield on U.S. government securities adjusted to a con-
stant maturity of two years.
Under our mortgage loan from HSBC Realty Credit
Corporation, we are required to make monthly prin-
cipal payments. A residual principal repayment of
approximately $7.0 million is due upon maturity in
April 2011. Interest is payable monthly and accrues
at an annual rate equal to the three month LIBOR
plus 3.0%.
loan with HSBC Realty Credit
Under our term
Corporation, we are required to make monthly pay-
ments in the amount of $250,000 in principal plus
accrued interest, with a residual principal payment
due upon maturity in June 2012. Interest on the loan
accrues at an annual rate equal to the 30-day LIBOR
plus 2.75%.
Under our revolving line of credit with Fifth Third Bank,
any outstanding principal is due upon maturity in June
2009. The principal amount outstanding at any time
under the line of credit may not exceed 75% of total
eligible accounts receivable under HHS and the DoD
contracts. Consistent with the terms of this agreement,
we repaid $15.0 million of outstanding principal under
the line of credit in February 2009. Interest is payable
monthly and accrues at an annual rate equal to the
30-day LIBOR plus 2.0%.
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
94
$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 financ-
ing to provide additional financial flexibility. Our
committed external sources of funds consist of the
borrowing availability under our revolving line of
credit with Fifth Third Bank and grant and devel-
opment funding of our anthrax immune globulin
therapeutic product candidate, recombinant botu-
linum vaccine candidate, anthrax monoclonal anti-
body therapeutic candidate and advanced BioThrax
vaccine candidate. 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 qualifica-
tion and validation activities related to our new
manufacturing facility in Lansing, Michigan and,
if we proceed, 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.
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 matu-
rity of our current borrowings. To the extent our capi-
tal resources are insufficient to meet our future capital
requirements, we will need to finance our cash needs
through public or private equity offerings, debt financings
or corporate collaboration and licensing arrangements.
Additional equity or debt financing, grants, or corporate
collaboration and licensing arrangements may not be
available on acceptable terms, if at all. If adequate funds
are not available, we may be required to delay, reduce
the scope of or eliminate our research and development
programs or reduce our planned commercialization
efforts. If we raise additional funds by issuing equity
securities, our stockholders may experience dilution.
Debt financing, if available, may involve agreements
that include covenants limiting or restricting our abil-
ity to take specific actions, such as incurring additional
debt, making capital expenditures or declaring divi-
dends. Any debt financing or additional equity that we
raise may contain terms, such as liquidation and other
preferences that are not favorable to us or our stock-
holders. If we raise additional funds through collabora-
tion and licensing arrangements with third parties, it
may be necessary to relinquish valuable rights to our
technologies or product candidates or grant licenses
on terms that may not be favorable to us.
Effects of Inflation
Our most liquid assets are cash, cash equivalents
and short-term investments. Because of their liquid-
ity, 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
95
and leasehold improvements, we believe that the incre-
mental inflation related to replacement costs of such
items will not materially affect our operations. However,
the rate of inflation affects our expenses, such as those
for employee compensation and contract services,
which could increase our level of expenses and the rate
at which we use our resources.
Recent Accounting Pronouncements
In November 2008, the EITF issued EITF Issue No. 08-8,
Accounting for an Instrument (or an Embedded Feature)
with a Settlement Amount That Is Based on the Stock of an
Entity’s Consolidated Subsidiary, or EITF No. 08-8. EITF
No. 08-8 applies to freestanding financial instruments
(and embedded features) for which the payoff to the
counterparty is based, in whole or in part, on the stock
of a consolidated subsidiary. EITF No. 08-8 applies to
those instruments (and embedded features) in the con-
solidated financial statements of the parent, whether
the instrument was entered into by the parent or the
subsidiary. Freestanding financial instruments (and
embedded features) for which the payoff to the coun-
terparty is based, in whole or in part, on the stock of a
consolidated subsidiary are not precluded from being
considered indexed to the entity’s own stock in the con-
solidated financial statements of the parent if the sub-
sidiary is a substantive entity. If the subsidiary is not a
substantive entity, the instrument or embedded feature
would not be considered indexed to the entity’s own
stock. EITF No. 08-8 is effective for fiscal years begin-
ning on or after December 15, 2008, and interim periods
within those fiscal years. Early adoption is not permit-
ted. We anticipate that the adoption of this EITF will not
have a material impact on our financial statements.
In November 2008, the EITF issued EITF Issue No. 08-7,
Accounting for Defensive Intangible Asset, or EITF No. 08-7.
EITF No. 08-7 applies to acquired intangible assets in
situations in which an entity does not intend to actively
use the asset but intends to hold or lock up the asset
to prevent others from obtaining access to the asset (a
defensive intangible asset), except for intangible assets
that are used in research and development activities.
EITF No. 08-7 states that a defensive intangible asset
should be accounted for as a separate unit of account-
ing. It should not be included as part of the cost of an
entity’s existing intangible asset(s) because the defen-
sive intangible asset is separately identifiable. EITF No.
08-7 applies to intangible assets acquired on or after
the beginning of the first annual reporting period begin-
ning on or after December 15, 2008. The provisions of
EITF No. 08-7 will impact our financial statements to
the extent that we acquire a defensive intangible asset
after EITF No. 08-7 has been adopted.
In June 2008, the FASB issued EITF Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entity’s Own Stock, or EITF No. 07-5. EITF
No. 07-5 supersedes EITF Issue No. 01-6, The Meaning
of ‘Indexed to a Company’s Own Stock,’ and provides guid-
ance in evaluating whether certain financial instru-
ments or embedded features can be excluded from the
scope of SFAS 133, Accounting for Derivatives and Hedging
Activities or SFAS 133. EITF No. 07-5 sets forth a two-
step approach that evaluates an instrument’s contin-
gent exercise and settlement provisions for the purpose
of determining whether such instruments are indexed
to an issuer’s own stock (a requirement necessary to
comply with the scope exception under SFAS 133). EITF
No. 07-5 will be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. We anticipate
that the adoption of this statement will not have a mate-
rial impact on our financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy
of Generally Accepted Accounting Principles, or SFAS No.
162. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the princi-
ples to be used in the preparation of financial statements
of nongovernmental entities that are presented in con-
formity with generally accepted accounting principles in
the U.S. SFAS No. 162 is effective 60 days following the
Securities and Exchange Commission approval of the
Public Company Accounting Oversight Board amend-
ments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
We anticipate that the adoption of this statement will not
have a material impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an
Amendment of FASB Statement No. 133, or SFAS No. 161.
SFAS No. 161 states that entities are required to provide
enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and
related hedged items are accounted for under SFAS No.
133 and its related interpretations and how derivative
96
instruments and related hedged items affect an enti-
ty’s financial position, financial performance, and cash
flows. The provisions of SFAS No. 161 are effective for
fiscal years beginning on or after November 15, 2008,
with early adoption encouraged. We anticipate that
the adoption of this statement will not have a material
impact on our financial statements.
In February 2008, the FASB issued a one-year deferral
for non-financial assets and liabilities to comply with
SFAS No. 157, Fair Value Measurements, or SFAS No. 157.
We adopted SFAS No. 157 for financial assets and lia-
bilities effective January 1, 2008. There was no material
effect upon adoption of this accounting pronouncement
on our consolidated results of operations or financial
position. We do not expect the adoption of SFAS No. 157
as it pertains to non-financial assets and liabilities to
have a material impact on our financial statements.
Interests
In December 2007, the FASB issued SFAS No. 160,
in Consolidated Financial
Noncontrolling
Statements—an Amendment of ARB No. 51, or SFAS No.
160. SFAS No. 160 clarifies that a noncontrolling inter-
est in a subsidiary is an ownership interest in the con-
solidated entity that should be reported as equity in the
consolidated financial statements, requires consoli-
dated net income (loss) 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 inter-
est in a subsidiary that do not result in deconsolidation,
and requires that a parent recognize a gain or loss in
net income (loss) when a subsidiary is deconsolidated.
The provisions of SFAS No. 160 are effective for fiscal
years beginning on or after December 15, 2008. We
anticipate that the adoption of this statement will not
have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business Combinations, or SFAS No. 141(R). SFAS
No. 141(R) requires the acquiring entity in a business
combination 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 rec-
ognition and measurement of contingent consideration,
and requires the expensing of acquisition-related costs
as incurred. In accordance with the provisions of SFAS
No. 141(R), in January 2009 we expensed $1.4 million
in previously capitalized acquisition-related costs asso-
ciated with acquisitions that were in progress but not
complete as of December 31, 2008. SFAS No. 141(R)
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 combina-
tion. SFAS No. 141(R) 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
be applied before that date. The provisions of SFAS No.
141(R) will impact our financial statements to the extent
that we are party to a business combination after the
pronouncement has been adopted.
In November 2007, the EITF issued EITF Issue No. 07-1,
Accounting for Collaborative Arrangements, or EITF No.
07-1. EITF No. 07-1 defines collaborative arrangements
and establishes reporting requirements for transac-
tions between participants in a collaborative arrange-
ment and between participants in the arrangement and
third parties. The provisions of EITF No. 07-1 are effec-
tive for fiscal years beginning on or after December 15,
2008 and interim periods within those fiscal years. EITF
No. 07-1 applies to all periods presented for all collab-
orative arrangements existing as of the effective date.
We anticipate that the adoption of the EITF will not have
a material impact on our financial statements.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our exposure to market risk is currently confined to our
cash and cash equivalents and restricted cash that have
maturities of less than three months. We currently do
not hedge interest rate exposure or foreign currency
exchange exposure, and the movement of foreign cur-
rency exchange rates could have an adverse or positive
impact on our results of operations. We have not used
derivative financial instruments for speculation or trad-
ing purposes. Because of the short-term maturities of
our cash and cash equivalents, we do not believe that an
increase in market rates would have a significant impact
on the realized value of our investments, but would likely
increase the interest expense associated with our debt.
97
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders Emergent BioSolutions Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Emergent BioSolutions Inc. and Subsidiaries
as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2008. These financial statements and
schedule 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. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as 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, 2008 and 2007, and the consoli-
dated results of their operations and their cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, in 2007 the Company changed its method of
accounting for uncertain tax provisions.
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,
2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2009 expressed an unquali-
fied opinion thereon.
McLean, Virginia
March 5, 2009
98
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
Note receivable
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Deferred tax assets, net
Restricted cash
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Accrued compensation
Indebtedness under line of credit
Long-term indebtedness, current portion
Income taxes payable
Deferred tax liabilities, net
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, 2008 and 2007, respectively
Common stock, $0.001 par value; 100,000,000 shares
authorized, 30,159,546 and 29,750,237 shares
issued and outstanding at December 31, 2008
and 2007, 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,
2008
2007
$ 91,473
24,855
19,728
10,000
6,623
152,679
124,656
12,073
208
1,172
$290,788
$ 18,254
1,399
11,380
15,000
6,248
951
557
232
54,021
35,935
—
1,483
91,439
—
—
30
109,170
(859)
91,008
199,349
$290,788
$105,730
18,817
16,897
—
2,866
144,310
110,218
12,397
5,200
1,383
$273,508
$ 20,257
1,778
9,502
11,832
3,514
7,665
211
902
55,661
42,588
2,473
1,627
102,349
—
—
30
101,933
(1,130)
70,326
171,159
$273,508
99
Emergent BioSolutions Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
2008
Year Ended December 31,
2007
2006
Revenues:
Product sales
Contracts and grants
Total revenues
Operating expense:
Cost of product sales
Research and development
Selling, general and administrative
Purchased in-process research and development
Income from operations
Other income (expense):
Interest income
Interest expense
Other income, net
Total other income (expense)
Minority interest in subsidiary
$
169,124
9,430
178,554
$
169,799
13,116
182,915
$
147,995
4,737
152,732
34,081
59,470
55,076
—
29,927
1,999
(47)
134
2,086
724
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)
—
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
32,737
12,055
20,682
0.69
0.68
$
$
$
29,835,134
30,458,098
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
The accompanying notes are an integral part of the consolidated financial statements.
100
Emergent BioSolutions Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities (net of effects of acquisitions):
Stock-based compensation expense
Depreciation and amortization
Deferred income taxes
Loss (gain) 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 expenses and other liabilities
Accrued compensation
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Issuance of note receivable
Acquisitions, net of cash received
Net cash used in investing activities
Cash flows from financing activities:
Restricted cash release (deposit)
Proceeds from borrowings on long term indebtedness and line of credit
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 line of credit
Excess tax benefits from stock-based compensation
Debt issuance costs
Net cash provided by 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
Year Ended December 31,
2007
2008
2006
$ 20,682
$ 22,936
$ 22,793
2,510
4,964
2,006
(135)
—
(1,336)
(6,038)
(2,831)
(6,714)
(3,546)
(457)
(523)
1,878
(3,143)
7,317
(20,813)
(10,000)
—
(30,813)
4,992
60,000
—
3,391
—
(60,751)
1,336
—
8,968
271
(14,257)
105,730
$ 91,473
2,541
4,817
5,589
24
—
(6,003)
24,514
7,825
(5,169)
(1,316)
(12)
(1,557)
2,312
(1,054)
55,447
(43,969)
—
—
(43,969)
(5,008)
33,195
—
2,471
—
(18,015)
6,003
(155)
18,491
(657)
723
4,715
987
27
477
(789)
(40,801)
(8,280)
11,463
(792)
7,105
209
1,013
(2,911)
(4,061)
(41,228)
—
(218)
(41,446)
(192)
32,430
54,229
590
(192)
(1,569)
789
(257)
85,828
(197)
29,312
76,418
$105,730
40,124
36,294
$ 76,418
$ 3,216
$ 16,788
$ 3,094
$ 14,329
$ 1,681
$ 2,788
Supplemental information on non-cash investing and financing activities:
Purchases of property, plant and equipment unpaid at year end
$ 2,510
$ 4,056
$ 11,140
The accompanying notes are an integral part of the consolidated financial statements.
101
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
(in thousands, except share and per share data)
Balance at December 31, 2005
Shares
22,303,280
Amount
$ 22
Exercise of stock options
Redemption of common stock
Conversion of class A $0.001 and class B
$0.01 par value common stock to $0.001
par value common stock
Issuance of common stock in initial public
offering (net of issuance cost)
Stock-based compensation expense
Excess tax benefits from exercises of
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 stock options
Net income
Foreign currency translation
Comprehensive income
Balance at December 31, 2007
Exercise of stock options
Stock-based compensation expense
Excess tax benefits from exercises
of stock options
Net income
Foreign currency translation
Comprehensive income
Balance at December 31, 2008
—
—
(22,303,280)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
—
—
(22)
—
—
—
—
—
—
$ —
—
—
—
—
—
—
—
$ —
—
—
—
—
—
—
$ —
Shares
21,283
95,858
—
(117,141)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Amount
$—
1
—
(1)
—
—
—
—
—
—
$—
—
—
—
—
—
—
—
$—
—
—
—
—
—
—
$—
$0.001 Par Value
Common Stock
Amount
$ —
Additional
Paid-In
Capital
$ 34,595
Accumulated
Other
Comprehensive
Loss
$ (276)
Retained
Earnings
$25,396
—
(192)
Total
Stockholders’
Equity
$ 59,737
590
(192)
Shares
175,828
—
—
22,420,421
5,000,000
27,596,249
2,153,988
29,750,237
409,309
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23
5
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
$28
$ 90,920
$ (473)
$47,997
$138,472
(197)
22,793
589
—
—
54,224
723
789
—
—
—
2,469
2,541
6,003
—
—
—
—
3,391
2,510
1,336
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(657)
271
—
$ (859)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(607)
22,936
20,682
—
54,229
723
789
22,793
(197)
22,596
2,471
2,541
(607)
6,003
22,936
(657)
22,279
3,391
2,510
1,336
20,682
271
20,953
$30
$101,933
$(1,130)
$70,326
$171,159
30,159,546
$30
$109,170
$91,008
$199,349
102
par value common stock
(22,303,280)
(22)
(117,141)
(1)
(in thousands, except share and per share data)
Balance at December 31, 2005
Exercise of stock options
Redemption of common stock
Conversion of class A $0.001 and class B
$0.01 par value common stock to $0.001
Issuance of common stock in initial public
offering (net of issuance cost)
Stock-based compensation expense
Excess tax benefits from exercises of
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 stock options
Net income
Foreign currency translation
Comprehensive income
Balance at December 31, 2007
Exercise of stock options
Stock-based compensation expense
Excess tax benefits from exercises
of stock options
Net income
Foreign currency translation
Comprehensive income
Balance at December 31, 2008
Class A $0.001 Par
Value Common Stock
Shares
22,303,280
Amount
$ 22
Class B $0.01 Par
Value Common Stock
Shares
21,283
95,858
—
Amount
$—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ —
$—
$ —
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
$ —
$—
$0.001 Par Value
Common Stock
Shares
—
175,828
—
22,420,421
5,000,000
—
—
—
—
—
27,596,249
2,153,988
—
—
—
—
—
—
29,750,237
409,309
—
—
—
—
—
30,159,546
Amount
$ —
—
—
23
5
—
—
—
—
—
$28
2
—
—
—
—
—
—
$30
—
—
—
—
—
—
$30
Additional
Paid-In
Capital
$ 34,595
589
—
—
54,224
723
789
—
—
—
$ 90,920
2,469
2,541
—
6,003
—
—
—
$101,933
3,391
2,510
1,336
—
—
—
$109,170
Accumulated
Other
Comprehensive
Loss
$ (276)
—
—
—
—
—
—
—
(197)
—
$ (473)
—
—
—
—
—
(657)
—
$(1,130)
—
—
—
—
271
—
$ (859)
Retained
Earnings
$25,396
—
(192)
—
—
—
—
22,793
—
—
$47,997
—
—
(607)
—
22,936
—
—
$70,326
—
—
—
20,682
—
—
$91,008
Total
Stockholders’
Equity
$ 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
3,391
2,510
1,336
20,682
271
20,953
$199,349
103
Emergent BioSolutions Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
AND ORGANIzATION
Inc.
(the “Company” or
Emergent BioSolutions
“Emergent”) is a biopharmaceutical company focused
on the development, manufacture and commercializa-
tion of vaccines and immune-related therapeutics. 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 manufac-
turing facilities at a multi-building campus on approxi-
mately 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 manufactur-
ing facility license for the manufacture of BioThrax at the
renovated facilities. In June 2004, the Company com-
pleted a corporate reorganization (“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 a portion of its portfolio of vaccine
and therapeutic product candidates through an acqui-
sition of Microscience Limited (“Microscience”) in a
share exchange in June 2005, and acquisitions of sub-
stantially 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 state-
ments include the accounts of Emergent and its
wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions
have been eliminated in consolidation. For invest-
ments in variable interest entities, as defined by FASB
Interpretation No. 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin
(ARB) No. 51, as revised (“FIN No. 46(R)”), the Company
would consolidate when it is determined to be the pri-
mary beneficiary.
Use of estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contin-
gent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
Cash and cash equivalents
Cash equivalents are highly liquid investments with
a maturity of 90 days or less at the date of purchase
and consist of time deposits and investments in money
market funds with commercial banks and financial
institutions. Also, the Company maintains cash bal-
ances with financial institutions in excess of insured
limits. The Company does not anticipate any losses
with such cash balances.
Fair value of financial instruments
The carrying amounts of the Company’s short-term
financial instruments, which include cash and cash
equivalents, accounts receivable and accounts payable,
approximate their fair values due to their short 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 $42.2 million and $42.0 million, respectively,
at December 31, 2008 and $46.1 million and $45.6 mil-
lion, respectively, at December 31, 2007.
Restricted cash
Restricted cash at December 31, 2008 and 2007
includes a certificate of deposit held by a bank as col-
lateral 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 collateral for a term loan, which was released to
unrestricted cash in 2008 due to the Company’s con-
tinued compliance with a debt coverage ratio covenant
contained in a loan agreement with HSBC Realty Credit
104
Corporation (USA) (“HSBC”). As of December 31, 2008
and 2007 the Company had restricted cash of $208,000
and $5.2 million, respectively.
Significant customers and accounts receivable
For the years ended December 31, 2008, 2007 and
2006, the Company’s primary customers were the U.S.
Department of Health and Human Services (“HHS”)
and the U.S. Department of Defense (the “DoD”). For
the year ended December 31, 2008, revenues from HHS
and HHS agencies comprised 96% of total revenues.
For the years ended December 31, 2007 and 2006,
revenues from the DoD, HHS and HHS agencies com-
prised 97% and 96%, respectively, of total revenues.
As of December 31, 2008 and 2007, the Company’s
receivable balances were comprised of 83% and 84%,
respectively, from these customers. Unbilled accounts
receivable, included in accounts receivable, totaling
$1.9 million and $1.1 million as of December 31, 2008
and 2007, respectively, relate to various service con-
tracts for which work has been performed, though
invoicing has not yet occurred. Accounts receivable
are stated at invoice amounts and consist primar-
ily of amounts due from HHS and the DoD as well as
amounts due under reimbursement contracts with
other government entities and non-government and
philanthropic organizations. If necessary, the Company
records a provision for doubtful receivables to allow
for any amounts which may be unrecoverable. This
provision is based upon an analysis of the Company’s
prior collection experience, customer creditworthi-
ness and current economic trends. As of December 31,
2008 and 2007, an allowance for doubtful account was
not recorded as the collection history from those cus-
tomers indicated collection was 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 manu-
facturing overhead expenses and includes the ser-
vices and products of third party suppliers. The
Company analyzes its inventory levels quarterly and
writes down, in the applicable period, inventory that
has become obsolete, inventory that has a cost basis in
excess of its expected net realizable value and inven-
tory in excess of expected customer demand. The
Company also writes off in the applicable period the
costs related to expired inventory.
Note receivable
The Company has entered into a loan and security
agreement with Protein Sciences Corporation (“PSC”)
to provide a loan to PSC of up to $10 million in conjunc-
tion with an agreement pursuant to which the Company
would acquire substantially all of the assets of PSC.
The loan is secured by substantially all of PSC’s assets,
including intellectual property. Under this loan agree-
ment and a related promissory note, PSC had drawn
$10 million as of December 31, 2008, and the Company
has recorded this as a note receivable. The note bears
interest at an annual rate of 8%. The note was origi-
nally due and payable on the earlier of December 31,
2008 or when the amount becomes due and payable
under the terms of the note. As of December 31, 2008,
the Company has recorded accrued interest on the note
receivable of $538,000, included in prepaid expenses
and other current assets.
On July 9, 2008, the Company initiated a lawsuit against
PSC and PSC’s senior management, alleging fraudu-
lent conduct by PSC’s senior management and breach
of the terms of PSC’s agreements with the Company.
Based on the event of default alleged by the Company,
the promissory note was accelerated and became due
and payable immediately. The Company has agreed to
extend the due date of the note to January 26, 2009,
and is currently in discussions with PSC to further
extend this due date. The Company has concluded that,
according to the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 114, Accounting by
Creditors for Impairment of a Loan, the $10 million note
receivable is not impaired as of December 31, 2008, and
has not recorded a reserve against this note.
105
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
39 years
3–7 years
Software
Leasehold improvements
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’s ability to realize deferred tax assets
depends upon future taxable income as well as the
limitations discussed below. For financial reporting
purposes, a deferred tax asset must be reduced by
a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not
be realized prior to expiration. The Company considers
future taxable income and ongoing tax planning strate-
gies in assessing the need for valuation allowances. In
general, if the Company determines that it is more likely
than not to realize more than the recorded amounts
of net deferred tax assets in the future, the Company
will reverse all or a portion of the valuation allowance
established against its deferred tax assets, resulting
in a decrease to the provision for income taxes in the
period in which the determination is made. Likewise, if
the Company determines that it is not more likely than
not to realize all or part of the net deferred tax asset
in the future, the Company will establish a valuation
allowance against deferred tax assets, with an offset-
ting increase to the provision for income taxes, in the
period in which the determination is made.
Under sections 382 and 383 of the Internal Revenue
Code, if an ownership change occurs with respect
to a “loss corporation,” as defined, there are annual
limitations on the amount of net operating losses and
deductions that are available. Due to the acquisition of
Microscience in 2005 and the Company’s initial public
offering, the Company believes the use of the operating
losses will be significantly limited.
Revenue recognition
The Company recognizes revenues from product
sales 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 previous contracts with HHS, the Company
invoiced HHS and recognized the related revenues
upon delivery of the product to the government car-
rier, at which time title to the product passed to HHS.
Under the Company’s current contracts with HHS, the
Company invoices HHS and recognizes the related rev-
enue upon acceptance by the government at delivery
site, at which time title to the product passes to HHS.
Under the Company’s previous contracts with the DoD,
title to the product passed to the DoD upon submis-
sion of the first invoice. The earnings process was
considered complete upon FDA release of the product
106
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 No. 104.
In December 2005, the Securities and Exchange
Commission released an interpretation with respect
to the accounting for sales of vaccines and bioterror
countermeasures to the federal government for place-
ment into the Strategic National Stockpile (“SNS”). This
interpretation provides for revenue recognition for spe-
cifically identified products purchased for the SNS in the
event that all requirements for revenue recognition, 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 require-
ments for revenue recognition 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. 00-21”), 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 col-
lectible. If not deemed substantive, the Company would
recognize such milestone as revenue on a straight-line
basis over the remaining expected term of continued
involvement in the research and development process.
Milestones are considered substantive if all of the 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 princi-
pal, with discretion to choose suppliers, bears credit
risk and performs a substantive part of the services,
revenue is recorded at the gross amount of the reim-
bursement. Costs associated with these reimburse-
ments are reflected as a component of research and
development expenses.
Impairment of long-lived assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
assesses the recoverability of its long-lived assets for
which an indicator of impairment exists by determin-
ing whether the carrying value of such assets can
be recovered through undiscounted future operating
107
cash flows. If the Company concludes that the carrying
value will not be recovered, the Company measures the
amount of such impairment by comparing the fair value
to the carrying value. The Company has recorded no
impairment losses for the years ended December 31,
2008, 2007 and 2006.
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.
Purchased in-process research
and development
The Company accounts for purchased in-process
research and development in accordance with SFAS No.
2, Accounting for Research and Development Costs 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. Under
these standards, the Company is required to determine
whether the technology relating to a particular research
and development project acquired through an acquisi-
tion has an alternative future use. If the determination
is that the technology has no alternative future use,
the acquisition amount assigned to assets to be used
in the particular research and development project
is expensed. Otherwise, the Company capitalizes and
amortizes the costs incurred over 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 func-
tional currency to the U.S. dollar in accumulated other
comprehensive income.
Foreign currencies
The local currency is the functional currency for the
Company’s foreign subsidiaries and, as such, assets
and liabilities are translated into U.S. dollars at year-
end exchange rates. Income and expense items are
translated at average exchange rates during the year.
Translation adjustments resulting from this process are
charged or credited to other comprehensive income.
Capitalized interest
The Company capitalizes interest 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, 2008, 2007 and 2006, the Company
incurred interest expense of $3.0 million, $3.2 mil-
lion and $1.9 million, respectively. Of these amounts,
the Company capitalized $3.0 million, $3.1 million and
$759,000, respectively.
Certain risks and uncertainties
The Company has derived substantially all of its rev-
enue from sales of BioThrax under contracts with HHS
and the DoD. The Company’s ongoing U.S. government
contract does not necessarily increase the likelihood
that it will secure future comparable contracts with
the U.S. government. The Company expects that a
significant portion of the business that it will seek
in the near future, in particular for BioThrax, will be
under government contracts that present a number of
risks that are not typically present in the commercial
contracting process. U.S. government contracts for
BioThrax are subject to unilateral termination or mod-
ification by the government. The Company may fail to
achieve significant sales of BioThrax to customers in
addition to the U.S. government, which would harm
its growth opportunities. The Company may not be
able to sustain or increase profitability. The Company
is spending significant amounts for the expansion of
its manufacturing facilities. The Company may not be
able to manufacture BioThrax consistently in accor-
dance with FDA specifications. Other than BioThrax,
all of the Company’s product candidates are under-
going clinical trials or are in early stages of develop-
ment, and failure is common and can occur at any
stage of development. None of the Company’s product
candidates other than BioThrax has received regula-
tory approval.
108
Earnings per share
Basic net income per share of common stock excludes
dilution for potential common stock issuances and is
computed by dividing net income by the weighted-average
number of shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could
occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
The following table presents the calculation of basic and diluted net income per share:
(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
2008
Year Ended December 31,
2007
2006
$
20,682
$
22,936
$
22,793
29,835,134
622,964
30,458,098
$
$
0.69
0.68
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
For the years ending December 31, 2008, 2007 and 2006,
outstanding stock options to purchase approximately
494,000, 463,000, and 160,000 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, 2008, 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 9—Stockholders’ Equity.
Effective January 1, 2006, the Company adopted the
fair value provisions of SFAS No. 123 (revised 2004),
Share-Based Payment (“SFAS No. 123(R)”). Under the
fair value recognition provisions of SFAS No. 123(R), the
Company recognizes stock-based compensation net of
an estimated forfeiture rate. The Company accounts for
equity instruments issued to non-employees in accor-
dance with 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.
Compensation cost recognized in 2008, 2007 and 2006
includes: (1) compensation cost for all share-based
payments granted prior to but not yet vested as of
December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-Based Compensation,
and (2) compensation cost for all share-based pay-
ments 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 compensation is recognized on a straight-line
basis over the vesting period.
Based on options granted to employees as of December 31,
2008, 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 1.6 years.
109
The Company has utilized the Black-Scholes valuation model for estimating the fair value of all stock options
granted. The fair value of each option is estimated on the date of grant. Set forth below are the assumptions used
in valuing the stock options granted and a discussion of the Company’s methodology for developing each of the
assumptions used:
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected average life of options
2008
0%
65%
1.63–2.75%
3.0 years
Year Ended December 31,
2007
0%
50%
2.99–5.09%
3.0 years
2006
0%
50%
4.58–5.21%
3.0 years
• Expected dividend yield—The Company does not
pay regular dividends on its common stock and
does not anticipate paying any dividends in the
foreseeable future.
• Expected volatility—Volatility is a measure of the
amount by which a financial variable, such as
share price, has fluctuated (historical volatility) or
is expected to fluctuate (expected volatility) dur-
ing a period. The Company analyzed the volatility
used by similar companies at a similar stage of
development to estimate expected volatility. The
volatility used by these similar companies ranged
from 40% to 89%, with an average estimated vol-
atility of 68%. The Company used a rate of 65% for
grants made in 2008, approximately the mid point
of this range.
• Risk-free interest rate—This is the range of U.S.
Treasury rates with a term that most closely
resembles the expected life of the option as of the
date in which the option was granted.
• Expected average life of options—This is the
period of time that the options granted are
expected to remain outstanding. This estimate is
based primarily on the Company’s expectation of
optionee exercise behavior subsequent to vesting
of options.
Pursuant to guidance in SFAS No. 123(R), the Company
classifies the cash flows resulting from the tax ben-
efits of deductions in excess of the compensation cost
recognized for options exercised (excess tax ben-
efits from stock-based compensation) as financing
cash flows.
Reclassifications
Certain amounts classified as accrued expenses and other
current liabilities in the consolidated balance sheet as of
December 31, 2007 have been reclassified as accounts
payable to conform with current period presentation.
Recent accounting pronouncements
In November 2008, the EITF issued EITF Issue No. 08-8,
Accounting for an Instrument (or an Embedded Feature)
with a Settlement Amount That Is Based on the Stock of an
Entity’s Consolidated Subsidiary (“EITF No. 08-8”). EITF
No. 08-8 applies to freestanding financial instruments
and embedded features for which the payoff to the
counterparty is based, in whole or in part, on the stock
of a consolidated subsidiary. EITF No. 08-8 applies to
those instruments and embedded features in the con-
solidated financial statements of the parent, whether
the instrument was entered into by the parent or the
subsidiary. Freestanding financial instruments and
embedded features for which the payoff to the coun-
terparty is based, in whole or in part, on the stock of a
consolidated subsidiary are not precluded from being
considered indexed to the entity’s own stock in the
consolidated financial statements of the parent if the
subsidiary is a substantive entity. If the subsidiary is
not a substantive entity, the instrument or embedded
feature would not be considered indexed to the entity’s
own stock. EITF No. 08-8 is effective for fiscal years
beginning on or after December 15, 2008, and interim
periods within those fiscal years. Early adoption is not
permitted. The Company anticipates that the adoption
of this statement will not have a material impact on its
financial statements.
In November 2008, the EITF issued EITF Issue No. 08-7,
Accounting for Defensive Intangible Asset (“EITF No. 08-7”).
EITF No. 08-7 applies to acquired intangible assets in
situations in which an entity does not intend to actively
use the asset but intends to hold or lock up the asset to
prevent others from obtaining access to the asset (“a
110
defensive intangible asset”). EITF No. 08-7 states that a
defensive intangible asset should be accounted for as a
separate unit of accounting. It should not be included as
part of the cost of an entity’s existing intangible asset(s)
because the defensive intangible asset is separately
identifiable. EITF No. 08-7 applies to intangible assets
acquired on or after the beginning of the first annual
reporting period beginning on or after December 15,
2008. The provisions of EITF No. 08-7 will impact the
Company’s financial statements to the extent that the
Company acquires a defensive intangible asset after
EITF No. 08-7 has been adopted.
In June 2008, the FASB issued EITF Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entity’s Own Stock (“EITF No. 07-5”). EITF
07-5 supersedes EITF Issue No. 01-6, The Meaning of
‘Indexed to a Company’s Own Stock,’ and provides guid-
ance in evaluating whether certain financial instru-
ments or embedded features can be excluded from the
scope of SFAS 133, Accounting for Derivatives and Hedging
Activities (“SFAS 133”). EITF No. 07-5 sets forth a two-
step approach that evaluates an instrument’s contin-
gent exercise and settlement provisions for the purpose
of determining whether such instruments are indexed
to an issuer’s own stock (a requirement necessary to
comply with the scope exception under SFAS 133). EITF
No. 07-5 will be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company
anticipates that the adoption of this statement will not
have a material impact on our financial statements.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(“SFAS No. 162”). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting
the principles to be used in the preparation of financial
statements of nongovernmental entities that are pre-
sented in conformity with generally accepted accounting
principles in the U.S. SFAS No. 162 is effective 60 days
following the Securities and Exchange Commission
approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company anticipates that
the adoption of this statement will not have a material
impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an
Amendment of FASB Statement No. 133 (“SFAS No. 161”).
SFAS No. 161 states that entities are required to provide
enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and
related hedged items are accounted for under SFAS
No. 133 and its related interpretations and how deriva-
tive instruments and related hedged items affect an
entity’s financial position, financial performance, and
cash flows. The provisions of SFAS No. 161 are effec-
tive for fiscal years beginning on or after November 15,
2008. The Company anticipates that the adoption of this
statement will not have a material impact on its finan-
cial statements.
In February 2008, the FASB issued a one-year defer-
ral for non-financial assets and liabilities to comply
with SFAS No. 157, Fair Value Measurements (“SFAS No.
157”). The Company adopted SFAS No. 157 for financial
assets and liabilities effective January 1, 2008. There
was no material effect upon adoption of this accounting
pronouncement on the Company’s consolidated results
of operations or financial position. The Company does
not expect the adoption of SFAS No. 157 as it pertains
to non-financial assets and liabilities to have a material
impact on its financial statements.
issued SFAS No.
In December 2007, the FASB
160, Noncontrolling Interests
in Consolidated Financial
Statements—an Amendment of ARB No. 51 (“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 consoli-
dated financial statements, requires consolidated net
income (loss) 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 inter-
est in a subsidiary that do not result in deconsolidation,
and requires that a parent recognize a gain or loss in net
income (loss) when a subsidiary is deconsolidated. The
provisions of SFAS No. 160 are effective for fiscal years
beginning on or after December 15, 2008. The Company
anticipates that the adoption of this statement will not
have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations (“SFAS No.
111
141(R)”). SFAS No. 141(R) requires the acquiring
entity in a business combination 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 measure-
ment of contingent consideration, and requires the
expensing of acquisition-related costs as incurred. In
accordance with the provisions of SFAS No. 141(R), in
January 2009 the Company expensed $1.4 million in
previously capitalized acquisition-related costs asso-
ciated with acquisitions that were in progress but not
complete as of December 31, 2008. SFAS No. 141(R)
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. 141(R) applies prospectively to
business combinations for which the acquisition date
is on or after the beginning of the first annual report-
ing period beginning on or after December 15, 2008,
and it may not be applied before that date. The provi-
sions of SFAS No. 141(R) will impact the Company’s
financial statements to the extent that the Company is
party to a business combination after the pronounce-
ment has been adopted.
In November 2007, the EITF issued EITF Issue No. 07-1,
Accounting for Collaborative Arrangements (“EITF No.
07-1”). EITF No. 07-1 defines collaborative arrange-
ments and establishes reporting requirements for
transactions between participants in a collaborative
arrangement and between participants in the arrange-
ment and third parties. The provisions of EITF No.
07-1 are effective for fiscal years beginning on or after
December 15, 2008 and interim periods within those
fiscal years. EITF No. 07-1 applies to all periods pre-
sented for all collaborative arrangements existing as
of the effective date. The Company anticipates that
the adoption of EITF No. 07-1 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,
a German limited liability company, to expand the
Company’s commercial vaccine portfolio, pursuant 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
provides 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, 2008, 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
$250
180
$430
The assets acquired were accounted for in accor-
dance with the provisions of SFAS No. 141, Business
Combinations. 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.
112
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
7. LONG-TERM DEBT
The components of long term-debt are as follows:
(in thousands)
Billed
Unbilled
Total
5. INVENTORIES
Inventories consist of the following:
(in thousands)
Raw materials and supplies
Work-in-process
Finished goods
Total inventories
December 31,
2008
$23,005
1,850
$24,855
2007
$17,741
1,076
$18,817
December 31,
2008
$ 2,755
14,459
2,514
$19,728
2007
$ 2,463
11,483
2,951
$16,897
(in thousands)
Term loan dated June 2007;
30-day LIBOR plus 2.75%,
due June 2012
Term loan dated April 2006;
three month 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
Other
Total long-term indebtedness
Less current portion of
December 31,
2007
2008
$25,500
$28,750
7,809
8,167
2,500
2,500
6,369
5
42,183
6,671
14
46,102
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
long-term indebtedness
(6,248)
(3,514)
Non-current portion of
long-term indebtedness
$35,935
$42,588
(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
2008
$ 5,050 $ 4,974
28,119
22,657
6,423
82,518
144,767
26,410
19,626
5,866
71,129
128,005
(20,111)
(17,787)
$124,656 $110,218
Depreciation and amortization expense was $5.0 mil-
lion, $4.8 million and $4.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively. For the
years ended December 31, 2008, 2007 and 2006, depre-
ciation and amortization expense included approxi-
mately $0, $1.0 million and $1.3 million, respectively,
related to the amortization of internal-use software. As
of December 31, 2008 and 2007, there was no unamor-
tized internal use software-cost.
In June 2007, the Company entered into a loan agreement
with 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 mil-
lion term loan and a $5 million revolving line of credit.
Under the new loan agreement, the Company is required
to make monthly payments in the amount of $250,000 in
principal plus accrued interest, with a residual princi-
pal 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 supply contracts with HHS
and the DoD that are pledged as collateral to secure a
$15 million revolving line of credit with Fifth Third Bank.
The annual interest rate is based on the 30-day LIBOR
plus 2.75% (3.83% as of December 31, 2008).
Under this term loan, the Company is required to main-
tain a book leverage ratio of less than 1.25. This ratio is
calculated by dividing total liabilities, excluding deferred
113
revenues specific to contracts with the U.S. govern-
ment, 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 or maintain a minimum balance of
$5.0 million in a deposit account pledged to HSBC. This
ratio is calculated by dividing earnings before inter-
est, taxes, depreciation and amortization for the most
recent four quarters by the sum of current obligations
under capital leases and principal obligations and
interest expenses for borrowed money, in each case
due and payable for the following four quarters. The
Company is in compliance with these covenants as of
December 31, 2008.
In August 2006, the Company entered into a term loan
with HSBC 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 principal payments beginning in April 2007
and a residual principal payment of approximately
$5.6 million upon maturity in August 2011. Under the
revolving credit loan, the Company was not required
to repay outstanding principal until October 2007. In
October 2007, the outstanding principal 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 acquisi-
tion of a 145,000 square foot facility in Frederick,
Maryland for $9.8 million. This facility was previously
under a lease which contained an option to purchase
the facility. The Company paid $1.3 million in cash
and financed the remaining balance with a bank loan
in the amount of $8.5 million. This loan requires
monthly principal and interest payments from May
2006 through April 2011 of $72,000 with a balloon
payment for the remaining unpaid principal and
interest due in April 2011. The annual interest rate
is based on the three month LIBOR plus 3.0% (4.83%
as of December 31, 2008). The loan is collateral-
ized by the facility. The loan requires the Company
to comply with certain non-financial covenants. The
Company is in compliance with these covenants as of
December 31, 2008.
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 interest in
the building. The Company is required to pay an annual
fee of 1.0% to maintain the letter of credit. The borrow-
ing 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 specified employ-
ment levels are achieved and maintained through
December 2012, at least $42.9 million in project costs
are expended prior to December 2009, and the Company
occupies the building through December 2012. 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 employees. If as of December 31, 2009,
2010, 2011 or 2012 the Company employs fewer than
225 full-time employees at the Company’s facilities in
Frederick, Maryland, then the Company will be required
to repay the entire outstanding principal amount of the
loan plus accrued interest. The full $2.5 million out-
standing under this loan is included in the current por-
tion of long-term indebtedness at December 31, 2008,
as the first measurement date under the agreement is
December 31, 2009
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 pur-
chase 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
114
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, 2008.
Scheduled principal repayments and maturities on
long-term debt as of December 31, 2008 are as follows:
(in thousands)
2009
2010
2011
2012
2013
2014 and beyond
$ 6,248
3,792
15,643
16,500
—
—
$42,183
8. 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. The Company can borrow under
this line of credit through June 2009, at which time the
agreement expires. The line of credit is secured by
accounts receivable under the Company’s HHS con-
tract and bears interest at a rate equal to the 30-day
LIBOR plus 2.0% (3.08% as of December 31, 2008).
The Company is subject to certain covenants, includ-
ing maintenance of specified equity levels on a quar-
terly basis, and is currently in compliance with those
covenants. At December 31, 2008 and 2007, $15.0 and
$11.8 million, respectively, were outstanding under the
line of credit. These amounts were repaid in February
2009 and January 2008, respectively.
9. 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, 2008 and 2007, 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 September 20, 2006, the Company’s board of direc-
tors recommended to the stockholders of the Company
an amendment of the Company’s amended and restated
certificate of incorporation, which the stockholders
approved on October 27, 2006, that, among other things,
reclassified the Class A Common Stock as $0.001 par
value per share Common Stock, increased the number
of authorized 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.
On November 14, 2006, the Company completed its initial
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
115
costs related to the offering were $8.3 million, result-
ing in net proceeds from the offering of $54.2 million. In
conjunction with the completion of the IPO, all outstand-
ing 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.
Stock options
As of December 31, 2008, 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%. As of
December 31, 2008, an aggregate of 3,424,040 shares
of Common Stock are authorized for issuance under
the 2006 Plan, and a total of 756,922 options are avail-
able for issuance. The maximum number of options
that may be granted per year under the 2006 Plan to
a single participant is 287,700. The exercise price of
each incentive option must be not less than 100% of the
fair market value of the shares on the date of grant.
Options granted under the 2006 Plan have a vesting
period of no more than 5 years and a contractual life
of no more than 10 years. The terms and conditions of
stock options (including price, vesting schedule, term
and number of shares) under the Emergent Plans are
determined by the Company’s compensation commit-
tee, 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, 2007
Exercisable at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Exercisable at December 31, 2008
2006 Plan
2004 Plan
Number
of Shares
1,380,111
289,900
1,512,540
(200,599)
(225,533)
2,466,519
487,148
Weighted-
Average
Exercise Price
$ 9.77
$10.27
7.96
9.86
8.57
$ 8.76
$10.00
Number
of Shares
666,519
507,802
—
(208,710)
(19,181)
438,628
383,486
Weighted-
Average
Exercise Price
$ 6.04
$ 4.94
—
6.76
10.28
$ 5.52
$ 4.68
Aggregate
Intrinsic
Value
743,995
682,439
51,826,012
16,063,651
116
The weighted-average remaining contractual term
of options outstanding as of December 31, 2008 and
2007 was 5.7 and 5.5 years, respectively. The weighted-
average remaining contractual term of options exercis-
able as of December 31, 2008 and 2007 was 4.5 and 4.6
years, respectively.
The weighted-average grant date fair value of options
granted during the years ended December 31, 2008,
2007 and 2006 was $3.53, $3.58 and $3.94, respec-
tively. The total intrinsic value of options exercised
during the years ended December 31, 2008, 2007 and
2006 was $4.0 million, $20.5 million and $2.3 million,
respectively. The total fair value of options vested dur-
ing 2008 was $1.9 million.
Stock-based compensation expense was recorded in
the following financial statement line items:
Years Ended
December 31,
(in thousands)
2007
2008
82
$ 100 $
Cost of sales
520
377
Research and development
Selling, general and administrative
2,082
1,890
Total stock-based compensation expense $2,510 $2,541
A summary of the status of the Company’s nonvested stock options at December 31, 2008 is presented below:
Nonvested at December 31, 2007
Granted
Exercised
Vested
Forfeited
Nonvested at December 31, 2008
Options expected to vest at December 31, 2008
2006 Plan
2004 Plan
Number
of Shares
1,090,211
1,512,540
—
(419,747)
(203,633)
1,979,371
1,309,957
Weighted-Average
Grant Date
Fair Value
$3.66
3.53
—
3.69
3.42
$3.57
Number
of Shares
158,717
—
—
(103,575)
—
55,142
45,770
Weighted-Average
Grant Date
Fair Value
$3.53
—
—
3.26
—
$4.24
During the years ended December 31, 2008, 2007 and
2006, the Company received a tax benefit from stock
options exercised of approximately $1.3 million, $6.0 mil-
lion and $789,000, respectively.
10. INCOME TAXES
Significant components of the provision for income taxes
attributable to operations consist of the following:
(in thousands)
Current
Federal
State
International
Total current
Deferred
2008
2007
2006
$11,186 $11,189 $14,212
812
—
13,464 15,024
98
101
11,385
2,275
—
Federal
State
100
98
Total preferred
198
Total provision for income taxes $12,055 $13,051 $15,222
2,832
(3,245)
(413)
(1,174)
1,844
670
The Company’s net deferred tax asset consists of the
following:
(in thousands)
Net operating loss carryforward
Research and development
carryforward
Stock compensation
Foreign deferrals
Other
Deferred tax asset
Fixed assets
Other
Deferred tax liability
Valuation allowance
Net deferred tax asset
December 31,
2007
2008
$ 6,361
$ 8,458
1,714
730
46,151
1,902
58,955
(851)
(2,051)
(2,902)
(44,537)
$ 11,516
511
523
39,044
1,508
47,947
(756)
(1,303)
(2,059)
(33,702)
$ 12,186
Net operating loss carryforwards consist of approxi-
mately $158 million for state
jurisdictions and
$134 million for foreign jurisdictions. The state net
117
operating loss carryforwards will begin to expire in
2018. The foreign net operating loss carryforwards
will have an indefinite life unless the foreign enti-
ties have a change in the nature or conduct of the
business in the three years following a change in
ownership. The use of the Company’s net operating
loss carryforwards may be restricted due to changes
in Company ownership.
The provision for income taxes differs from the amount of taxes determined by applying the U.S. federal statutory
rate to loss before provision for income taxes as a result of the following:
(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 income taxes
The effective annual tax rate for the years ended
December 31, 2008, 2007 and 2006 was 37%, 36% and
40%, respectively. The increase in the effective rate
from 2007 to 2008 is due primarily to a reduction in state
valuation allowance in 2007 related to the expected
utilization of net operating losses, partially offset by a
reduction in state and local taxes in 2008. The decrease
in the effective rate from 2006 to 2007 was due primar-
ily to a reduction in state valuation allowances related
to the expected utilization of net operating losses.
in
for Uncertainty
In September 2006, the FASB issued FASB Interpretation
48, Accounting
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
2008
$ 66,326
(33,589)
$ 32,737
$ 11,458
(2,118)
(8,384)
10,835
—
(11)
(819)
185
909
$ 12,055
Year Ended December 31,
2007
$ 62,016
(26,029)
$ 35,987
$ 12,595
701
(7,106)
6,419
493
154
(880)
(617)
1,292
$ 13,051
2006
$ 56,698
(18,683)
$ 38,015
$ 13,305
(395)
(6,050)
6,605
—
752
(759)
1,044
720
$ 15,222
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 earnings.
The Company recognizes interest in interest expense
and recognizes potential penalties related to unrecog-
nized tax benefits in selling, general and administrative
expense. The Company accrued approximately $44,000
and $27,000, respectively, for the payment of interest and
penalties as of December 31, 2008 and 2007. Of the total
unrecognized tax benefits recorded at December 31,
2008 and 2007, $160,000 and $33,000, respectively
is classified as a current liability and $110,000 and
$244,000, respectively is classified as a non-current
liability on the balance sheet. As of December 31, 2008
and 2007, $0 and $33,000, respectively, of unrecognized
tax benefits will reverse within the next twelve months.
118
The table below presents the gross unrecognized tax
benefits activity for 2007 and 2008:
the Company made matching contributions of approxi-
mately $827,000, $682,000 and $573,000, respectively.
(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
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, 2008
$ 607
262
(65)
100
(201)
(426)
277
28
—
—
—
(35)
$ 270
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 2007 to 2005 remain open to examination.
The Company’s tax returns in the United Kingdom remain
open to examination for the tax years 2007 to 2001, and
tax returns in Germany remain open indefinitely.
In July 2008, the Company was notified by the Internal
Revenue Service that the federal income tax return for
the 2006 tax year has been selected for a limited scope
audit. A federal income tax audit of the Company’s tax
return for the 2005 tax year was completed in March
2008. As a result of that audit, the Company paid an
assessment of $450,000, including $55,000 of interest.
A federal income tax audit of the Company’s tax return
for the 2004 tax year was completed in March 2007. As
a result of this audit, the Company paid an assessment
of $722,000, including $96,000 of interest.
11. 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 cur-
rently provides for matching of qualified deferrals up
to 50% of the first 6% of the employee’s salary. During
the years ended December 31, 2008, 2007 and 2006,
12. LEASES
The Company leases laboratory and office facilities,
office equipment and vehicles under various operating
lease agreements. The Company leases office and labo-
ratory space in Gaithersburg, Maryland under a non-
cancelable operating lease that expires in November
2009. 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, 2008,
2007 and 2006, total rent expense was $3.7 million,
$3.4 million and $2.4 million, respectively.
Future minimum lease payments under operating lease
obligations as of December 31, 2008 are as follows:
(in thousands)
2009
2010
2011
2012
2013
2014 and beyond
Total minimum lease payments
$ 1,972
1,317
1,300
1,268
1,288
3,928
$11,073
13. LITIGATION
In July 2008, the Company filed a lawsuit against Protein
Sciences Corporation (“PSC”), Daniel D. Adams, PSC’s
Chief Executive Officer, and Manon M.J. Cox, PSC’s
Chief Operating Officer, in the Supreme Court of the
State of New York asserting claims related to a let-
ter of intent, a loan agreement, and an asset purchase
agreement that PSC and the Company entered into in
2008. On September 12, 2008, a stipulation of discon-
tinuance was filed with the court regarding the claims
against Mr. Adams and Ms. Cox, and, on October 3,
2008, the Company filed a separate suit against Mr.
Adams and Ms. Cox in the United States District Court
for the District of Connecticut, alleging fraud and unfair
trade practices and seeking compensatory and punitive
damages. On September 12, 2008, the Company filed
an amended complaint against PSC, which remains
119
pending in the New York state court, alleging fraud,
breach of the letter of intent, loan agreement, and asset
purchase agreement, breach of the duty of good faith
and fair dealing, unjust enrichment, and unfair busi-
ness practices. The Company is seeking from PSC
money damages of no less than $13 million, punitive
damages, declaratory judgment that the Company has
no further funding obligations to PSC, injunctive relief
to protect the collateral for the loan, and other appro-
priate relief. PSC has moved to dismiss the New York
action, and Mr. Adams and Ms. Cox have moved to dis-
miss the Connecticut action. Those motions remain
pending. PSC, Mr. Adams, and Ms. Cox have not yet
asserted any counterclaims, but PSC has stated that
it may assert counterclaims for “among other things,
breach of contract, intentional misrepresentations,
tortious interference with business relations and unfair
trade practices,” which would include a $1.5 million
reverse break-up fee under the asset purchase agree-
ment as a setoff to the loan.
Between March 2008 and June 2008, the Company
provided PSC with $10 million in funding under a loan
agreement between the parties to enable PSC to con-
tinue operations through June 24, 2008, the anticipated
closing date of the asset purchase transaction. Under
the loan agreement, PSC was obligated to repay the
$10 million principal plus interest and costs of collec-
tion the earlier of December 31, 2008, or an event of
default under the loan agreement. In the lawsuit against
PSC, the Company alleges that an event of default
occurred under the loan agreement and that the loan
was due and payable as of June 2008. Subsequent to fil-
ing the lawsuit, a potential alternative transaction was
discussed with PSC. In connection with those discus-
sions, effective December 31, 2008, the Company and
PSC entered into a forbearance agreement, pursuant
to which the Company agreed not to foreclose on the
collateral or to pursue other remedies relating to the
loan prior to January 26, 2009. On January 5, 2009, the
Company notified PSC that it would not be pursuing the
proposed alternative transaction, and on January 6,
2009, issued a press release stating that it had ended
all activities related to the planned acquisition of PSC
and would pursue full repayment of the $10 million
loan, which is secured by substantially all of PSC’s
assets, and settlement of the outstanding litigation.
Since January 26, 2009, when the forbearance period
expired, the Company has been negotiating the terms
of an extended forbearance agreement with PSC, but,
as of the date of this report, has not been successful
in reaching such an agreement. If an agreement is not
reached, the Company intends to seek to enforce its
rights, which may include initiating a foreclosure action
with respect to the collateral for the loan.
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. ASSET PURCHASE AGREEMENT
In May 2008, the Company and VaxGen, Inc. (“VaxGen”)
entered into an asset purchase agreement in which the
Company acquired all assets and rights related to a
recombinant protective antigen anthrax vaccine prod-
uct candidate and related technology from VaxGen, in
exchange for consideration of $2 million upon execution
of the definitive agreement, up to an additional $8 mil-
lion in milestone payments, and specified percentages
of future net sales. The $2 million was paid to VaxGen in
May 2008, and a $1 million milestone payment was paid
in August 2008. These amounts have been recorded as
research and development expense.
15. JOINT VENTURE
In July 2008, the Company entered into a joint venture
with the University of Oxford (“Oxford”) and certain
University of Oxford researchers to conduct clinical
trials in the advancement of a vaccine candidate for
tuberculosis, resulting in the formation of the Oxford-
Emergent Tuberculosis Consortium (“OETC”). The
Company has a 51% equity interest in OETC and controls
the OETC Board of Directors. In addition, the Company
has certain funding and services obligations of up to
$20.3 million related to its investment. In accordance
with the provisions of FIN No. 46(R) the Company has
evaluated its variable interests in OETC and has deter-
mined that it is the primary beneficiary as it will absorb
the majority of expected losses. Accordingly, the
Company consolidates the entity. As of December 31,
2008, assets of $514,000 and liabilities of $122,000
120
related to this entity are included within the Company’s
consolidated balance sheet. During the year ended
December 31, 2008, the entity incurred a net loss of
$2.1 million, of which $1.3 million is included in the
Company’s consolidated statement of operations.
In conjunction with the establishment of OETC, the
Company granted a put option to Oxford and the
Oxford researchers whereby the Company may be
required to acquire all of the OETC shares held by
Oxford and the Oxford researchers at fair market
value of the underlying shares. This put option is
contingent upon the satisfaction of a number of con-
ditions that must exist or occur subsequent to the
grant of a marketing authorization for a tuberculosis
vaccine by the European Commission. The Company
accounts for the put option in accordance with SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities and EITF Topic D-98, Classification
and Measurement of Redeemable Securities (revised
December 15, 2008). In accordance with this guid-
ance, the Company has determined that the put option
has a fair value of $0 as of December 31, 2008.
16. 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 former partner at WilmerHale, who did not
participate in providing legal services to the Company.
For the 2008 and 2007 periods during which the spouse
of the General Counsel was partner at WilmerHale, the
Company incurred fees for legal services of approxi-
mately $735,000 and $1.0 million, respectively. At
December 31, 2008 and 2007, $0 and $131,000, respec-
tively, remained in accounts payable for these services.
The Company entered into a marketing arrangement in
2009 with an entity controlled by family members of the
Chief Executive Officer to market and sell BioThrax. The
contract requires a payment of 17.5% and reimburse-
ment of certain expenses on net sales of our biodefense
products in Saudi Arabia, and 15% and reimbursement of
certain expenses on net sales in Qatar and United Arab
Emirates. No royalty payments under this agreement
have been triggered for the year ended December 31,
2008. During the year ended December 31, 2008, the
Company paid the same entity a $70,000 settlement
related to a previously terminated agreement.
The Company has entered into a consulting arrange-
ment with a member of the Company’s Board of
Directors. At December 31, 2008 and 2007, $7,000 and
$15,000, respectively, remained in accounts payable
for these services. During the years ended December
31, 2008 and 2007, the Company paid approximately
$218,000 and $200,000, respectively, under this agree-
ment for strategic consultation and project support for
the Company’s marketing and communications group.
The Company has entered
into a transportation
arrangement with an entity owned by the Company’s
Chief Executive Officer. At December 31, 2008 and
2007, $3,000 remained in accounts payable for these
services. During the years ended December 31, 2008
and 2007, the Company paid approximately $31,000
and $33,000, respectively, under this arrangement for
transportation and logistical support.
17. SEGMENT INFORMATION
For financial reporting purposes, the Company reports
financial information for two business segments: bio-
defense and commercial. In the biodefense segment,
the Company develops, manufactures and commercial-
izes vaccine and immune-related therapeutics for use
against biological agents that are potential weapons of
bioterrorism or biowarfare. Revenues in this segment
relate primarily to the Company’s FDA-licensed prod-
uct, BioThrax. In the commercial segment, the Company
develops vaccines and immune-related therapeutics
for use against infectious diseases and other medical
conditions that have resulted in significant unmet or
underserved public health needs. Revenues in this seg-
ment consist predominantly of milestone payments and
development and grant revenues received under col-
laboration, development contracts and grant arrange-
ments. 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 seg-
ment consist primarily of cash and fixed assets.
121
(in thousands)
Biodefense
Commercial
All Other
Total
Reportable Segments
Year Ended December 31, 2008
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, 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
$174,061
—
26,321
—
—
3,438
69,770
161,091
20,014
$179,738
—
24,744
—
—
3,445
76,397
133,692
38,880
$ 4,346
—
29,658
—
—
1,114
(41,313)
23,450
64
$ 3,177
—
26,159
—
—
947
(38,213)
21,672
1,991
$
147
—
3,491
1,999
(47)
412
(7,775)
106,247
735
$
—
—
3,055
2,809
(71)
425
(15,248)
118,144
3,098
$178,554
—
59,470
1,999
(47)
4,964
20,682
290,788
20,813
$182,915
—
53,958
2,809
(71)
4,817
22,936
273,508
43,969
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the years ended December 31, 2008 and 2007 is presented in the following tables:
(in thousands)
Fiscal year 2008
Revenue
Income from operations
Net income
Net income per share, basic
Net income per share, diluted
Fiscal year 2007
Revenue
Income (loss) from operations
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
March 31,
June 30,
September 30,
December 31,
Three Months Ended
$42,720
11,175
7,024
0.24
0.24
$26,448
(5,831)
(2,690)
(0.10)
(0.10)
$43,485
2,558
1,815
0.06
0.06
$23,186
(8,657)
(4,961)
(0.17)
(0.17)
$56,599
15,338
10,386
0.35
0.34
$43,644
4,422
2,845
0.10
0.10
$35,750
856
1,457
0.05
0.05
$89,637
43,159
27,742
0.93
0.93
122
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH
ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures
Our management, with the participation of our chief
executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and proce-
dures as of December 31, 2008. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act, means controls
and other procedures of a company that are designed
to ensure that information required to be disclosed by
a company in the reports that it files or submits under
the Exchange Act is recorded, processed, summa-
rized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and
procedures designed to ensure that information required
to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and
communicated to the company’s management, includ-
ing its principal executive and principal financial offi-
cers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any
controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance
of achieving their objectives and management nec-
essarily applies its judgment in evaluating the cost-
benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and
procedures as of December 31, 2008, our chief execu-
tive officer and chief financial officer concluded that, as
of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.
Management’s Report on Internal Control
Over Financial Reporting
Our management is responsible for establishing and
maintaining adequate internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Because of its inherent limita-
tions, internal control over financial reporting may not
prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are sub-
ject to the risk that controls may become inadequate
because of changes in conditions, or that the degree
of compliance with the policies or procedures may
deteriorate. Our management assessed the effective-
ness of our internal control over financial reporting
as of December 31, 2008. In making this assessment,
our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework.
Based on this assessment, our management concluded
that, as of December 31, 2008, our internal control over
financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public
accounting firm that has audited our consolidated finan-
cial statements included herein, has issued an attesta-
tion report on the effectiveness of our internal control
over financial reporting as of December 31, 2008, a copy
of which is included in this annual report on Form 10-K.
Changes in Internal Control Over
Financial Reporting
No change in our internal control over financial report-
ing, as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act, occurred during the fiscal quarter
ended December 31, 2008 that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
123
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Stockholders of Emergent BioSolutions Inc. and Subsidiaries
We have audited Emergent BioSolutions Inc. and Subsidiaries’ internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Emergent BioSolutions
Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial report-
ing, and for its assessment of the effectiveness of internal control over financial reporting included in the accom-
panying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an
opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a mate-
rial weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reason-
able assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Emergent BioSolutions Inc. and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Emergent BioSolutions Inc. and Subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2008 of Emergent BioSolutions Inc. and Subsidiaries and our
report dated March 5, 2009 expressed an unqualified opinion thereon.
McLean, Virginia
March 5, 2009
124
ITEM 9B. OTHER INFORMATION
Executive Compensation
On March 5, 2009, cash bonuses were awarded to the
following executives in the following amounts: Fuad
El-Hibri, $323,250; Daniel J. Abdun-Nabi, $211,350; R.
Don Elsey, $118,560; Kyle W. Keese, $96,460; and Robert
G. Kramer, Sr., $78,815. Also on March 5, 2009, the fol-
lowing base salaries and target bonus percentages for
the following executives were approved, all effective as
of January 1, 2009: Fuad El-Hibri, $575,000 and 65%;
Daniel J. Abdun-Nabi, $410,958 and 45%; R. Don Elsey,
$315,666 and 45%; Kyle W. Keese, $286,624 and 40%;
and Robert G. Kramer, Sr., $394,075 and 40%.
125
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
Directors and Executive Officers
Information regarding our directors may be found
under the caption “Election of Directors’’ in the Proxy
Statement for our 2009 Annual Meeting of Stockholders.
Information regarding our executive officers may be
found under the caption “Executive Officers of the
Registrant’’ in the Proxy Statement for our 2009 Annual
Meeting of Stockholders. Such information is incorpo-
rated herein by reference.
Compliance with Section 16(a)
of the Exchange Act
Information regarding compliance with Section 16(a) of
the Exchange Act by our directors, officers and ben-
eficial owners of more than 10% of our common stock
may be found under the caption “Stock Ownership
(a) Beneficial Ownership
Information—Section 16
Reporting Compliance’’ in the Proxy Statement for our
2009 Annual Meeting of Stockholders. Such informa-
tion is incorporated herein by reference.
Code of Ethics
We have adopted a code of business conduct and ethics
that applies to our directors, officers (including our prin-
cipal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing
similar functions), as well as our other employees. A copy
of our code of business conduct and ethics is available
on our website at www.emergentbiosolutions.com. We
intend to post on our website all disclosures that are
required by applicable law, the rules of the Securities
and Exchange Commission or the New York Stock
Exchange concerning any amendment to, or waiver
from, our code of business conduct and ethics.
Director Nominees
Information regarding procedures for recommend-
ing nominees to the board of directors may be found
under the caption “Corporate Governance—Director
Nomination Process” in the Proxy Statement for our
2009 Annual Meeting of Stockholders. Such informa-
tion is incorporated herein by reference.
Audit Committee
We have separately designated a standing Audit
Committee established in accordance with Section
3(a)(58)(A) of the Exchange Act. Additional information
regarding the Audit Committee may be found under the
captions “Corporate Governance—Board Committees—
Audit Committee” and “Corporate Governance—Audit
Committee Report” in the Proxy Statement for our 2009
Annual Meeting of Stockholders. Such information is
incorporated herein by reference.
Audit Committee Financial Expert
Our board of directors has determined that Zsolt
Harsanyi, Ph.D.
is an “audit committee financial
expert’” as defined by Item 407(d)(5) of Regulation S-K
of the Exchange Act and is “independent” under the
rules of the New York Stock Exchange.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found
under the caption “Information About Executive and
Director Compensation” in the Proxy Statement for our
2009 Annual Meeting of Stockholders. Such information
is incorporated herein by reference. The Compensation
Committee Report contained in the Proxy Statement
for our 2009 Annual Meeting of Stockholders shall be
deemed furnished in this annual report on Form 10-K
and shall not be deemed “soliciting material” or “filed”
with the Securities and Exchange Commission or oth-
erwise subject to the liabilities of Section 18 of the
Exchange Act, nor shall it be deemed incorporated by
reference into any filing under the Securities Act or the
Exchange Act, except to the extent that we specifically
request that such information be treated as soliciting
material or specifically incorporate such information
by reference into a document filed under the Securities
Act or the Exchange Act.
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
AND RELATED
STOCKHOLDER MATTERS
Information with respect to this item may be found
under the captions “Stock Ownership Information”
and “Information About Executive and Director
Issuance
Compensation—Securities Authorized for
Under Equity Compensation Plans”
in the Proxy
Statement for our 2009 Annual Meeting of Stockholders.
Such information is incorporated herein by reference.
126
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information with respect to this item may be found under
the captions “Corporate Governance—Transactions
with Related Persons” and “Corporate Governance—
Board Determination of Independence” in the Proxy
Statement for our 2009 Annual Meeting of Stockholders.
Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
Information with respect to this item may be found
under the captions “Corporate Governance—Registered
Public Accounting Firm’s Fees” and “Corporate
Governance—Pre-Approval Policy and Procedures” in
the Proxy Statement for our 2009 Annual Meeting of
Stockholders. Such information is incorporated herein
by reference.
127
PART IV
ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
Financial Statements
The following financial statements and supplementary data
are filed as a part of this annual report on Form 10-K.
Report of Independent Registered Public
Accounting Firm
Consolidated Balance Sheets at December 31,
2008 and 2007
Consolidated Statements of Operations for the
years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the
years ended December 31, 2008, 2007 and 2006
Consolidated Statement of Changes in
Stockholders’ Equity for the years ended
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Financial Statement Schedules
All financial statement schedules are omitted because
they are not applicable or the required information is
included in the financial statements or notes thereto.
Exhibits
Those exhibits required to be filed by Item 601 of
Regulation S-K are listed in the Exhibit Index immedi-
ately preceding the exhibits hereto and such listing is
incorporated herein by reference.
128
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EMERGENT BIOSOLUTIONS INC.
By: /s/Fuad El-Hibri
Fuad El-Hibri
Chief Executive Officer and
Chairman of the Board of Directors
Date: March 5, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/Fuad El-Hibri
Fuad El-Hibri
/s/R. Don Elsey
R. Don Elsey
/s/Joe Allbaugh
Joe Allbaugh
/s/Zsolt Harsanyi, Ph.D.
Zsolt Harsanyi, Ph.D.
/s/Jerome M. Hauer
Jerome M. Hauer
/s/Ronald B. Richard
Ronald B. Richard
/s/Louis W.Sullivan, M.D.
Louis W.Sullivan, M.D.
/s/Dr. Sue Bailey
Dr. Sue Bailey
Title
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Senior Vice President Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Date
March 5, 2009
March 5, 2009
March 5, 2009
March 5, 2009
March 5, 2009
March 5, 2009
March 5, 2009
March 5, 2009
129
EXHIBIT 31.1
Certification
I, Fuad El-Hibri, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Emergent BioSolutions Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliabil-
ity of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, pro-
cess, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 5, 2009
/s/ Fuad El-Hibri
Fuad El-Hibri
Chief Executive Officer
130
EXHIBIT 31.2
Certification
I, R. Don Elsey, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Emergent BioSolutions Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliabil-
ity of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, pro-
cess, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 5, 2009
/s/ R. Don Elsey
R. Don Elsey
Senior Vice President Finance,
Chief Financial Officer and Treasurer
131
EXHIBIT 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Emergent BioSolutions Inc. (the “Company”) for the period
ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
the undersigned, Fuad El-Hibri, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C.
Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 5, 2009
/s/ Fuad El-Hibri
Fuad El-Hibri
Chief Executive Officer
132
EXHIBIT 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Emergent BioSolutions Inc. (the “Company”) for the period
ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
the undersigned, R. Don Elsey, Senior Vice President Finance, Chief Financial Officer and Treasurer of the Company,
hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 5, 2009
/s/ R. Don Elsey
R. Don Elsey
Senior Vice President Finance,
Chief Financial Officer and Treasurer
133
134
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative 26-month total return provided to shareholders on Emergent
BioSolutions Inc.’s common stock relative to the cumulative total returns of the S&P 500 index and the S&P
Biotechnology index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made
in our common stock and in each of the indexes on 11/15/2006 and its relative performance is tracked through
12/31/2008.
COMPARISON OF CUMULATIVE TOTAL RETURN*
Among Emergent BioSolutions Inc., the S&P 500 Index
and the S&P Biotechnology Index
$250
$200
$150
$100
$50
$0
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 1/08 2/08 3/08 4/08 5/08 6/08 7/08 8/08 9/08 10/08 11/08 12/08
Emergent BioSolutions Inc.
S&P 500
S&P Biotechnology
*$100 invested on 11/15/06 in stock and in indexes, including reinvestment of dividends. Fiscal year ending December 31.
Copyright © 2009, S&P, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Emergent BioSolutions Inc.
S&P 500
S&P Biotechnology
11/06
100.00
100.00
100.00
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
3/08
76.24
98.71
96.00
6/07
88.03
110.52
93.77
4/08
80.43
103.52
95.55
7/07
79.40
107.10
92.87
5/08
91.88
104.86
98.71
8/07
76.32
108.70
91.87
6/08
84.87
96.02
99.59
9/07
75.90
112.77
100.91
7/08
115.13
95.21
116.73
10/07
86.15
114.56
107.51
8/08
118.46
96.59
111.41
11/07
47.78
109.77
104.49
9/08
111.88
87.98
103.72
12/07
43.25
109.01
91.41
10/08
153.93
73.21
101.85
1/08
63.76
102.47
95.03
11/08
193.33
67.95
93.70
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
4/07
112.31
108.60
100.34
2/08
63.85
99.14
93.65
12/08
223.16
68.68
100.84
135
DIRECTORS AND OFFICERS
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
Dr. Sue Bailey(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.
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
Daniel J. Abdun-Nabi*
President and Chief Operating Officer
R. Don Elsey*
Senior Vice President Finance and Administration and Chief Financial Officer
Denise Esposito*
Senior Vice President Legal Affairs, General Counsel and Secretary
Mauro Gibellini
Senior Vice President Corporate Affairs
W. James Jackson, Ph.D.
Senior Vice President and Chief Scientific Officer
Kyle W. Keese*
Senior Vice President Manufacturing Operations
Denise Landry
Senior Vice President Quality and Regulatory Affairs
Stephen Lockhart, MA, BM, BCh, DM, MRCP, FFPM
Senior Vice President Product Development
Allen Shofe
Senior Vice President Public Affairs
136
1 Audit Committee
2 Compensation Committee
3 Nominating & Corporate Governance Committee
4 Lead Independent Director
* Chairman of Committee
* Executive Officer
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®, spi-VeC™, MVAtor™ and typhella™ are our trademarks.
additional copies of the company’s Form 10-K
for the year ended december 31, 2008, filed with
the securities and exchange commission, and
copies of the exhibits thereto, are 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.
annual Meeting
thursday, May 21, 2009
10 a.m. eastern time
Crowne Plaza Rockville
3 Research Court
Rockville, MD 20850
united States
corporate governance
the certifications of our Chief executive Officer and
Chief Financial Officer required by Rule 13a-14(a)
under the Securities exchange Act of 1934 are
attached as exhibits to our Annual Report on Form
10-K included in this annual report. 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, 2008 included in this
annual report 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.
Emergent BioSolutions Inc.
Corporate Headquarters
2273 Research Boulevard, Suite 400, Rockville, MD 20850 USA
www.emergentbiosolutions.com
4/2009