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 financial information included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. You should carefully review the "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this annual report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Business Overview

We are a global life sciences company focused on providing to civilian and military populations a portfolio of innovative preparedness and response products and solutions that address accidental, deliberate and naturally occurring PHTs.

We are currently focused on the following five distinct PHT categories: CBRNE, EID, travel health, emerging health crises, acute/emergency care; and CDMO. We have a product portfolio of ten products (vaccines, therapeutics, and drug-device combination products) that contribute a substantial portion of our revenue. We also have two procured product candidates that are procured under special circumstances by certain government agencies, although they are not approved by the FDA or any other health agency. Additionally, we have a development pipeline consisting of a diversified mix of both pre-clinical and clinical stage product candidates (vaccines, therapeutics, devices and combination products). Finally, we have a fully-integrated portfolio of CDMO services. Our CDMO service offerings cover development services, drug substance manufacturing and drug product manufacturing across pharmaceutical and biotechnology industries as well as the USG and non-governmental organizations. The majority of our revenue comes from the following products and procured product candidates:

Vaccines

•Anthrax vaccines, including our AV7909 (Anthrax Vaccine adsorbed with Adjuvant) procured product candidate being developed as a next-generation anthrax vaccine for post-exposure prophylaxis and BioThrax® (Anthrax Vaccine adsorbed), the only vaccine licensed by the FDA for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;

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

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

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

Devices

•NARCAN® (naloxone HCl) Nasal Spray, the first needle-free formulation of naloxone approved by the FDA and Health Canada, for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression;

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

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

Therapeutics

•raxibacumab (Anthrax Monoclonal), the first fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax;

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

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

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

Contract Development and Manufacturing Services

Our CDMO business unit consists of a fully integrated molecule-to-market CDMO services business, with offerings across development services, drug substance and drug product manufacturing and packaging and fill, finish services. Our customers for such services include pharmaceutical and biotechnology organizations as well as governments and non-governmental organizations ranging from small to mid to large pharmaceutical and biotechnology companies whose programs range from clinical stage to commercial stage. We compete for CDMO service business with a number of biopharmaceutical product development organizations, contract manufacturers of biopharmaceutical products and university research laboratories. We also compete with in-house research, development and support service departments of other biopharmaceutical companies.

Highlights and Business Accomplishments for 2020

•On January 13, 2020, received agreement from the EMA and FDA on the Company’s proposed development plan to use Serum Neutralizing Antibodies (SNA) as surrogate endpoint to predict likely clinical benefit of CHIKV VLP, the Company’s chikungunya virus virus-like particle (VLP) vaccine candidate, in a Phase 3 safety and immunogenicity study anticipated in the second quarter of 2021.

•On January 31, 2020, received positive opinion and subsequent approval from EMA of Vaxchora® (Cholera Vaccine, Live, Oral), the Company’s cholera vaccine, making it the only single-dose oral vaccine indicated for active immunization against disease caused by Vibrio cholerae serogroup 01 in adults and children from 6 years of age across all 27

member states of the European Union and the European Economic Area countries.

•On March 10, 2020, signed a development and manufacturing agreement with Novavax, Inc. for an experimental vaccine candidate for COVID-19.

•On March 11, 2020, initiated development of two investigational plasma-derived therapies. COVID-Human Immune Globulin (COVID-HIG) is being developed as a human plasma-derived therapy candidate for potential treatment of COVID-19 in severe hospitalized and high-risk patients, and COVID-Equine Immune Globulin (COVID-EIG) is being developed as an equine plasma-derived therapy candidate for potential treatment of severe disease in humans.

•On March 18, 2020, signed a development and manufacturing agreement with Vaxart, Inc. to produce its experimental oral vaccine candidate for COVID-19.

•On March 31, 2020, signed an agreement with Novavax, Inc. to manufacture NanoFluTM, its seasonal influenza vaccine candidate.

•On April 2, 2020, announced HHS funding valued at $14.5 million to support the development of COVID-HIG for treatment, which will be included in at least one of the studies of the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health, evaluating potential treatments for COVID-19.

•On April 23, 2020, announced an initial agreement, valued at $135 million, to be the U.S. manufacturing partner of Johnson & Johnson's lead COVID-19 vaccine candidate.

•On May 28, 2020, announced the exercise by the HHS of the first of nine annual contract options, valued at $176 million, to procure doses of ACAM2000® (Smallpox (Vaccine, Live) into the U.S. Strategic National Stockpile (SNS).

•On June 1, 2020, announced an agreement to join the USG's Warp Speed Program in public-private CDMO partnership for COVID-19 vaccine development and manufacturing. The agreement has a contract value of $628 million and includes manufacturing capacity valued at $542.7 million and $85.5 million for expansion of viral and non-viral CDMO drug product fill/finish capacity.

•On June 11, 2020, announced an agreement to be the U.S. manufacturing partner for AstraZeneca's COVID-19 vaccine candidate to provide large-scale manufacturing capacity through 2020. The agreement has a contract value of $87 million.

•On June 18, 2020, announced a $75 million planned expansion of a property adjacent to our Canton, Massachusetts live viral drug substance development and manufacturing facility. The expansion will increase advanced therapy (viral vector and gene therapy) capability, which is expected to be available beginning in 2023.

•On July 2, 2020, further announced signing a large scale drug substance manufacturing agreement for Johnson & Johnson's lead COVID-19 vaccine candidate for up to five years beginning in 2021. The first two years are valued at approximately $480 million, with the remaining three years providing flexible capacity.

•On July 6, 2020, announced the award of approximately $34.6 million by the U.S. Department of Defense Joint Program Executive Office and formed collaboration with Mount Sinai Health System and ImmunoTek Bio Centers to advance COVID-HIG for potential post-exposure prophylaxis in populations at high risk of COVID-19.

•On July 14, 2020, announced the exercise by BARDA of the contract option, valued at $258 million, to procure additional doses of AV7909 (anthrax vaccine adsorbed with adjuvant) for delivery into the SNS over 12 months.

•On July 27, 2020, further announced the signing of a large-scale drug substance manufacturing agreement for AstraZeneca's COVID-19 vaccine candidate, valued at approximately $174 million through 2021.

•On August 7, 2020, announced the completion of an offering of $450 million in aggregate principal amount 3.875% Senior Unsecured Notes due in 2028. The Company utilized the proceeds from the offering to repay $353 million outstanding under its revolving credit facility with the remainder to be utilized for general corporate purposes.

•On October 8, 2020, announced the initiation of a Phase 3 clinical trial to evaluate the safety, tolerability, and efficacy of hyperimmune globulin products, including our COVID-19 Human Immune Globulin, as a potential treatment in adult patients hospitalized with COVID-19.

•On December 29, 2020, announced the initiation of the clinical program to evaluate the Company's COVID-HIG product candidate in the first of two Phase 1 studies to support its use for potential post-exposure prophylaxis in individuals at high risk of exposure to SARS-CoV-2.

Financial Operations Overview

Revenues

We generate product revenues from the sale of our marketed products and procured product candidates which include vaccines, therapeutics and devices which have been described above. The USG is the largest purchaser of our CBRNE products and primarily purchases our products for the SNS, a national repository of medical countermeasures including critical antibiotics, vaccines, chemical antidotes, antitoxins, and other critical medical supplies. The USG primarily purchases our products under long-term, firm fixed price procurement contracts. Our opioid overdose reversal product, NARCAN® Nasal Spray and our travel health products, comprising Vivotif and Vaxchora, are sold commercially through wholesalers and distributors, physician-directed or standing order prescriptions at retail pharmacies, as well as to other state and local community healthcare agencies, practitioners and hospitals.

We also generate revenue from our CDMO business unit, which is based on our established development and manufacturing infrastructure, technology platforms and expertise. Our services include a fully integrated molecule-to-market CDMO services business offering across development services, drug substance and drug product for small to mid to large pharmaceutical and biotechnology industry and government agencies/non-governmental organizations.

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

Our revenue, operating results and profitability vary quarterly based on the timing of production and deliveries and the nature of our business to provide

large scale bundles of products and services as needs arise. During 2020, our revenues have increased due largely to the contribution of CDMO arrangements with industry and government customers to combat the COVID-19 pandemic. This increase in CDMO revenues has been offset by reduced sales of our vaccine products that target travelers which have declined due to the reduction of international travel caused by the COVID-19 pandemic. We expect continued variability in our quarterly financial statements.

Cost of Product Sales and CDMO Services

The primary expenses that we incur to deliver our products and to perform CDMO services consist of fixed and variable costs. We determine the cost of product sales for products sold during a reporting period based on the average manufacturing cost per unit in the period those units were manufactured. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. Variable manufacturing costs primarily consist of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing operations, sales-based royalties, shipping and logistics. In addition to the fixed and variable manufacturing costs described above, the cost of product sales depends on utilization of available manufacturing capacity. For our commercial sales, other associated expenses include sales-based royalties (which include fair value adjustments associated with contingent consideration), shipping, and logistics.

We use the same manufacturing facilities and methods of production for our own products as well as for fulfillment of our CDMO service contracts. We operate nine manufacturing facilities, five of which perform manufacturing activities for CDMO services customers. As a result, management reviews expenses associated with manufacturing our own products as well CDMO service contracts on an aggregate basis when analyzing the financial performance of its manufacturing and development facilities. Our manufacturing process for our own products and our CDMO service business includes the production of bulk material and performing “fill finish” work for containment and distribution of biological products. For “fill finish” customers, we receive work in process inventory to be prepared for distribution. When producing bulk material, we generally procure raw materials, manufacture the product and retain the risk of loss through the manufacturing and review process until delivery.

Research and Development Expenses

We expense research and development costs as incurred. Our research and development expenses consist primarily of:

▪personnel-related expenses;

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

▪costs of CDMO services for clinical trial material; and

▪costs of materials used in clinical trials and research and development.

In many cases, we plan to seek funding for development activities from external sources and third parties, such as governments and non-governmental organizations, or through collaborative partnerships. We expect our research and development spending will be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of research and development spending, the number of product candidates under development, the size, structure and duration of any clinical programs that we may initiate, the costs associated with manufacturing and development of our product candidates on a large-scale basis for later stage clinical trials, and our ability to use or rely on data generated by government agencies.

Selling, General and Administrative Expenses

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

Income Taxes

Uncertainty in income taxes is accounted for using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

Management believes that the assumptions and estimates related to the provision for income taxes are critical to the Company’s results of operations. For the year ended December 31, 2020, income tax expense totaled $102.1 million. For every 1% change in the 2020 effective rate, income tax expense would have changed by approximately $4.1 million.

For additional information on our uncertain tax positions and income tax expense, please see note

12, Income taxes to our consolidated financial statements included in this report.

Results of Operations

Year ended December 31,

(in millions) 2020 2019 $ Change % Change

Product sales net:

Contract development and manufacturing services 450.5 80.0 370.5 NM

Operating expenses:

Amortization of intangible assets 59.8 58.7 1.1 2 %

Other income (expense):

Other income (expense), net 4.7 1.7 3.0 NM

NM - Not meaningful

Total Revenues

Anthrax vaccines Other Product Sales

NARCAN Nasal Spray CDMO

ACAM2000 Contracts and Grants

Product Sales, net

Anthrax Vaccines

The increase in anthrax vaccine sales for the year ended December 31, 2020 was primarily due to the transition of SNS deliveries from BioThrax to a more consistent cadence of deliveries of AV7909. There were lower sales of anthrax vaccines during the year ended December 31, 2019 as the USG transitioned from BioThrax to AV7909. Deliveries of AV7909 began in September of 2019.

NARCAN Nasal Spray

The increase in NARCAN Nasal Spray sales for the year ended December 31, 2020 was primarily due to an increase in sales to the public interest markets in the United States and Canada and to a lesser extent an increase in commercial sales.

ACAM2000

The decrease in ACAM2000 sales for the year ended December 31, 2020 was due to timing of deliveries to the SNS partially offset by standard inflationary rate increases. ACAM2000 product sales are made under a long-term procurement contract. The fluctuations in ACAM2000 revenue are dictated by the timing and delivery of orders to the USG.

Other Product Sales

The decrease in the Company's other product sales during the year ended December 31, 2020, was mostly due to a decline in sales of raxibacumab, and Vaxchora and Vivotif due to the reduction of global travel.

Contract Development and Manufacturing Services

The increase in CDMO services revenue for the year ended December 31, 2020 is due to the Company's public-private partnership with BARDA in support of the USG's efforts to address the COVID-19 pandemic and arrangements with AstraZeneca and Johnson & Johnson.

Contracts and Grants

The decrease in contracts and grants revenue for the year ended December 31, 2020 is due to the completion of developmental activities associated with our AV7909 procured product candidate partially offset by increases in development awards related to the Company's COVID related product candidates and other product candidates.

Cost of Product Sales and CDMO Services

l Gross profit margin for product sales and CDMO services

Cost of product sales and CDMO services increased for the year ended December 31, 2020 due to an increase in product sales and CDMO services. Additionally, the increase in the cost of product sales and CDMO services was impacted due to a write-down of travel health vaccine inventory and contingent consideration charges.

Research and Development Expenses (Gross and Net)

Research and Development expense

The increase in research and development expenses during the year ended December 31, 2020 is due to the impairment of our IPR&D intangible asset of $29 million. Excluding the impacts of the IPR&D impairment charge research and development expenses decreased for the year ended December 31, 2020. The decrease was due to a decline in spending associated with the Company's AV7909 product candidate offset by increased spending related to the Company's COVID-HIG and other product candidates.

Selling, General and Administrative Expenses

Selling, General and Administrative

l SG&A as a percentage of total revenue

Selling, general and administrative expenses increased for the year ended December 31, 2020 primarily due to an increase in staffing costs to support the Company's growth as well as a special broad-based, immediately vested equity award granted to employees below the senior vice president level offset by a decrease in travel expenses.

Amortization of intangible Assets

Amortization expense

Amortization of intangible assets for the year ended December 31, 2020 was consistent with the year ended December 31, 2019.

Total Other Income (Expense), Net

Interest expense

Other income (expense)

Total other expense, net decreased primarily due to a decrease in interest expense. The decrease in interest expense was driven by a decline in the average interest rates during the year ended December 31, 2020 as compared to 2019 partially offset by an increase in average outstanding debt during the year ended December 31, 2020 as compared to 2019.

Income Taxes

Income tax

l Effective tax rate

During the year ended December 31, 2020, income taxes increased largely due to an increase in income before income taxes. The effective tax rate was 25% for the year ended December 31, 2020 as compared to 30% in 2019. The effective tax rate decreased largely due to a decrease in the rate impact of non-deductible expenses as a percent of income before income taxes. Excluding these non-deductible expenses, the effective tax rate was approximately 23% in both 2020 and 2019.

Discussion and analysis of the year ended December 31, 2019 compared to the year ended December 31, 2018 is included under the heading "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.

Liquidity and Capital Resources

Sources of Liquidity

The Company has historically financed our operating and capital expenditures through cash on hand, cash from operations, debt financing and development funding. We also obtain financing from the sale of our common stock upon exercise of stock options. We have operated profitably for each of the last five annual periods. As of December 31, 2020, we had cash and cash equivalents of $621.3 million and capacity under our revolving credit facility of $597.2 million. As of December 31, 2020, we believe that we have sufficient liquidity to fund our operations over the next 12 months.

Cash Flows

The following table provides information regarding our cash flows for the years ended December 31, 2020, 2019 and 2018.

Year ended December 31,

Net cash provided by (used in):

Effect of exchange rate changes $ (1.0) $ 0.4 $ (0.2)

Net increase (decrease) in cash and cash equivalents $ 453.5 $ 55.6 $ (66.9)

Certain significant cash flows were as follows:

Operating Activities:

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

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

Net cash provided by operating activities of $41.8 million in 2018 was primarily due to our net income excluding non-cash items of $160.9 million, offset by $119.1 million of negative changes in working capital.

Investing Activities:

Net cash used in investing activities of $151.0 million in 2020 largely relates to purchases of property, plant and equipment. We also made a milestone payment related to an asset acquisition of $10.0 million from our acquisition of raxibacumab in October 2017. The cash used in investing activities increased during the year ended December 31, 2020 largely due to infrastructure and equipment investments related to our CDMO arrangements and the purchase of a building near our Canton, Massachusetts facility.

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

Net cash used in investing activities of $897.2 million in 2018 was primarily due to our acquisitions of Adapt and PaxVax, along with software, infrastructure and equipment investments.

Financing Activities:

Net cash provided by financing activities of $69.5 million in 2020 was primarily due to proceeds from the $450.0 million Senior Unsecured Notes and net

employee share-based compensation activity of $17.8 million offset by payments of $387.1 million on the term loan and revolving credit facility and $8.4 million of debt issuance costs.

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

Net cash provided by financing activities of $788.7 million in 2018 was primarily due to $798.0 million of proceeds from long-term debt borrowings used to finance a portion of the Adapt and PaxVax acquisitions and for general corporate purposes and $15.9 million in proceeds from the issuance of common stock pursuant to our employee equity awards plan, partially offset by $6.6 million associated with the taxes paid on behalf of employees for equity activity.

Long-term debt

Funding Requirements

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

▪existing cash and cash equivalents;

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

▪development contracts and grants funding; and

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

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

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

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

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

▪the payment obligations under our indebtedness;

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

▪our ability to obtain funding from collaborative partners, government entities and non-

governmental organizations for our development programs;

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

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

If we raise funds by issuing equity securities, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants, like those contained in our Senior Unsecured Notes due 2028 and the Senior Secured Credit Facilities, which could limit or restrict our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities, buying back shares or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us.

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

Amended and Restated Credit Agreement

See further discussion around the amended and restated credit agreement in Item 8. Financial Statements and Supplementary Data Note 9 Long-term debt.

Unused Credit Capacity

Available room under the revolving credit facility for the years ended December 31, 2020 and 2019 was:

(in millions)

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2020:

Payments due by period

(in millions) Total Less than1 year 1 to 3Years 3 to 5Years More than5 years

Contractual obligations:

Critical Accounting Policies and Estimates

Our consolidated financial statements and related disclosures are prepared in accordance with US GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported. Note 2, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management considers an accounting policy to be critical if it is important to reporting our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition

The Company recognizes revenue when or as the customer obtains control of the promised product or services, in an amount that reflects the consideration in which the Company expects to receive in exchange for the product or services. The Company's products are typically recognized when the customer obtains control of the product, which occurs at a point-in-time, typically upon delivery to the customer. The Company's services are recognized either over-time as the service is being performed or at a point-in-time generally upon delivery to the customer, depending on the performance obligation which the Company is delivering.

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

standalone selling price based on the best available information.

Revenues are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with customers. The Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Estimates of variable consideration includes allowances for returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government rebates, chargebacks and rebates under managed care plans. Revenues from sales of products is recognized to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with such variable consideration is subsequently resolved. Provisions for variable consideration revenues from sales of products are recorded at the net sales price. For additional information on our revenues, please read Note 2, Revenue Recognition, of Item 8. Financial Statements and Supplementary Data.

Contingent Consideration

In connection with the Company's acquisitions accounted for as business combinations, the Company records contingent consideration associated with sales-based royalties, sales-based milestones and development and regulatory milestones at fair value, as applicable. The fair value model used to calculate these obligations is based on the income approach (a discounted cash flow model) that has been risk adjusted based on the probability of achievement of net sales and achievement of the milestones. The inputs the Company uses for determining the fair value of the contingent consideration associated with sales-based royalties, sales-based milestones and development and regulatory milestones are Level 3 fair value measurements. The Company re-evaluates the fair value on a quarterly basis. Changes in the fair value can result from adjustments to the discount rates and updates in the assumed timing of or achievement of net sales and/or the achievement of development and regulatory milestones. A one-percent change in the discount rate would result in an approximate $0.5 million change in the fair value of the Company’s contingent consideration as of December 31, 2020.

Income Taxes

The Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and research and development tax credit carryforwards. Deferred tax assets and liabilities are measured using

enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of additional risks arising from our operations, see “Item 1A—Business—Risk Factors” in this 2020 Annual Report.

Market Risks

We have interest rate and foreign currency market risk. Because of the short-term maturities of our cash and cash equivalents, we believe that an increase in market rates would likely not have a significant impact on the realized value of our investments.

Interest Rate Risk

We have debt with a mix of fixed and variable rates of interest. Floating rate debt carries interest based generally on the eurocurrency rate, as defined in our Amended Credit Agreement, plus an applicable margin. We manage the impact of interest rate changes on our variable debt through derivative instruments such as interest rate swap arrangements. For debt that we have not hedged through our interest rate swap arrangements increases in interest rates could therefore increase the associated interest payments that we are required to make on this debt. See Note 9, "Long-term debt," to the Notes of our consolidated financial statements included in this 2020 Annual Report under the caption Item 8, "Financial Statements and Supplementary Data.”

We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our operating results assuming various changes in market interest rates. A hypothetical increase of one percentage point in the eurocurrency rate as of

December 31, 2020 would increase our interest expense by approximately $0.7 million annually.

Foreign Currency Exchange Rate Risk

We have exposure to foreign currency exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Swiss franc and British pound. We manage our foreign currency exchange rate risk primarily by either entering into foreign currency hedging transactions or incurring operating expenses in the local currency in the countries in which we operate, to the extent practicable. We currently do not hedge all of our foreign currency exchange exposure and the movement of foreign currency exchange rates could have an adverse or positive impact on our results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Emergent BioSolutions Inc. and subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Emergent BioSolutions Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue recognition - identifying performance obligations and determining the stand alone selling price of each performance obligation and the transaction price including variable consideration

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2004.

Baltimore, Maryland

February 18, 2021

Emergent BioSolutions Inc. and Subsidiaries

Consolidated Balance Sheets

(in millions, except per share data)

December 31,

ASSETS

Current assets:

Cash and cash equivalents $ 621.3 $ 167.8

Restricted cash 0.2 0.2

Prepaid expenses and other current assets 36.5 25.0

Property, plant and equipment, net 644.1 542.3

In-process research and development — 29.0

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Debt, current portion 33.8 12.9

Other current liabilities 83.1 6.7

Contingent consideration, net of current portion 34.2 26.0

Deferred tax liability 53.2 63.9

Contract liabilities, net of current portion 55.5 85.6

Stockholders’ equity:

Treasury stock, at cost, 1.2 common shares (39.6) (39.6)

Accumulated other comprehensive loss, net (25.3) (9.9)

Total liabilities and stockholders’ equity $ 2,883.2 $ 2,327.3

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

Emergent BioSolutions Inc. and Subsidiaries

Consolidated Statements of Operations

(in millions, except per share data)

Year Ended December 31,

Revenues:

Contract development and manufacturing services 450.5 80.0 98.9

Operating expenses:

Amortization of intangible assets 59.8 58.7 25.0

Other income (expense):

Total other income (expense), net (26.6) (36.7) (8.3)

Net income per share-basic $ 5.79 $ 1.06 $ 1.25

Net income per share-diluted (Note 15) $ 5.67 $ 1.04 $ 1.22

Weighted-average number of shares - basic 52.7 51.5 50.1

Weighted-average number of shares - diluted 53.8 52.4 51.4

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

Emergent BioSolutions Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in millions)

Year Ended December 31,

Other comprehensive income (loss), net of tax:

Foreign currency translation (1.7) 0.4 (1.6)

Unrealized gains (losses) on hedging activities (9.4) (1.6) —

Unrealized losses on pension benefit obligation (4.3) (3.2) (0.2)

Total other comprehensive income (loss), net of tax (15.4) (4.4) (1.8)

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

Emergent BioSolutions Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in millions)

Year Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile to net cash provided by operating activities:

Stock-based compensation expense 51.0 26.7 23.2

Impairment of IPR&D intangible asset 29.0 12.0 —

Change in fair value of contingent consideration, net 31.7 24.8 3.1

Amortization of deferred financing costs 3.5 3.0 0.9

Deferred income taxes (2.4) (1.1) 8.6

Changes in operating assets and liabilities:

Prepaid expenses and other assets (29.2) (39.1) (13.0)

Accrued expenses and other liabilities 19.4 (15.1) (11.6)

Net cash provided by operating activities: 536.0 188.0 41.8

Cash flows from investing activities:

Purchases of property, plant and equipment and other (141.0) (86.9) (72.1)

Milestone payment from asset acquisition (10.0) (10.0) —

Business acquisitions, net of cash acquired — — (827.7)

Proceeds from sale of assets — — 2.6

Net cash used in investing activities: (151.0) (96.9) (897.2)

Cash flows from financing activities:

Proceeds from revolving credit facility — 130.0 348.0

Principal payments on revolving credit facility (373.0) (105.0) —

Proceeds from term loan facility — — 450.0

Principal payments on term loan facility (14.1) (11.3) (2.8)

Proceeds from senior unsecured notes 450.0 — —

Debt issuance costs (8.4) — (13.4)

Proceeds from share-based compensation activity 31.6 8.2 15.9

Taxes paid for share-based compensation activity (13.8) (7.4) (6.6)

Contingent consideration payments (2.8) (50.4) (3.4)

Receipts and payments of restricted cash — — 1.1

Purchase of treasury stock — — (0.1)

Net cash provided by (used in) financing activities 69.5 (35.9) 788.7

Effect of exchange rate changes on cash and cash equivalents (1.0) 0.4 (0.2)

Net change in cash and cash equivalents and restricted cash 453.5 55.6 (66.9)

Supplemental disclosure of cash flow information:

Cash paid during the year for interest $ 21.0 $ 34.5 $ 10.2

Cash paid during the year for income taxes $ 109.3 $ 30.8 $ 14.0

Supplemental information on non-cash investing and financing activities:

Issuance of common stock to acquire Adapt Pharma $ — $ — $ 37.7

Reconciliation of cash and cash equivalents and restricted cash:

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

Emergent BioSolutions Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity

(in millions, except per share data)

Shares Amount Shares Amount

Employee equity plans activity 1.1 — 32.6 — — — — 32.6

Issuance of common stock in acquisition 0.7 — 37.7 — — — — 37.7

Treasury stock — — — — (0.1) — — (0.1)

Net income — — — — — — 62.7 62.7

Other comprehensive loss — — — — — (1.8) — (1.8)

Employee equity plans activity 0.6 — 27.5 — — — — 27.5

Net income — — — — — — 54.5 54.5

Other comprehensive loss — — — — — (4.4) — (4.4)

Employee equity plans activity 1.3 — 68.8 — — — — 68.8

Other comprehensive income — — — — — (15.4) — (15.4)

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

Emergent BioSolutions Inc. and Subsidiaries

Notes to consolidated financial statements

1.Nature of the business and organization

Organization and business

Emergent BioSolutions Inc. (the "Company" or "Emergent") is a global life sciences company focused on providing civilian and military populations with a portfolio of innovative preparedness and response products and solutions that address accidental, deliberate and naturally occurring public health threats ("PHTs," each a “PHT”).

The Company is focused on the following five distinct PHT categories: Chemical, Biological, Radiological, Nuclear and Explosives (CBRNE); emerging infectious diseases (EID); travel health; emerging health crises; acute/emergency care; and contract development and manufacturing (CDMO) services. The Company has a product portfolio of ten products (vaccines, therapeutics, and drug-device combination products) that contribute a substantial portion of our revenue. The Company has two product candidates that are procured under special circumstances by certain government agencies, although they are not approved by the U.S. Food and Drug Administration (FDA) or any health agency. The U.S. government (USG) is the Company's largest customer and provides the Company with substantial funding for the development of a number of its product candidates.

The Company's product and services portfolio includes:

Vaccines

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

▪BioThrax® (Anthrax Vaccine adsorbed), the only vaccine licensed by the FDA, for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;

▪Vaxchora® (Cholera Vaccine, Live, Oral), the only single-dose oral vaccine licensed by the FDA and the European Medicines Agency (EMA) for the prevention of cholera; and

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

Devices

▪NARCAN® (naloxone HCl) Nasal Spray, the first needle-free formulation of naloxone approved by the FDA and Health Canada, for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression; and

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

Therapeutics

▪raxibacumab (Anthrax Monoclonal), a fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax;

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

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

▪VIGIV (Vaccinia Immune Globulin Intravenous (Human)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination.

Procured Product Candidates

•AV7909® (Anthrax Vaccine adsorbed with Adjuvant), is a procured product candidate being developed as a next generation anthrax vaccine for post-exposure prophylaxis of disease resulting from suspected or confirmed Bacillus anthracis exposure. The USG has started procuring AV7909 for the Strategic National

Stockpile ("SNS") prior to its approval by the FDA and has been reducing its purchases of BioThrax as a result; and

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

CDMO Services

The Company's CDMO service offerings cover development services, drug substance manufacturing and drug product manufacturing across the pharmaceutical and biotechnology industries as well as the USG and non-governmental organizations. The Company's technology platforms include mammalian, microbial, viral, plasma and advanced therapies utilizing the Company's core capabilities for manufacturing to third parties on a clinical and commercial (small and large) scale. Additional services include fill/finish formulation and analytical development services for injectable and other sterile products, inclusive of process design, technical transfer, manufacturing validations, aseptic filling, lyophilization, final packaging and stability studies, as well as manufacturing of vial and pre-filled syringe formats on multiple platforms.

The Company operates as one operating segment.

2. Summary of significant accounting policies

Basis of presentation and consolidation

The accompanying consolidated financial statements include the accounts of Emergent and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates

The preparation of financial statements requires management to make estimates, judgments and assumptions that affect reported amounts and disclosures for asset impairments, revenue recognition, allowances for doubtful accounts, inventory, depreciation and amortization, business combinations, contingent consideration, stock-based compensation, income taxes, and other contingencies. Management continually re-evaluates its estimates, judgments and assumptions. These estimates are sometimes complex, sensitive to changes in assumptions and require fair value determinations using Level 3 fair value measurements. Actual results may differ materially from those estimates.

Cash, cash equivalents and restricted cash

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 balances with financial institutions in excess of insured limits. Restricted cash includes cash that is not readily available for use in the Company's operating activities. Restricted cash is primarily comprised of cash pledged under letters of credit.

Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value include:

On a recurring basis, the Company measures and records money market funds (level 1), contingent purchase consideration (level 3) and interest-rate swap arrangements (level 2) using fair value measurements in the accompanying financial statements. On a non-recurring basis, the Company measures its in-process research and

development ("IPR&D") assets (level 3) using fair value measurements. The carrying amounts of the Company's short-term financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable and convertible senior notes approximate their fair values due to their short maturities. The carrying amounts of the Company’s long-term variable interest rate debt arrangements (level 2) approximate their fair values.

Significant customers and accounts receivable

Billed accounts receivable are stated at invoice amounts and consist of amounts due from the USG, commercial CDMO customers, as well as amounts due under reimbursement contracts with other government entities and non-government organizations. Our opioid overdose reversal product is sold commercially through physician-directed or standing order prescriptions at retail pharmacies, as well as state health departments, law enforcement agencies, state and local community based organizations, substance abuse centers and federal agencies. If necessary, the Company records a provision for doubtful receivables to allow for amounts which may be unrecoverable. This provision is based upon an analysis of the Company's prior collection experience, customer creditworthiness and current economic trends. We do not adjust our receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We provide reserves against accounts receivable for estimated losses that may result from a customer's inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve. Unbilled accounts receivable relates to various service contracts for which work has been performed, though invoicing has not yet occurred.

Concentration Risk

Customers

The Company has long-term contracts with the USG that expire at various times from 2020 through 2029. The Company has derived a significant portion of its revenue from sales of ACAM2000 and Anthrax Vaccines under contracts with the USG. The Company's current USG contracts do not necessarily increase the likelihood that it will secure future comparable contracts with the USG. The Company expects that a significant portion of the business will continue to be under government contracts that present a number of risks that are not typically present in the commercial contracting process. USG contracts for ACAM2000 and Anthrax Vaccines are subject to unilateral termination or modification by the government. The Company may fail to achieve significant sales of ACAM2000 and Anthrax Vaccines to customers in addition to the USG, which would harm its growth opportunities. The Company's other product sales are largely sold commercially through physician-directed or standing order prescriptions at retail pharmacies, as well as to state health departments, local law enforcement agencies, community-based organizations, substance abuse centers and other federal agencies.

Although the Company seeks expand its customer base and to renew its agreements with its customers prior to expiration of a contract, a delay in securing a renewal or a failure to secure a renewal or securing a renewal on less favorable terms may have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s accounts receivables do not represent a significant concentration of credit risk. The USG accounted for approximately 64%, 61% and 76% of total revenues for 2020, 2019 and 2018, respectively. The Company’s accounts receivable as of December 31, 2020 and 2019, consist primarily of amounts due from the USG or other large multi-national highly reputable customers for product sales, CDMO services or from government agencies under government grants. Management does not deem credit risk to be significant.

Financial Institutions

Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.

Lender Counterparties

There is lender counterparty risk associated with the Company's revolving credit facility and derivatives instruments. There is risk that the Company’s revolving credit facility investors and derivative counterparties will not be available to fund as obligated. If funding under the revolving credit facility is unavailable, the Company may have to acquire a replacement credit facility from different counterparties at a higher cost or may be unable to find a suitable replacement. The Company seeks to manage risks from its revolving credit facility and derivative instruments by contracting with experienced large financial institutions and monitoring the credit quality of its lenders. As of December 31, 2020, the Company did not anticipate nonperformance by any of its counterparties.

Inventories

Inventories are stated at the lower of cost or net realizable value with cost being determined using a standard cost method, which approximates average cost. Average cost consists primarily of material, labor and manufacturing overhead expenses (including fixed production-overhead costs) and includes the services 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 inventory in excess of expected customer demand. The Company also writes off, in the applicable period, the costs related to expired inventory. Costs of purchased inventories are recorded using weighted-average costing. The Company determines normal capacity for each production facility and allocates fixed production-overhead costs on that basis.

The Company records inventory acquired in business acquisitions utilizing the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairments. subject to reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The cost of normal, recurring or periodic repairs and maintenance activities related to property, plant and equipment are expensed as incurred. The cost for planned major maintenance activities, including the related acquisition or construction of assets, is capitalized if the repair will result in future economic benefits.

Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset.

The Company capitalizes internal-use software when both (a) the software is internally developed, acquired, or modified solely to meet the entity’s internal needs and (b) during the software’s development or modification, no substantive plan either exists or is being developed to market the software externally. Capitalization of qualifying internal-use software costs begins when the preliminary project stage is completed, management with the relevant authority, implicitly or explicitly, authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended.

We generally depreciate or amortize the cost of our property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets, which are summarized as follows:

Land Not depreciated

Buildings 31-39 years

Building improvements 10-39 years

Furniture and equipment 3-15 years

Software 3-7 years

Leasehold improvements 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 maintenance costs are expensed as incurred.

The Company determines the fair value of the property, plant and equipment acquired in a business combination utilizing either the cost approach or the sales comparison approach. The cost approach is determined by establishing replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.

Income taxes

Income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and research and development tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recognized under the asset and liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws in the year of enactment.

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 strategies 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 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 offsetting increase to 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 therein, there are annual limitations on the amount of net operating losses and deductions that are available. The Company has recognized the portion of net operating losses and research and development tax credits acquired that will not be limited and are more likely than not to be realized.

Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company makes certain estimates and assumptions, in (1) calculating the Company's income tax expense, deferred tax assets and deferred tax liabilities, (2) determining any valuation allowance recorded against deferred tax assets and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The Company's estimates and assumptions may differ from tax benefits ultimately realized.

Acquisitions

In determining whether an acquisition is a business combination versus an asset acquisition, the Company evaluates whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If that threshold is met, the set of assets and activities is not a business and therefore treated as an asset acquisition. If that threshold is not met, the entity evaluates whether the set meets the definition of a business. If an acquired asset or asset group does not meet the definition of a business, the transaction is accounted for as an asset acquisition. Otherwise, the acquisition is treated as a business combination.

In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the merger or acquisition at their respective fair values with limited exceptions and generally use Level 3 fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair values that do not reflect the Company's intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company's consolidated financial statements after the date of the merger or acquisition. If the Company determines the assets acquired do not meet the definition of a business under the acquisition method of accounting, the transaction will be accounted for as an asset acquisition and recorded at cost rather than a business combination and, therefore, no goodwill will be recorded.

The fair values of intangible assets are determined utilizing information available at or near the merger or acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets until the completion or abandonment of the associated research and development effort and are evaluated for impairment at least annually. Upon successful completion of each project, the Company will make a separate determination as to the remaining useful life of the asset and begin amortization. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset lives, can materially affect the Company’s results of operations.

The fair values of identifiable intangible assets related to current products and product rights are primarily determined by using an income approach through which fair value is estimated based on each asset’s discounted projected net cash flows. The Company's estimates of market participant net cash flows consider historical and projected pricing, margins and expense levels, the performance of competing products where applicable, relevant industry and therapeutic area growth drivers and factors, current and expected trends in technology and product life cycles, the time and investment that will be required to develop products and technologies, the ability to obtain marketing and regulatory approvals, the ability to manufacture and commercialize the products, the extent and timing of potential new product introductions by the Company’s competitors, and the life of each asset’s underlying patent, if any. The net cash flows are then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.

Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized.

Asset Impairment Analysis

Goodwill and Indefinite-lived Intangible Assets

Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but is reviewed for impairment. Goodwill is allocated to the Company's reporting units, which are one level below its operating segment. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment annually as of October 1 and earlier if an event or other circumstance indicates that we may not recover the carrying value of the asset. If the Company believes that as a result of its qualitative assessment it is more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is greater than its carrying amount, the quantitative impairment test is not required. If however it is determined that it is not more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is greater than its carrying amount, a quantitative test is required.

The quantitative goodwill impairment test is performed using a one-step process. The process is to compare the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit is impaired and an impairment loss is recognized in an amount equal to that excess. The Company utilized a quantitative assessment for our goodwill impairment testing of one reporting unit in 2020. The Company used a qualitative assessment for our goodwill impairment testing for all other reporting units in 2020 and all reporting units in 2019. The assessments completed during the years ended December 31, 2020 and 2019 indicated no impairment losses.

The Company had material indefinite lived intangible assets associated with in-process research and development (IPR&D). Following a qualitative assessment indicating that it is not more likely than not that the fair value of the indefinite lived intangible asset exceeds its carrying amount, the Company compares the estimated fair value of the intangible with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Determining fair value requires the exercise of judgment about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows (see Notes 5. Fair value measurements and 8. Intangible assets and goodwill).

Long-lived Assets

Long-lived assets such as intangible assets and property, plant and equipment are not required to be tested for impairment annually. Instead, long-lived assets are tested for impairment whenever circumstances indicate that the carrying amount of the asset may not be recoverable, such as when the disposal of such assets is likely or there is an adverse change in the market involving the business employing the related assets. If an impairment analysis is required, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first requires a comparison of undiscounted future cash flows to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, the asset would not be deemed to be recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value. Fair value is typically determined by discounting the future cash flows associated with that asset. If the intent is to hold the asset for sale and certain other criteria are met, the impairment test involves comparing the asset’s carrying value to its fair value less costs to sell. To the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized in an amount equal to the difference. Significant judgments used for long-lived asset impairment assessments include identifying the appropriate asset groupings and primary assets within those groupings, determining whether events or circumstances indicate that the carrying amount of the asset may not be recoverable, determining the future cash flows for the assets involved and assumptions applied in determining fair value, which include, reasonable discount rates, growth rates, market risk premiums and other assumptions about the economic environment.

Contingent Consideration

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

The associated payments which will become due and payable for sales-based royalties and milestones result in a charge to cost of product sales and CDMO in the period in which the increase is determined. Similarly, any future decrease in the fair value of contingent consideration associated with sales-based royalties and sales-based milestones will result in a reduction in cost of product sales and CDMO. The changes in fair value for potential future sales-based royalties associated with product candidates in development will result in a charge to cost of product sales and CDMO services expense in the period in which the increase is determined.

The associated payment or payments which will become due and payable for development and regulatory milestones will result in a charge to research and development expense in the period in which the increase is determined. Similarly, any future decrease in the fair value for development and regulatory milestones will result in a reduction in research and development expense.

Revenue recognition

On January 1, 2018 the Company adopted ASC topic 606 using the modified retrospective approach applied to those contracts in effect as of January 1, 2018.

The Company recognizes revenue when the Company's customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services by analyzing the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. To indicate the transfer of control for the Company’s product sales and CDMO services, it must have a present right to payment, legal title must have passed to the customer, and the customer must have the significant risks and rewards of ownership.

Multiple performance obligations

A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606. Contracts sometimes include options for customers to purchase additional products or services in the future. Customer options that provide a material right to the customer, such as free or discounted products or services, gives rise to a separate performance obligation. For contracts with multiple performance obligations, the Company allocates the contract price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers, however when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price. Allocation of the transaction price is determined at the contracts’ inception.

Transaction price and variable consideration

Once the performance obligations in the contract have been identified, the Company estimates the transaction price of the contract. The estimate includes amounts that are fixed as well as those that can vary based on expected outcomes of the activities or contractual terms. The Company's variable consideration includes consideration transferred under its development contracts with the USG as consideration received can vary based on developmental progression of the product candidate(s). When a contract's transaction price includes variable consideration, the Company evaluates the variable consideration to determine whether the estimate needs to be constrained; therefore, the Company includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration estimates are updated at each reporting date. There were no significant constraints or material changes to the Company's variable consideration estimates as of or during the twelve months ended December 31, 2020.

Contract financing

In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer with a significant benefit of financing the transfer of goods or services to the customer, which is called a significant financing component. The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less.

Product sales

CBRNE, EID, emerging health crisis

The primary customer for the Company's CBRNE products and the primary source of funding for the development of its CBNRE product candidate portfolio is the USG. The Company's contracts for the sale of CBRNE products generally have a single performance obligation. Certain product sales contracts with the USG include multiple performance obligations, which generally include the marketed product and plasma collection. The USG contracts for the sale of the Company's CBRNE products are normally multi-year contracts. AV7909 and Trobigard are product candidates that are not approved by the FDA or any other health agency, but are procured by certain government agencies under special circumstances.

For our product sales, we recognize revenue at a "point in time" when the Company’s performance obligations have been satisfied and control of the products transfer to the customer. This “point in time” depends on several factors, including delivery, transfer of legal title, transition of risk and rewards of the product to the customer and the Company's right to payment. The Company's contracts for the sale of the Company's CBRNE products also include certain acceptance criteria before title passes to the customer.

Acute/emergency care (Opioid) and travel health

Revenues are recognized when control of the goods are transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Estimates of variable consideration includes allowances for returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government rebates, chargebacks and rebates under managed care plans. Revenues from sales of products is recognized to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with such variable consideration is subsequently resolved. Provisions for variable consideration revenues from sales of products are recorded at the net sales price. Product sales revenue is recognized when control has transferred to the customer, which occurs at a point in time, which is typically upon delivery to the customer. Calculating certain of these provisions involves estimates and judgments and the Company determines their expected value based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, the Company's expectations regarding future utilization rates for these programs and channel inventory data. These provisions reflect the Company's best estimate of the amount of consideration to which the Company is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company reassesses the Company's provisions for variable consideration at each reporting date. Historically, adjustments to estimates for these provisions have not been material.

Provisions for returns, specialty distributor fees, wholesaler fees, government rebates and rebates under managed care plans are included within current liabilities in the Company's consolidated balance sheets. Provisions for chargebacks and prompt payment discounts are shown as a reduction in accounts receivable.

CDMO services

The Company performs CDMO services for third parties. Under these contracts, activities can include pharmaceutical product process development, manufacturing and filling services for injectable and other sterile products, inclusive of process design, technology transfer, manufacturing validations, laboratory analytical development support, aseptic filling, lyophilization, final packaging and accelerated and ongoing stability studies. These contracts vary in duration and number of performance obligations. Performance obligations can include technology transfer activities, stand-ready obligations, suite-reservations and drug substance manufacturing. The Company has determined that the technology transfer, stand-ready and suite-reservation performance obligations are satisfied over time; drug substance manufacturing performance obligations are satisfied when the goods have been released, legal title has passed and the goods are in the customer's possession. The suite-reservation performance obligations generally are considered an operating lease as the customer obtains substantially all of the economic benefits of the identified asset and has the right to direct its use. The associated revenue is recognized on a straight-line basis over the term of the lease.

Contracts and grants

The Company generates contract and grant revenue primarily from cost-plus-fee contracts associated with development of certain product candidates. Revenues from reimbursable contracts are recognized as costs are incurred, generally based on allowable costs incurred during the period, plus any recognizable earned fee. The Company uses this input method to measure progress as the customer has the benefit of access to the development research under these projects and therefore benefits from the Company's performance incrementally as research and development activities occur under each project. We consider fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract. We analyze costs for contracts and reimbursable grants to ensure reporting of revenues gross versus net is appropriate. Revenue for long-term development contracts is considered variable consideration, because the deliverable is dependent on the successful completion of development and is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with satisfying the performance obligation over time. The USG contracts for the development of the Company's CBRNE product candidates are normally multi-year contracts. Revenue for long-term development contracts is generally recognized over-time based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with transferring control of the good or service over time.

Research and development

The Company expenses research and development costs as incurred. The Company's research and development expenses consist primarily of:

▪personnel-related expenses;

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

▪costs of CDMO services for clinical trial material; and

▪costs of materials used in clinical trials and research and development.

Comprehensive income

Comprehensive income is comprised of net income and other changes in equity that are excluded from net income. The Company includes translation gains and losses incurred when converting its subsidiaries' financial statements from their functional currency to the U.S. dollar in accumulated other comprehensive income as well as gains and losses on its pension benefit obligation and derivative instruments.

Translation of Foreign Currencies

For our non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive income, a separate component of equity. For subsidiaries where the functional currency of the assets and liabilities differ from the local currency, non-monetary assets and liabilities are translated at the rate of exchange in effect on the date assets were acquired while monetary assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average foreign currency rates for the period. Translation adjustments of these subsidiaries are included in other income (expense), net in our consolidated statements of income.

Earnings per share

The Company calculates basic earnings per share by dividing net income by the weighted average number of shares of common stock outstanding during the period.

For the years ended December 31, 2020, 2019, and 2018 the Company calculated diluted earnings per share using the treasury method by dividing net income by the weighted average number of shares of common stock outstanding during the period. The weighted average number of diluted shares was adjusted for the potential dilutive effect of the exercise of stock options and the vesting of restricted stock units.

Accounting for stock-based compensation

The Company has one stock-based employee compensation plan, the Emergent BioSolutions Inc. Stock Incentive Plan (the "Emergent Plan"), under which the Company may grant various types of equity awards including stock options, restricted stock units and performance stock units.

The terms and conditions of equity awards (such as price, vesting schedule, term and number of shares) under the Emergent Plan is determined by the compensation committee of the Company's board of directors, which administers the Emergent Plan. Each equity award granted under the Emergent Plan vests as specified in the relevant agreement with the award recipient and no option can be exercised after seven years from the date of grant depending on the grant date. The Company charges the estimated fair value of awards against income on a straight-line basis over the requisite service period, which is generally the vesting period. Where awards are made with non-substantive vesting periods (for instance, where a portion of the award vests upon retirement eligibility), the Company estimates and recognizes expense based on the period from the grant date to the date the employee becomes retirement eligible.

The Company determines the fair value of restricted stock units using the closing market price of the Company's common stock on the day prior to the date of grant. The Company's performance stock units settle in the Company's stock. The fair value is determined on the date of the grant using the number of shares expected to be earned and

the ending market value of the stock on the day prior to the grant date. The number of shares expected to vest is determined by assessing the probability that the performance criteria will be met and the associated targeted payout level that is forecasted will be achieved.

The Company utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted. Set forth below is a discussion of the Company's methodology for developing each of the assumptions used:

▪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 — a measure of the amount by which a financial variable, such as share price, has fluctuated (historical volatility) or is expected to fluctuate (implied volatility) during a period. The Company analyzed its own historical volatility to estimate expected volatility over the same period as the expected average life of the options.

▪Risk-free interest rate — the range of U.S. Treasury rates with a term that most closely resembles the expected life of the option as of the date on which the option is granted.

▪Expected average life of options — the period of time that options granted are expected to remain outstanding, based primarily on the Company's expectation of optionee exercise behavior subsequent to vesting of options.

Pension plans

The Company maintains defined benefit plans for employees in certain countries outside the U.S., including retirement benefit plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increase, and pension adjustments. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. Actuarial gains and losses are deferred in accumulated other comprehensive income, net of tax and are amortized over the remaining service attribution periods of the employees under the corridor method. Differences between the expected long-term return on plan assets and the actual annual return are amortized to net periodic benefit cost over the estimated remaining life as a component of selling, general and administrative expenses in the consolidated statements of operations.

Derivative Instruments and Hedging Activities

The Company's interest rate swaps qualify for hedge accounting as cash flow hedges. All derivatives are recorded on the balance sheet at fair value. Hedge accounting provides for the matching of the timing of gain or loss recognition on these interest rate swaps with the recognition of the changes in interest expense on the Company's variable rate debt. For derivatives designated as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The cash flows from the designated interest rate swaps are classified as a component of operating cash flows, similar to interest expense.

Recently issued accounting standards

Recently Adopted

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13")

In June 2016, the FASB issued ASU 2016-13. ASU 2016-13 provides guidance on measurement of credit losses on financial instruments that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and that requires entities to use a new, forward-looking “expected loss” model that is expected to generally result in the earlier recognition of allowances for losses. The guidance became effective for annual periods beginning after December 15, 2019, including interim periods within those years. The Company adopted the standard as of January 1, 2020 and has evaluated the effects of this standard and determined that the adoption did not have a material impact on the Company's consolidated financial statements.

ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820) ("ASU 2018-13")

In August 2018, the FASB issued ASU 2018-13. ASU 2018-13 improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company adopted the standard as of January 1, 2020 which has resulted in expanded disclosures around the Company's recurring level 3 fair value measurements. The disclosures are included in note 5 of the condensed consolidated financial statements.

ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14")

In August 2018, the FASB issued ASU 2018-14. ASU 2018-14 modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for all entities for fiscal years ending after December 15, 2020. The Company adopted the standard on a retrospective basis for the reporting period ended December 31, 2020. There was no impact on the Company's consolidated financial statements.

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")

In August 2018, the FASB issued ASU 2018-15. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for all entities for fiscal years beginning after December 15, 2019. The Company adopted the standard as of January 1, 2020 and has evaluated the effects of this standard and determined that the adoption did not have a material impact on the Company's consolidated financial statements.

ASU 2017-4, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-4")

In January 2017, the FASB issued ASU 2017-4. ASU 2017-4 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. ASU 2017-4 is effective for annual and interim goodwill tests beginning after December 15, 2019. The Company's measurement period is October 1. The Company adopted the standard as of January 1, 2020 and has evaluated the effects of this standard and determined that the adoption did not have a material impact on the Company's consolidation financial statements.

Not Yet Adopted

ASU 2019-12, Simplifications to Accounting for Income Taxes ("ASU 2019-12")

In December 2019, the FASB issued ASU 2019-12. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including deferred taxes for goodwill and allocating taxes for members of a consolidated group. ASU 2019-12 is effective for all entities for fiscal years beginning after December 15, 2020, and earlier adoption is permitted. The Company will adopt the standard as of January 1, 2021 and has determined that the adoption will not impact the Company's consolidated financial statements.

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

In March 2020, the FASB issued Topic 848. Topic 848 provides relief for impacted areas as it relates to impending reference rate reform. ASC 848 contains optional expedients and exceptions to debt arrangements, contracts, hedging relationships, and other areas or transactions that are impacted by reference rate reform. This guidance is effective upon issuance for all entities and elections of certain optional expedients are required to apply the provisions of the guidance. The Company continues to assess all potential impacts of the standard and will disclose the nature and reason for any elections that the Company makes.

3. Revenue recognition

For the years ended December 31, 2020, 2019 and 2018 the Company's revenues disaggregated by the major sources was as follows:

(in millions) Year Ended December 31,

The Company's product sales from Anthrax Vaccines, ACAM2000, NARCAN Nasal Spray and Other comprised approximately:

% of product sales:

Anthrax Vaccines 38 % 19 % 46 %

NARCAN Nasal Spray 31 % 31 % 7 %

As of December 31, 2020, 2019 and 2018, aside from sales to the USG, there were no sales to an individual customer in excess of 10% of total revenues. For the years ended December 31, 2020, 2019, and 2018, the Company’s revenues within the United States comprised 93%, 90% and 91%, respectively, of total revenues.

The Company operates in one business segment. Therefore, results of the Company's operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting.

Contract liabilities

When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations are reflected as contract liabilities on the consolidated balance sheets and are deferred until control of these performance obligations is transferred to the customer. The following table presents the rollforward of contract liabilities:

(in millions)

Deferral of revenue 46.7

Revenue recognized (30.9)

Deferral of revenue 146.2

Revenue recognized (135.0)

As of December 31, 2020 and 2019, the current portion of contract liabilities was $44.6 million and $3.3 million, respectively, and was included in other current liabilities on the balance sheet.

Transaction price allocated to remaining performance obligations

As part of the Company's multi-year CDMO services arrangements that were entered into during 2020, the Company identified a suite-reservation performance obligation which is considered an operating lease as the customer obtains substantially all of the economic benefits of the identified asset and has the right to direct its use. The associated revenue is recognized on a straight-line basis over the term of the lease. The remaining term on the Company's operating lease performance obligations approximates 2.3 years. The Company utilizes a cost-plus model to determine the stand-alone selling price of the lease component to allocate contract consideration between the lease and non-lease components. During the year ended December 31, 2020, the Company's lease revenues were $30.5 million, which is included within CDMO services in the consolidated statement of operations. The Company did not recognize lease revenue during the years ended December 31, 2019 and 2018. The Company has allocated contracted operating lease revenues due under our long-term CDMO service arrangements as follows:

Year Ended December 31,

As of December 31, 2020, the Company expects future revenues of approximately $1.9 billion associated with all performance obligations described above that have not been satisfied and all other arrangements entered into by the Company. The Company expects to recognize a majority of these revenues within the next 24 months. However, the amount and timing of revenue recognition for unsatisfied performance obligations can materially change due to timing of funding appropriations from the USG and the overall success of the Company's development activities associated with its PHT procured product candidates that are then receiving development funding support from the USG under development contracts. In addition, the amount of future revenues associated with unsatisfied performance obligations excludes the value associated with unexercised option periods in the Company's contracts.

Contract assets

The Company considers unbilled accounts receivables and deferred costs associated with revenue generating contracts, which are not included in inventory or property, plant and equipment, as contract assets. As of December 31, 2020 and 2019, the Company had contract assets associated with deferred costs of $41.1 million and $34.0 million, respectively, which is included in prepaid expenses and other current assets and other assets on the Company's consolidated balance sheets.

Accounts receivable

Accounts receivable including unbilled accounts receivable contract assets consist of the following:

December 31,

As of December 31, 2020 and 2019, the allowance for doubtful accounts was $3.1 million and de minimis, respectively.

4. Acquisitions

Adapt

On October 15, 2018, the Company acquired Adapt, a company focused on developing new treatment options and commercializing products addressing opioid overdose and addiction. Adapt's NARCAN® (naloxone HCI) Nasal Spray marketed product is the first needle-free formulation of naloxone approved by the FDA and Health Canada for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression. This acquisition included approximately 50 employees, located in the U.S., Canada, and Ireland, including those responsible for supply chain management, research and development, government affairs, and commercial operations. The products and product candidates within Adapt's portfolio are consistent with the Company's mission and expand the Company's core business of addressing public health threats.

The total purchase price revised for adjustments is summarized below:

Fair value of contingent purchase consideration 48.0

Preliminary purchase consideration 667.2

Adjustments 1.5

Final purchase consideration $ 668.7

The Company issued 733,309 shares of Common Stock at $60.44 per share, the closing price of Emergent's share price on October 15, 2018, for a total of $44.3 million (inclusive of adjustments). The $44.3 million value of the common stock shares issued has been adjusted to a fair value of $37.7 million considering a discount for lack of marketability due to a two-year lock-up period beginning on October 15, 2018. The remaining consideration payable for the acquisition consists of up to $100 million in cash based on the achievement of certain sales milestones through 2022 which the Company has determined the fair value of to be $48.0 million as of the acquisition date. The fair value of the contingent purchase consideration is based on management’s assessment of the potential future realization of the contingent purchase consideration payments. This assessment is based on inputs that have no observable market (Level 3). The obligation is measured using a discounted cash flow model.

This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of Adapt were recorded as of October 15, 2018, the acquisition date, at their respective fair values, and combined with those of the Company. The Company reflects measurement period adjustments in the period in which the adjustments occur. The adjustments during the measurement period resulted from receipt of additional financial information associated with certain acquired contract assets and the value of associated contingent purchase consideration. These adjustments did not impact the Company's statements of operations.

The table below summarizes the final allocation of the purchase price based upon fair values of assets acquired and liabilities assumed at October 15, 2018.

Fair value of tangible assets acquired and liabilities assumed:

Accounts receivable 21.3 — 21.3

Prepaid expenses and other assets 7.8 3.0 10.8

Accounts payable (32.2) — (32.2)

Accrued expenses and other liabilities (50.4) — (50.4)

Deferred tax liability, net (62.4) (0.5) (62.9)

Acquired in-process research and development 41.0 — 41.0

The Company determined the fair value of the intangible asset using the income approach, which is based on the present value of future cash flows. The fair value measurements are based on significant unobservable inputs that are developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products.

The fair value of the intangible asset acquired for Adapt's marketed product NARCAN® Nasal Spray was valued at $534.0 million. The Company has determined the useful life of the NARCAN® Nasal Spray intangible asset to be 15 years. The Company calculated the fair value of the NARCAN® Nasal Spray intangible asset using the income approach with a present value discount rate of 10.5%, which is based on the weighted-average cost of capital for companies with profiles substantially similar to that of Adapt. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from the NARCAN® Nasal Spray intangible asset were based on key assumptions including: estimates of revenues and operating profits; and risks related to the viability of and potential alternative treatments in any future target markets.

The intangible asset associated with IPR&D acquired from Adapt is related to a product candidate. Management determined that the acquisition-date fair value of intangible assets related to IPR&D was $41.0 million. The fair value was determined using the income approach, which discounts expected future cash flows to present value. The Company calculated the fair value using a present value discount rate of 11%, which is based on the weighted-average cost of capital for companies with that profiles substantially similar to that of Adapt and IPR&D assets at a similar stage of development as the product candidate. The Company has recorded impairment charges of $29.0 million and $12.0 million during the years ended December 31, 2020 and December 31, 2019, respectively. The fair value of the IPR&D intangible asset is de minimus at December 31, 2020 (see Note 8).

The Company determined the fair value of the inventory using the comparative sales method, which estimates the expected sales price reduced for all costs expected to be incurred to complete/dispose of the inventory with a profit on those costs.

The Company recorded approximately $148.0 million in goodwill related to the Adapt acquisition, which is calculated as the purchase price paid in excess of the fair value of the tangible and intangible assets acquired representing the future economic benefits the Company expects to receive as a result of the acquisition. The goodwill created from the Adapt acquisition is associated with early stage pipeline products. The goodwill generated from the Adapt acquisition is not expected to be deductible for tax purposes.

PaxVax

On October 4, 2018, the Company completed the acquisition of PaxVax Holding Company Ltd. ("PaxVax"), a company focused on developing, manufacturing, and commercializing specialty vaccines that protect against existing and emerging infectious diseases. This acquisition includes Vivotif® (Typhoid Vaccine Live Oral Ty21a), the only oral

vaccine licensed by the FDA for the prevention of typhoid fever, Vaxchora® (Cholera Vaccine, Live, Oral), the only FDA-licensed vaccine for the prevention of cholera, adenovirus 4/7 and additional clinical-stage vaccine candidates targeting chikungunya and other emerging infectious diseases, European-based current good manufacturing practices ("cGMP") biologics manufacturing facilities, and approximately 250 employees including those in research and development, manufacturing, and commercial operations with a specialty vaccines sales force in the U.S. and in select European countries. The products and product candidates within PaxVax's portfolio are consistent with the Company’s mission and will expand the Company’s core business of addressing PHTs. In addition, the acquisition expands the Company's manufacturing capabilities.

At the closing, the Company paid a cash consideration of $273.1 million (inclusive of closing adjustments). This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of PaxVax were recorded as of October 4, 2018, the acquisition date, at their respective fair values, and combined with those of the Company.

The table below summarizes the final allocation of the purchase consideration based upon the fair values of assets acquired and liabilities assumed at October 4, 2018.

Fair value of tangible assets acquired and liabilities assumed:

Accounts receivable 4.1 — 4.1

Prepaid expenses and other assets 12.2 (0.3) 11.9

Property, plant and equipment 57.8 — 57.8

Deferred tax assets, net 3.8 1.8 5.6

Accounts payable (3.5) — (3.5)

Accrued expenses and other liabilities (33.6) (0.4) (34.0)

Acquired in-process research and development 9.0 (9.0) —

Total purchase consideration $ 273.1 $ — $ 273.1

The fair value of the intangible assets acquired for PaxVax's marketed products are valued at a total of $133.0 million. The Company has determined that the weighted average useful lives of the intangible assets to be 19 years.

The Company determined the fair value of the intangible assets using the income approach, which is based on the present value of future cash flows. The fair value measurements are based on significant unobservable inputs that are developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products.

The Company calculated the fair value of the Vivotif and Vaxchora intangible assets using the income approach with a present value discount rate of 14.5% and 15%, respectively, which is based on the weighted-average cost of capital for companies with profiles substantially similar to that of PaxVax. This is comparable to the internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from these intangible assets were based on key assumptions including: estimates of revenues and operating profits; and risks related to the viability of and potential alternative treatments in any future target markets.

The intangible asset associated with IPR&D acquired from PaxVax is related to a product candidate. The Company adjusted the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the

measurement of the amounts recognized as of that date. The Company estimates the fair value based on the income approach.

The Company determined the fair value of the property, plant and equipment utilizing either the cost approach or the sales comparison approach. The cost approach is determined by establishing replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration. The sales comparison approach determines an asset is equal to the market price of an asset of comparable features such as design, location, size, construction, materials, use, capacity, specification, operational characteristics and other features or descriptions.

The Company recorded approximately $69.5 million in goodwill related to the PaxVax acquisition, calculated as the purchase price paid in the acquisition that was in excess of the fair value of the tangible and intangible assets acquired representing the future economic benefits the Company expects to receive as a result of the acquisition. The goodwill created from the PaxVax acquisition is associated with early stage pipeline products along with potential CDMO services. The majority of the goodwill generated from the PaxVax acquisition is expected to be deductible for tax purposes.

The Company has incurred transaction costs related to the PaxVax acquisition of approximately $4.5 million for the year ended December 31, 2019, which were recorded in selling, general and administrative expenses.

5. Fair value measurements

The Company’s recurring fair value measurement items recorded on a recurring basis primarily consist of contingent consideration, interest rate swaps and investments in money market funds.

Contingent consideration

The contingent consideration liabilities have been generated from our acquisitions. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders if future events occur or conditions are met. The Company’s contingent consideration is measured initially and subsequently at each reporting date at fair value. The changes in the fair value of contingent consideration obligations are primarily due to the expected amount and timing of future net sales and achieving regulatory milestones, which are inputs that have no observable market (Level 3). Any changes in expectations for the Company’s products are classified in the Company's statement of operations as cost of product sales and CDMO services. Any changes in expectations for the Company’s product candidates are recorded in research and development expense for regulatory and development milestones.

The following table is a reconciliation of the beginning and ending balance of the contingent consideration liabilities measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2020 and 2019.

(in millions)

Expense included in earnings 24.8

Measurement period adjustment 1.5

Settlements (57.1)

Expense included in earnings 31.7

Settlements (2.8)

As of December 31, 2020 and 2019, the current portion of the contingent consideration liability was $23.9 million and $3.2 million, respectively, and was included in other current liabilities on the balance sheet.

The recurring Level 3 fair value measurements for the Company's contingent consideration liability include the following significant unobservable inputs:

Interest rate swaps

The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swaps fall into Level 2 in the fair value hierarchy. See note 10 "Derivative Instruments " for further details on the interest rate swaps.

Money market funds

The fair values of the Company's money market funds are based on quoted prices in active markets for identical assets (level 1). As of December 31, 2020 and 2019, the Company held cash in money market accounts of $352.2 million and $52.2 million, respectively. These amounts are included in cash and cash equivalents in the consolidated balance sheets.

Non-recurring fair value measurements

Separate disclosure is required for assets and liabilities measured at fair value on a recurring basis from those measured at fair value on a non-recurring basis. As of December 31, 2020 there were no assets or liabilities measured at fair value on a non-recurring basis. As of December 31, 2019, the Company's IPR&D assets were measured at fair value. See Note 8. "Intangible assets and goodwill" for further details on the IPR&D assets.

6. Inventories

Inventories consist of the following:

December 31,

Raw materials and supplies $ 160.6 $ 70.5

EBS US Equity

EBS · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EBS US Equity☆

EBS · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EBS US Equity