Emergent BioSolutions Inc. - Quarter Report: 2016 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number: 001-33137

EMERGENT BIOSOLUTIONS INC.

(Exact Name of Registrant as Specified in Its Charter)

(240) 631-3200

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 Large accelerated filer  Accelerated filer  Non-accelerated filer  Smaller reporting company

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

As of July 29, 2016, the registrant had 40,458,718 shares of common stock outstanding.

Emergent BioSolutions Inc.

Index to Form 10-Q

BioThrax® (Anthrax Vaccine Adsorbed), RSDL® (Reactive Skin Decontamination Lotion Kit), BAT™ [Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)], Anthrasil™ (Anthrax Immune Globulin Intravenous [human]), HepaGam B® [Hepatitis B Immune Globulin Intravenous (Human)], VARIZIG® [Varicella Zoster Immune Globulin (Human)], WinRho® SDF [Rh₀ (D) Immune Globulin Intravenous (Human)], NuThrax™ (anthrax vaccine adsorbed with CPG 7909 adjuvant), PreviThrax™ (recombinant protective antigen anthrax vaccine, purified), VIGIV [Vaccinia Immune Globulin Intravenous (Human)], IXINITY^® (coagulation factor IX (recombinant)), Emergard™ and any and all Emergent BioSolutions Inc. brands, products, services and feature names, logos and slogans are trademarks or registered trademarks of Emergent BioSolutions Inc. or its subsidiaries in the United States or other countries. All other brands, products, services and feature names or trademarks are the property of their respective owners.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding the future earnings and performance of Emergent or any of its businesses, our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. We generally identify forward-looking statements by using words like "believes," "expects," "anticipates," "intends," "plans," "forecasts," "estimates" and similar expressions in conjunction with, among other things, discussions of financial performance or financial condition, growth strategy, product sales, manufacturing capabilities, product development, regulatory approvals or expenditures. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. You should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. You are, therefore, cautioned not to place undue reliance on any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we do not undertake to update any forward-looking statement to reflect new information, events or circumstances.

There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements, including, among others:



appropriations for the procurement of BioThrax® (Anthrax Vaccine Adsorbed) and our other countermeasure products;

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our ability to perform under our contracts with the U.S. government related to BioThrax, including the timing of deliveries;

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our ability to obtain new BioThrax sales contracts or modifications to existing contracts;

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the availability of funding for our U.S. government grants and contracts;

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our ability to successfully execute our growth strategy and achieve our financial and operational goals;

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our ability to successfully integrate and develop the products or product candidates, programs, operations and personnel of any entities or businesses that we acquire;

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our ability to perform under our contract with the U.S. government to develop and obtain regulatory approval for the manufacturing of BioThrax in Building 55, our large-scale vaccine manufacturing facility in Lansing, Michigan;

§

whether the operational, marketing and strategic benefits of the spin-off of our biosciences business can be achieved and the timing of any such benefits;



our ability to identify and acquire companies or in-license products or late-stage product candidates that satisfy our selection criteria;

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our ability to realize synergies and benefits from acquisitions or in-licenses within expected time periods or at all;

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our ability to successfully identify and respond to new development contracts with the U.S. government, as well as successfully maintain, through achievement of development milestones, current development contracts with the U.S. government;

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our ability to obtain and maintain intellectual property protection for our products and product candidates;

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our ability and plans to expand our manufacturing facilities and capabilities;

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our ability and the ability of our contractors and suppliers to maintain compliance with cGMP and other regulatory obligations;

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the results of regulatory inspections;

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the operating and financial restrictions placed on us and our subsidiaries under our senior secured credit facility;

§

the outcome of the purported class action lawsuit recently filed against us and possible other future material legal proceedings;

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the rate and degree of market acceptance and clinical utility of our products;

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the success of our ongoing and planned development programs, non-clinical activities and clinical trials of our product candidates;

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our ability to obtain and maintain regulatory approvals for our product candidates and the timing of any such approvals;

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the success of our commercialization, marketing and manufacturing capabilities and strategy; and

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the accuracy of our estimates regarding future revenues, expenses, capital requirements and needs for additional financing.

The foregoing sets forth many, but not all, of the factors that could cause actual results to differ from our expectations in any forward-looking statement. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. You should consider this cautionary statement, the risk factors identified in the section entitled "Risk Factors" in this quarterly report on Form 10-Q and the risk factors identified in our other periodic reports filed with the Securities and Exchange Commission when evaluating our forward-looking statements.

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

(1) See Note 8 "Earnings per share" for details on calculation.

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

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

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

EMERGENT BIOSOLUTIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basis of presentation and consolidation

On August 6, 2015, Emergent BioSolutions Inc. (the "Company" or "Emergent"), announced its plan to separate into two independent publicly-traded companies, one a biotechnology company focused on novel oncology and hematology therapeutics to meaningfully improve patients' lives and the other a global specialty life sciences company focused on providing specialty products for civilian and military populations that address intentional and naturally emerging public health threats. In accordance with the separation plan, Emergent transferred certain assets and liabilities of its biosciences business into Aptevo Therapeutics Inc. ("Aptevo"), a wholly-owned subsidiary of Emergent before the completion of the spin-off, which was incorporated in February 2016.

In anticipation of the spin-off, the Company realigned certain components of its biosciences business to the new Aptevo segment to be consistent with how the Company's chief operating decision maker ("CODM") allocates resources and makes decisions about the operations of the Company. Effective January 1, 2016, the Company changed its segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation.

On August 1, 2016, the Company completed the spin-off of Aptevo. Aptevo is now an independent public company trading under the symbol "APVO" on the NASDAQ Global Select Market ("NASDAQ"). The accompanying unaudited financial statements for the three months and six months ended June 30, 2016 and 2015 include the results of Aptevo. The spin-off of Aptevo has therefore not yet been reflected in the Company's historical results and will be presented as a discontinued operation beginning in the third quarter of 2016. Discontinued operations will reflect the revenues and expenses directly associated with the results of operations of Aptevo for all periods presented.

The accompanying unaudited consolidated financial statements include the accounts of Emergent and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC.

During the six months ended June 30, 2016, there have been no significant changes to the Company's summary of significant accounting policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC. In the opinion of the Company's management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, and are necessary to present fairly the financial position of the Company as of June 30, 2016; the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015; and cash flows for the six months ended June 30, 2016 and 2015. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.

The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis:

(1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.

During the six months ended June 30, 2016, the Company did not have any transfers between Level 1 and Level 2 assets or liabilities.

The fair value of contingent consideration obligations are based on management's assessment of certain development and regulatory milestones, along with updates in the assumed achievement of potential future net sales for the EV-035 series of molecules and the broad spectrum antiviral platform program, which are inputs that have no observable market (Level 3). For both the three and six months ended June 30, 2016, the contingent consideration obligation decreased by $0.4 million. For the three months ended June 30, 2015, the contingent consideration obligation decreased by $0.4 million. For the six months ended June 30, 2015, the contingent consideration obligation increased by $0.4 million. These changes are primarily due to the estimated timing and probability of success for certain development and regulatory milestones and the estimated timing and volume of potential future sales of EV-035 series of molecules and the broad spectrum antiviral platform, along with the novation of the DTRA contract for the EV-035 series of molecules. These decreases and increases in the contingent consideration were classified in the Company's statement of operations as both selling, general and administrative and research and development expense. During the six months ended June 30, 2015, the Company received novation of the DTRA contract and paid the $4.0 million milestone to Evolva in the second quarter of 2015.

The fair value of the RSDL and HepaGam contingent consideration obligations changed as a result of management's assessment of the assumed and actual achievement of future net sales, which are inputs that have no observable market (Level 3). For the three and six months ended June 30, 2016, the contingent purchase consideration obligations increased by $0.5 million and $1.3 million, respectively. For the three months ended June 30, 2015, the contingent consideration obligation decreased by $0.4 million. For the six months ended June 30, 2015, the contingent consideration obligation increased by $0.4 million. The increases and decreases are primarily due to an adjustment to the actual and expected timing and volume of RSDL and HepaGam B sales. These changes are classified in the Company's statement of operations as cost of product sales and contract manufacturing.

The following table is a reconciliation of the beginning and ending balance of the liabilities, consisting only of contingent consideration, measured at fair value using significant unobservable inputs (Level 3) during the six months ended June 30, 2016.

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 June 30, 2016, the in-process research and development asset for EV-035 series of molecules was measured at fair value on a non-recurring basis.

Inventories consisted of the following:

4. Property, plant and equipment

Property, plant and equipment consisted of the following:

As of June 30, 2016, $41.8 million of IPR&D assets related to the Company's otlertuzumab product candidate is included in the Aptevo segment.

Intangible assets consisted of the following:

Amortization expense consisted of the following:

As of June 30, 2016, the weighted average amortization period remaining for intangible assets in the Biodefense and Aptevo segments was 81 and 91 months, respectively.

In July 2016, the Company determined the pending spin-off of Aptevo was a potential indicator of impairment for the definite-lived intangible assets, in-process research and development indefinite-lived intangible assets and the goodwill within the Aptevo reporting unit. The Company completed an undiscounted cash flow recoverability test for the definite-lived intangibles and qualitative assessments for the indefinite-lived intangible assets, as well as the reporting unit and concluded that there was no impairment.

6. Long-term debt

On January 29, 2014, the Company issued $250.0 million aggregate principal amount of 2.875% Convertible Senior Notes due 2021 (the "Notes"). The Notes mature on January 15, 2021, unless earlier purchased by the Company or converted. The conversion rate is equal to 30.8821 shares of common stock per $1,000 principal amount of notes (which is equivalent to a conversion price of approximately $32.38 per share of common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. As of August 1, 2016, certain conversion features were triggered due to the completion of the Aptevo spin-off. The conversion rate under the Notes will be adjusted in accordance with the terms of the indenture, with the ten-trading day valuation period contemplated by the indenture commencing August 1, 2016. The new conversion rate will be determined and announced promptly following the end of the ten-trading day valuation period.

As of June 30, 2016, the Company had two active stock-based employee compensation plans, the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan (the "2006 Plan") and the Emergent BioSolutions Employee Stock Option Plan (the "2004 Plan"). The Company refers to both plans together as the "Emergent Plans."

The following is a summary of stock option award activity under the Emergent Plans:

The following is a summary of restricted stock unit award activity under the 2006 Plan:

On May 19, 2016, at the Company's annual meeting, the shareholders approved the issuance of 3.8 million shares under the Fourth Amended and Restated Emergent BioSolutions Inc. 2006 Stock Incentive Plan, none of which have been issued. In addition, the shareholders approved an increase in the number of authorized shares of common stock to 200 million shares.

On July 14, 2016, the Company's board of directors authorized management to repurchase, from time to time, up to an aggregate of $50 million of the Company's common stock under a board-approved share repurchase program. The timing, amount, and price of any repurchases will be made pursuant to one or more 10b5-1 plans. The term of the board authorization of the repurchase program is until December 31, 2017. The plan will permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with Emergent's stock plans and for other corporate purposes.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including: (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. ASU 2016-09 is effective for the annual reporting period beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the consolidated financial statements and related disclosures.

8. Earnings per share

The following table presents the calculation of basic and diluted net income (loss) per share:

For the three and six months ended June 30, 2016 and 2015, basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.

For the three months ended June 30, 2015, diluted earnings per share is computed using the "if-converted" method by dividing the net income adjusted for interest expense and amortization of debt issuance cost, both net of tax, associated with the Company's 2.875% convertible Senior notes due 2021 (the "Notes") by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares is adjusted for the potential dilutive effect of the exercise of stock options and the vesting of restricted stock units along with the assumption of the conversion of the Notes, at the beginning of the period.

For the three and six months ended June 30, 2016 and the six months ended June 30, 2015, basic and diluted earnings per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. No adjustment to the net loss was computed under the "if-converted" method as the effect would have been anti-dilutive.

For both the three and six months ended June 30, 2016, outstanding equity awards to purchase approximately 3.5 million, respectively, shares of common stock were excluded from the calculation of diluted earnings per share. For the six months ended June 30, 2015, outstanding equity awards to purchase approximately 4.7 million shares of common stock were excluded from the calculation of diluted earnings per share. In addition, for both the three and six months ended June 30, 2016 and the six months ended June 30, 2015, approximately 7.7 million shares of common stock related to the Company's Notes were excluded from the calculation of diluted earnings per share. All outstanding equity awards to purchase common stock and shares of common stock related to the Company's Notes were excluded from the calculation of diluted earnings per share in the periods in which the Company incurred a net loss.

9. Related party transactions

In November 2015, the Company entered into a consulting arrangement with a member of the Company's Board of Directors, amended in July 2016, to provide assistance in connection with the planned spin-off of Aptevo. The total compensation under the agreement was approximately $0.2 million. The consulting agreement terminated on August 1, 2016.

10. Segment information

On August 6, 2015, the Company announced its plan to separate into two independent publicly-traded companies, one a biotechnology company focused on novel oncology and hematology therapeutics to meaningfully improve patients' lives and the other a global specialty life sciences company focused on providing specialty products for civilian and military populations that address intentional and naturally emerging public health threats. In anticipation of the spin-off, the Company realigned certain components of its biosciences business to the new Aptevo segment.  Effective January 1, 2016, the Company changed its segment presentation to reflect this new structure, and prior periods have been recast to conform to the new presentation.

For financial reporting purposes, the Company reports financial information for two business segments: Biodefense and Aptevo. The Company's two business segments, or divisions, engage in business activities for which discrete financial information is provided to and resources are allocated by the CODM. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company's reportable segments offer different products, product candidates, manufacturing processes and services, development processes, sales and marketing processes, and are managed separately.

The Biodefense division consists of three business units: vaccines and therapeutics, medical devices and contract manufacturing. Revenues in this segment are primarily from sales of the Company's FDA-licensed product, BioThrax® (Anthrax Vaccine Adsorbed), to the U.S. government. The Aptevo division consists of one business unit, which is focused on: the discovery, development, commercialization and sale of novel oncology and hematology therapeutics.

11. Subsequent events

Aptevo

On August 1, 2016, the Company completed the previously announced spin-off through the distribution of 100% of the outstanding common stock of Aptevo to the Company's shareholders (the "Distribution"). The Distribution was made to the Company's shareholders of record as of the close of business on July 22, 2016 ("Record Date"), who received one share of Aptevo common stock for every two shares of Emergent common stock held as of the Record Date. The Distribution was intended to take the form of a tax-free distribution for federal income tax purposes in the United States. As a result of the Distribution, Aptevo is now an independent public company trading under the symbol "APVO" on NASDAQ. In the aggregate, approximately 20,230,000 shares of Aptevo common stock were distributed to the Company's shareholders of record as of the Record Date in the Distribution. After giving effect to the Distribution, the Company no longer holds shares of Aptevo's common stock. In addition, on August 1, 2016, the Company entered into a non-negotiable, unsecured promissory note with Aptevo to provide up to an additional $20 million in funding within the next six to twelve months.

Litigation

ITEM 2. 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 quarterly report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, 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 "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this quarterly report on Form 10-Q 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.

Product Portfolio

Emergent BioSolutions Inc., or Emergent, is a global specialty biopharmaceutical company seeking to protect and enhance life by offering specialized products to healthcare providers and governments to address medical needs and emerging public health threats. We develop, manufacture, and deliver a portfolio of medical countermeasures primarily for government agencies in the areas of biological and chemical threats and emerging infectious diseases. We also develop and commercialize therapeutics and other specialty products for hospitals and clinics in the areas of hematology/oncology, transplantation, infectious diseases and autoimmune disorders. As of June 30, 2016, we have two operating divisions: Biodefense and Aptevo Therapeutics Inc., or Aptevo. For financial reporting purposes, we operate in two business segments that correspond to these two divisions.

On August 6, 2015, we announced our plan to separate into two independent publicly-traded companies, one a biotechnology company focused on novel oncology and hematology therapeutics to meaningfully improve patients' lives and the other a global specialty life sciences company focused on providing specialty products for civilian and military populations that address intentional and naturally emerging public health threats.

On August 1, 2016, we completed the spin-off of Aptevo. Aptevo is now an independent public company trading under the symbol "APVO" on the NASDAQ Global Select Market ("NASDAQ"). The accompanying unaudited financial statements for the three months and six months ended June 30, 2016 and 2015 include the results of Aptevo. The spin-off of Aptevo has therefore not yet been reflected in Emergent's historical results and will be presented as a discontinued operation beginning in the third quarter of 2016. Discontinued operations will reflect the revenues and expenses directly associated with the results of operations of Aptevo for all periods presented.

Change in segments

In anticipation of the spin-off, we realigned certain components of our Biosciences business to the new Aptevo segment. Effective January 1, 2016, we changed our segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation.

Biodefense

Our Biodefense division is a specialty biopharmaceutical business focused on countermeasures that address public health threats, specifically Chemical, Biological, Radiological, Nuclear and Explosive, or CBRNE, threats as well as emerging infectious diseases, or EID. The U.S. government is the primary purchaser of our Biodefense products and often provides us with substantial funding for the development of our Biodefense product candidates. Operations that support this division include manufacturing, regulatory affairs, quality assurance, quality control, international sales and marketing, and domestic government affairs in support of our marketed products, as well as product development and manufacturing infrastructure in support of our investigational stage product candidates. Our Biodefense portfolio consists of the following marketed products and various investigational stage product candidates.

Our Biodefense division marketed products are:

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BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the U.S. Food and Drug Administration, or the FDA, for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;

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Anthrasil™ (Anthrax Immune Globulin Intravenous (Human)), the only polyclonal antibody therapeutic licensed by the FDA for the treatment of inhalational anthrax;

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BAT™ (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-Equine), the only heptavalent therapeutic licensed by the FDA for the treatment of botulinum disease;

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VIGIV (Vaccinia Immune Globulin Intravenous (Human)), the only therapeutic licensed by the FDA to address adverse events from smallpox vaccination; and

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RSDL® (Reactive Skin Decontamination Lotion Kit), the only device cleared by the FDA for the removal or neutralization of chemical agents, T-2 toxin and many pesticide-related chemicals from the skin.

Our Biodefense division investigational stage product candidates are:

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NuThrax™ (anthrax vaccine adsorbed with CPG 7909 adjuvant), a next generation anthrax vaccine;

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UV-4B, a novel antiviral being developed for dengue and influenza infections;

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GC-072, the lead compound in the EV-035 series of broad spectrum antibiotics, being developed for Burkholderia pseudomallei;

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VAX161C, a recombinant pandemic influenza vaccine candidate being developed by VaxInnate, Inc. and for which we have an exclusive license agreement to manufacture and sell in the event of a surge order from the Biomedical Advanced Research and Development Authority, or BARDA; and

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Other Biodefense product candidates focused on public health threats and emerging infectious diseases.

A unique attribute of our Biodefense division investigational stage product portfolio is that most of our candidates are under an active development contract with significant funding from the U.S. government. This allows our development pipeline, along with our marketed products, to be aligned with the strategic priorities of our U.S. and allied foreign government customers.

Our Biodefense division also has programs that leverage our proven manufacturing infrastructure and expertise.  We have responded to specific Task Order Requests issued by BARDA for the development and manufacture of specific countermeasures as part of our Center for Innovation in Advanced Development and Manufacturing, or CIADM, program focused on imminent public health threats, including pandemic influenza and Ebola. On June 27, 2016, we received a task order from BARDA to develop and manufacture three cGMP lots of Zika vaccine for use in a Phase 1 clinical trial. Using a base vaccine candidate provided by BARDA, we will conduct technology transfer of process materials and information, process and analytical method development, execute small-scale production runs, and perform cGMP cell banking leading to cGMP manufacture of bulk drug substance and final drug product. The task order consists of a 30-month base valued at $17.9 million and includes options that, if executed, will bring the total value to up to $21.9 million.

Our Biodefense division also includes multiple platform technologies, including the MVAtor™ (modified vaccinia virus Ankara vector) platform technology and Emergard™, a military-grade auto-injector device designed for intramuscular self-injection of antidotes and other emergency response medical treatments that can address exposure to certain chemical agents and other similar emerging threats and our hyperimmune specialty plasma product manufacturing platform. In February 2016, we announced that Emergard was selected by the U.S. Department of Defense, or DoD, and Battelle Memorial Institute to be tested against and developed to U.S. military specifications as a platform for nerve agent antidote delivery. Initial development and testing of Emergard is expected to be completed in 2016 and, if successful, could lead to Emergard's future procurement for U.S. military and emergency responder use. The testing and development of Emergard will be performed under a subcontract with Battelle, which in turn has a prime contract with the DoD.

In addition, our Biodefense division provides contract manufacturing services to third-party customers. The majority of these services are performed at our facilities located in Baltimore, Maryland. At these facilities we perform pharmaceutical product development and filling services for injectable and other sterile products, as well as process design, technical transfer, manufacturing validation, laboratory support, aseptic filling, lyophilization, final packaging and accelerated and ongoing stability studies. We manufacture both vial and pre-filled syringe formats for a wide variety of drug products - small molecule and biological - in all stages of development and commercialization, including 20 licensed products, which are currently sold in more than 40 countries. This facility produces finished units of clinical and commercial drugs for a variety of customers ranging from small biopharmaceutical companies to major multinationals. The facility is an approved manufacturing facility under the regulatory regimes in the United States, Canada, Japan, Brazil, the Middle East and several countries in the European Union.

We have derived the majority of our historical product sales revenues from BioThrax sales to the U.S. government. We are focused on increasing the sales of our Biodefense products to U.S. government customers and expanding the market for our product portfolio to other customers domestically and internationally, although there can be no assurance that we will be able to do so. We are currently a party to a contract with the Centers for Disease Control and Prevention, or the CDC, an operating division of the U.S. Department of Health and Human Services, or HHS, to supply up to 44.75 million doses of BioThrax for the placement into the Strategic National Stockpile, or SNS, over a five-year period ending September 30, 2016.

On June 21, 2016, the U.S. Department of Health and Human Service, or HHS, issued two solicitation notices with respect to the development and procurement of anthrax vaccines for the SNS. HHS issued a Sole Source Notification indicating its intention by September 23, 2016 to award Emergent a follow-on contract for the purchase of 29.4 million doses of BioThrax with a period of performance of five years. The solicitation does not state the number of doses expected to be procured per year. The terms of the contract, including the price per dose and the timing of deliveries remain subject to contract negotiation, and there can be no assurance that an agreed follow-on contract will be in place by September 23, 2016, or at all. In addition, the procurement of doses of BioThrax by the CDC remains subject to the availability of funding. For example, by letter dated April 26, 2016, the CDC indicated that it anticipates that the quantity of BioThrax it plans to purchase for the remaining term of the existing contract will be less than the total remaining doses available to be purchased under the existing contract, and the CDC did not quantify the reduced number of doses it intends to purchase under the existing contract.

In conjunction with the Sole Source Notification with respect to BioThrax, on June 21, 2016, HHS issued a request for proposal seeking a next generation anthrax vaccine for post-exposure prophylaxis of anthrax disease. We have submitted a response to the HHS request for proposal with respect to its NuThrax vaccine candidate. The vaccine candidate, as outlined in the solicitation, must have the ability to confer protection in one or two doses, a favorable safety profile following completion of clinical studies through Phase 2, demonstrated efficacy in non-clinical studies and manufacturing consistency necessary to advance towards approval by Emergency Use Authorization, or EUA. The contract is for the development of the vaccine candidate to licensure as well as for the purchase and delivery of an initial two million doses of a next generation anthrax vaccine to the SNS, with potential additional procurement of 12 million doses up to 25 million dose regimens of final drug product, which is the equivalent of up to 50 million doses of NuThrax.

Our Biodefense segment has generated net income for each of the last five years.

Aptevo

As previously noted, on August 1, 2016, we completed the spin-off of Aptevo. The Aptevo division is a biotechnology business that focuses on novel oncology and hematology therapeutics to meaningfully improve patients' lives. The Aptevo division's portfolio consists of marketed products, various investigational stage product candidates and platform technologies. Operations that support this division include manufacturing, quality, regulatory affairs, medical affairs, and sales and marketing in support of our marketed products, as well as additional product development capabilities in support of our investigational stage product candidates.

The Aptevo division's investigational stage products MOR209/ES414, ES210 and otlertuzumab are built on the novel ADAPTIR^TM (modular protein technology) platform, which is designed to expand on the utility and effectiveness of therapeutic antibodies. The technology platform can form the basis for a variety of product constructs, principally monospecific and multispecific immunotherapeutic proteins and bispecific therapeutic molecules, all which may have structural advantages over monoclonal antibodies. The technology platform utilizes two mechanisms of action: redirected T-cell cytotoxicity, or RTCC, and targeted cytokine delivery. The structural differences of ADAPTIR molecules over monoclonal antibodies allow for the development of other ADAPTIR immunotherapeutics that engage disease targets in a unique manner and produce a unique signaling response. Aptevo is skilled at product candidate generation, validation and subsequent clinical development using the ADAPTIR platform. Aptevo has the ability to progress ADAPTIR molecules from concept to marketed product by employing a variety of capabilities it brings to bear, including protein engineering, pre-clinical development and process development, current good manufacturing practices, or cGMP, and manufacturing oversight. Aptevo also brings to bear key downstream capabilities including the ability to launch, market and commercialize product candidates.

Aptevo's marketed products are:

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WinRho® SDF [Rho(D) Immune Globulin Intravenous (Human)], for treatment of autoimmune platelet disorder, also called immune thrombocytopenic purpura or ITP, and, separately, for the treatment of hemolytic disease of the newborn, or HDN;

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HepaGam B® [Hepatitis B Immune Globulin Intravenous (Human)], for post-exposure prophylactic treatment of hepatitis-B; and for prevention of hepatitis-B recurrence following liver transplantation in HBsAg-positive liver transplant patients, and for post-exposure prophylactic treatment of hepatitis-B;

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VARIZIG® [Varicella Zoster Immune Globulin (Human)], for post-exposure prophylactic treatment of varicella zoster virus, which causes chickenpox, in high risk individuals; and

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IXINITY® [coagulation factor IX (recombinant)], indicated in adults and children 12 years of age and older with hemophilia B for control and prevention of bleeding episodes, and for perioperative management.

Aptevo's investigational stage product candidates include the following:

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MOR209/ES414, a protein therapeutic being developed for metastatic castration-resistant prostate cancer under Aptevo's collaboration with MorphoSys AG;

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ES210, a protein therapeutic being developed for Ulcerative Colitis and other autoimmune and inflammatory diseases;

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otlertuzumab, a protein therapeutic being developed for Chronic Lymphocytic Leukemia;

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5E3, a monoclonal antibody therapeutic being developed for Alzheimer's disease; and

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Other protein therapeutic product candidates primarily targeting immuno-oncology.

The Aptevo division has generated revenue for each of the last five years through product sales, development contracts and collaborative funding but has incurred a net loss for each of those years.

Litigation

Revenues

Effective September 30, 2011, we entered into a contract with the CDC to supply up to 44.75 million doses of BioThrax to the CDC over a five-year period from September 30, 2011 through September 30, 2016. The maximum amount that could be paid to us under the contract is $1.25 billion, subject to availability of funding by the U.S. government. As of June 30, 2016, the U.S. government has committed approximately $1.1 billion for the procurement of BioThrax doses under this contract. Through June 30, 2016, we have delivered and, upon CDC acceptance, recognized revenue on approximately 40.5 million doses, representing approximately $1.1 billion in revenue under this contract.

By letter dated April 1, 2016, the CDC informed us of its intent to award a follow-on BioThrax procurement contract, to prevent a lapse in coverage from the current contract to the new contract. The CDC reaffirmed their intent in a follow-up letter, dated April 26, 2016, in which the CDC stated that their acquisition planning process is ongoing and that they project to issue an award for a follow-on BioThrax procurement contract on October 1, 2016.  That letter further indicates that the CDC anticipates continuing to purchase doses of BioThrax in the second and third quarters of 2016 under the current procurement contract, although the quantity to be purchased will be less than the total remaining doses available to be purchased under the current contract.

On June 21, 2016, the U.S. Department of Health and Human Service, or HHS, issued two solicitation notices with respect to the development and procurement of anthrax vaccines for the SNS. HHS issued a Sole Source Notification indicating its intention by September 23, 2016 to award Emergent a follow-on contract for the purchase of 29.4 million doses of BioThrax with a period of performance of five years. The solicitation does not state the number of doses expected to be procured per year. The terms of the contract, including the price per dose and the timing of deliveries remain subject to contract negotiation, and there can be no assurance that an agreed follow-on contract will be in place by September 23, 2016, or at all. In addition, the procurement of doses of BioThrax by the CDC remains subject to the availability of funding. For example, by letter dated April 26, 2016, the CDC indicated that it anticipates that the quantity of BioThrax it plans to purchase for the remaining term of the existing contract will be less than the total remaining doses available to be purchased under the existing contract, and the CDC did not quantify the reduced number of doses it intends to purchase under the existing contract.

In conjunction with the Sole Source Notification with respect to BioThrax, on June 21, 2016, HHS issued a request for proposal seeking a next generation anthrax vaccine for post-exposure prophylaxis of anthrax disease. We have submitted a response to the HHS request for proposal with respect to its NuThrax vaccine candidate. The vaccine candidate, as outlined in the solicitation, must have the ability to confer protection in one or two doses, a favorable safety profile following completion of clinical studies through Phase 2, demonstrated efficacy in non-clinical studies and manufacturing consistency necessary to advance towards approval by Emergency Use Authorization, or EUA. The contract is for the development of the vaccine candidate to licensure as well as for the purchase and delivery of an initial two million doses of a next generation anthrax vaccine to the SNS, with potential additional procurement of 12 million doses up to 25 million dose regimens of final drug product, which is the equivalent of up to 50 million doses of NuThrax.

We have received contract and grant funding from BARDA, the CDC, Defense Threat Reduction Agency, or DTRA, and National Institute of Allergy and Infectious Diseases, or NIAID, for the following Biodefense-related development programs:

Our revenue, operating results and profitability have varied, and we expect that they will continue to vary on a quarterly basis, primarily due to the timing of sales of our products and timing of work completed under existing and new grants, development contracts and collaborative relationships.

Cost of Product Sales and Contract Manufacturing

The primary expense that we incur to deliver to our customers our marketed vaccines and therapeutics and to perform for our customers our contract manufacturing operations is manufacturing costs consisting of fixed and variable costs. Variable manufacturing costs consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing and filling operations, and sales-based royalties. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. 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. In addition to the fixed and variable manufacturing costs described above, the cost of product sales depends on utilization of available manufacturing capacity.

The primary expense that we incur to deliver our medical devices to our customers is the cost per unit of production from our third-party contract manufacturers. Other associated expenses include sales-based royalties, amortization of intangible assets, shipping, logistics and the cost of support functions.

Research and Development Expenses

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

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personnel-related expenses;

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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;

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costs of contract manufacturing services for clinical trial material; and

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

We intend to focus our product development efforts on promising late-stage candidates that we believe satisfy well-defined criteria and seek to utilize collaborations or non-dilutive funding. 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 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, such as studies involving BioThrax conducted by the CDC.

Selling, General and Administrative Expenses

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

There have been no significant changes to our Critical Accounting Policies and Estimates during the six months ended June 30, 2016. Refer to the Critical Accounting Policies and Estimates section in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission.

Results of Operations

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenues

Product Sales:

The decrease in BioThrax sales was primarily due to the reduction in shipments to the CDC, resulting from the April 2016 letter from the CDC that indicated that it anticipated procuring less than the total remaining doses of BioThrax under the existing procurement contract. The increase in Other Biodefense revenues was primarily due to VIGIV sales to the SNS. The increase in Aptevo sales was mainly due to increased sales of IXINITY (received FDA licensure and launched in the second quarter of 2015).

Contract Manufacturing:

Contract manufacturing revenues increased by $1.3 million, or 15%, to $10.2 million for the three months ended June 30, 2016 from $8.9 million for the three months ended June 30, 2015. The increase is due primarily to services related to plasma collection and related testing activities.

Contracts, Grants and Collaborations:

Contracts, grants and collaborations revenues decreased by $2.4 million, or 7%, to $32.8 million for the three months ended June 30, 2016 from $35.2 million for the three months ended June 30, 2015. The decrease was primarily due to:

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decreased development funding of $16.1 million for Anthrasil related to plasma collection;

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decreased development funding of $5.0 million for PreviThrax due to reduced interest by the U.S. government for the product candidate;

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increased development funding of $10.9 million related to our CIADM program, including $4.7 million from new CIADM task orders, and

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increased development funding of $6.9 million for VIGIV related to plasma collection.

Cost of Product Sales and Contract Manufacturing

Cost of product sales and contract manufacturing increased by $8.3 million, or 30%, to $35.6 million for the three months ended June 30, 2016 from $27.3 million for the three months ended June 30, 2015. The increase was attributable to an increase in rejected BioThrax work-in-process material, as well as increased Aptevo and other Biodefense product sales, partially offset by a decrease in BioThrax sales to the CDC.

Research and Development Expenses

Research and development expenses decreased by $5.6 million, or 14%, to $35.3 million for the three months ended June 30, 2016 from $40.9 million for the three months ended June 30, 2015. This decrease primarily reflects lower contract service costs. Net of contracts, grants and collaborations revenues, we incurred net research and development expenses of $2.6 million and $5.7 million during the three months ended June 30, 2016 and 2015, respectively.

Our principal research and development expenses for the three months ended June 30, 2016 and 2015 are shown in the following table:

The decrease in expense for large-scale manufacturing for BioThrax was primarily due to the timing of manufacturing development activities. The increase in expense for BioThrax related programs was primarily related to the timing of clinical studies to support applications for label expansion for BioThrax. The decrease in expense for PreviThrax was primarily due to the timing of non-clinical studies. In light of reduced funding by the U.S. government for this product candidate, we expect the spending for PreviThrax will be minimal in the future. The increase in expense for NuThrax was primarily due to the timing of non-clinical animal studies and manufacturing activities. The spending for Pandemic influenza was primarily for manufacturing development activities. The decrease in expense for our Anthrasil program was primarily due to the timing of plasma collection services. The decrease in expense for our Botulinum antitoxin program was primarily due to the timing of stability testing and plasma collection. The expense for the EV-035 series of molecules was primarily related to the timing of preclinical formulation development activities. The expense for CIADM task orders awarded in 2015 was primarily for manufacturing development for Ebola monoclonal antibodies. The increase in expense for VIGIV was primarily due to plasma collection. The increase in expense for Emergard was primarily for formulation development. The spending for our Other Biodefense activities was primarily for our funded pre-clinical product candidates and manufacturing development activities.

The decrease in expense for the MOR209/ES414 product candidate was primarily due to the timing of manufacturing activities, along with reimbursement for clinical material from MorphoSys. The decrease in expense for our IXINITY product was primarily due to the timing of manufacturing process development activities and the timing of clinical trial activities. The spending for the otlertuzumab product candidate was primarily related to clinical trial activities. The decrease in expense for 5E3 was primarily due to early stage non-clinical activities. The increase in expense for Other ADAPTIR related programs was primarily due to an increase in characterization and non-clinical activities. The increase in expense for Other Aptevo was associated the timing of centralized research and development activities attributable to product candidates.

Selling, General and Administrative Expenses

The increase includes costs associated with the Aptevo spin-off along with increased professional services to support our strategic growth initiatives, higher IXINITY selling costs, and increased information technology investments.

Total Other Expense

Total net other expense decreased by $0.6 million, or 32%, to $1.3 million for the three months ended June 30, 2016 from $1.9 million for the three months ended June 30, 2015.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes decreased by $9.4 million to a benefit from income taxes of $3.9 million for the three months ended June 30, 2016 from a provision for income taxes of $5.5 million for the three months ended June 30, 2015. The decrease in the provision for (benefit from) income taxes was primarily due to the $34.5 million decrease in our pre-tax income.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues

Product Sales:

The increase in BioThrax sales was primarily due to the suspension of shipments to the CDC during the first quarter of 2015 following the discovery of foreign particles in a limited number of vials in two manufactured lots of BioThrax, resulting in reduced sales volume in the first half of 2015. The decrease in Other Biodefense revenues was primarily due to the timing of RSDL shipments. The increase in Aptevo sales was mainly due to increased sales of IXINITY.

Contract Manufacturing:

The decrease is primarily due to a decrease of $3.8 million from services related to the production of an MVA Ebola vaccine in 2015.

Contracts, Grants and Collaborations:

The decrease in contracts, grants and collaborations was primarily due to:

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decreased development funding of $31.2 million for Anthrasil related to the timing of plasma collection during 2015;

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decreased development funding of $5.6 million for PreviThrax due to reduced interest by the U.S. government for the product candidate;

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increased development funding of $18.6 million related to our CIADM program, including $8.0 million from new CIADM task orders; and

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increased development funding of $15.5 million for VIGIV related to plasma collection.

Cost of Product Sales and Contract Manufacturing

Cost of product sales and contract manufacturing increased by $18.1 million, or 39%, to $64.1 million for the six months ended June 30, 2016 from $46.0 million for the six months ended June 30, 2015. The increase was attributable to the increase in sales of BioThrax to the CDC, along with an increase in rejected BioThrax work-in-process material during the second quarter of 2016.

Research and Development Expenses

Research and development expenses decreased by $10.1 million, or 13%, to $69.5 million for the six months ended June 30, 2016 from $79.6 million for the six months ended June 30, 2015. This decrease primarily reflects lower contract service costs. Net of contracts, grants and collaborations revenues, we incurred net research and development expenses of $5.0 million and $11.3 million during the six months ended June 30, 2016 and 2015, respectively.

Our principal research and development expenses for the six months ended June 30, 2016 and 2015 are shown in the following table:

The decrease in expense for large-scale manufacturing for BioThrax was primarily due to the timing of manufacturing development activities. The increase in expense for BioThrax related programs was primarily related to the timing of clinical studies to support applications for label expansion for BioThrax. The decrease in expense for PreviThrax was primarily due to the timing of non-clinical studies. In light of reduced funding by the U.S. government for this product candidate, we expect the spending for PreviThrax will be minimal in the future. The increase in expense for NuThrax was primarily due to the timing of non-clinical animal studies and manufacturing activities. The decrease in expense for Pandemic influenza was primarily due to the timing of manufacturing development activities. The decrease in expense for our Anthrasil program was primarily due to the timing of plasma collection services. The decrease in expense for our Botulinum antitoxin program was primarily due to the timing of stability testing and plasma collection. The spending for the EV-035 series of molecules was primarily related to the timing of preclinical formulation development activities. The expense for CIADM task orders awarded in 2015 was primarily for manufacturing development for Ebola monoclonal antibodies. The increase in expense for VIGIV was primarily due to plasma collection. The increase in expense for Emergard was primarily for formulation development. The increase in expense for our Other Biodefense activities was primarily due to increased expense related to our funded pre-clinical product candidates and manufacturing development activities.

The increase in expense for the MOR209/ES414 product candidate was primarily due to the timing of manufacturing activities, along with reimbursement for clinical material from MorphoSys. The decrease in expense for our IXINITY product was primarily due to the timing of manufacturing process development activities and the timing of clinical trial activities. The decrease in expense for the otlertuzumab product candidate was primarily related to the timing of clinical trial activities. The decrease in expense for 5E3 was primarily due to early stage non-clinical activities. The increase in expense for Other ADAPTIR related programs was primarily due to an increase in characterization and non-clinical activities. The increase in expense for Other Aptevo was associated the timing of centralized research and development activities attributable to product candidates.

Selling, General and Administrative Expenses

The increase includes costs associated with the Aptevo spin-off along with increased professional services to support our strategic growth initiatives, higher IXINITY selling costs, and increased information technology investments.

Total Other Expense

Total net other expense decreased by $0.8 million, or 24%, to $2.5 million for the six months ended June 30, 2016 from $3.3 million for the six months ended June 30, 2015.

Benefit from Income Taxes

Benefit from income taxes decreased by $2.2 million to a benefit from income taxes of $0.6 million for the six months ended June 30, 2016 from a benefit from income taxes of $2.8 million for the six months ended June 30, 2015. The decrease in the benefit from income taxes was primarily due to the $2.6 million decrease in our pre-tax loss. For the six months ended June 30, 2016 and 2015, our estimated effective annual tax rate was 29% and 27%, respectively. For the six months ended June 30, 2016, the benefit from income taxes included a one-time non-cash charge of $1.6 million associated with tax planning and restructuring activities.

Sources of Liquidity

From inception through June 30, 2016, we have funded our cash requirements principally with a combination of revenues from sales of BioThrax, debt financing, development funding from government entities, non-government and philanthropic organizations, and collaborative partners, the net proceeds from our initial public offering and the sale of our common stock upon exercise of stock options. We have operated profitably for each of the five years ended December 31, 2015. As of June 30, 2016, we had cash and cash equivalents of $333.4 million.

At the closing of the spin-off of Aptevo from Emergent, Emergent provided to Aptevo cash of $45 million from its cash reserves, along with a commitment in the form of a promissory note to provide another $20 million within six to 12 months after the separation.

Cash Flows

The following table provides information regarding our cash flows for the six months ended June 30, 2016 and 2015:

(i) Includes the effect of exchange rates on cash and cash equivalents.

Net cash provided by operating activities of $35.9 million for the six months ended June 30, 2016 was primarily due to our net loss of $7.0 million, an increase in inventories of $19.7 million primarily due to the timing of deliveries of BioThrax to the CDC and a decrease of $14.0 million in income taxes related to quarterly estimated tax payments to federal and state tax jurisdictions, partially offset by a $53.9 million decrease in accounts receivable related to the timing of collection of amounts billed primarily to the CDC along with non-cash charges of $17.8 million for depreciation and amortization.

Net cash used in operating activities of $63.4 million for the six months ended June 30, 2015 was primarily due to our net loss of $7.4 million, a decrease in income taxes of $16.1 million related to timing differences, a decrease in accounts receivable of $40.9 million related to timing of collection of amounts billed primarily to the CDC, and an increase in inventories of $19.0 million primarily due to the timing of deliveries of BioThrax to the CDC, partially offset by a non-cash charge of $17.3 million for depreciation and amortization.

Net cash used in investing activities of $39.2 million for the six months ended June 30, 2016 was due to infrastructure and equipment investments, including the construction of a third manufacturing suite at our Baltimore CIADM manufacturing facility.

Net cash used in investing activities of $19.7 million for the six months ended June 30, 2015 was due to infrastructure and equipment investments.

Net cash provided by financing activities of $24.0 million for the six months ended June 30, 2016 was primarily due to $14.5 million in proceeds from the issuance of common stock pursuant to employee equity plans and $10.4 million in excess tax benefits from exercise of stock options.

Net cash provided by financing activities of $17.4 million for the six months ended June 30, 2015 was primarily due to $13.2 million in proceeds from the issuance of common stock pursuant to employee equity plans and $7.2 million in excess tax benefits from the exercise of stock options, partially offset by $5.0 million in contingent obligation payments.

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 existing cash and cash equivalents, revenues from product sales; development contract, grant and collaboration funding; contract manufacturing services and our revolving credit facility 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:

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the level, timing and cost of product sales;

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

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

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the payment obligations under our indebtedness;

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

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our ability to obtain funding from collaborative partners, government entities and non-governmental organizations for our development programs;

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to the extent to which we repurchase our common stock under our share repurchase program; and

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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. In May 2015, we filed an automatic shelf registration statement, which immediately became effective under SEC rules. For so long as we continue to satisfy the requirements to be deemed a "well-known seasoned issuer" under SEC rules, this shelf registration statement, effective until May 2018, allows us to issue an unrestricted amount of equity, debt and certain other types of securities through one or more future primary or secondary offerings. 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 secured revolving credit facility, 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.

We are not restricted under the terms of the indenture governing our senior convertible notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing our notes that could have the effect of diminishing our ability to make payments on our indebtedness. However, our credit facility restricts our ability to incur additional indebtedness, including secured indebtedness.

Current economic conditions may make it difficult to obtain financing on attractive terms, or at all. If financing is unavailable or lost, our business, results of operations and financial condition would be adversely affected and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.

Share Repurchase Program

On July 14, 2016, our board of directors authorized our management to repurchase, from time to time, up to an aggregate of $50 million of our common stock under a board-approved share repurchase program. The timing, amount, and price of any repurchases will be made pursuant to one or more 10b5-1 plans. The term of the board authorization of the repurchase program is until December 31, 2017. The plan will permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with Emergent's stock plans and for other corporate purposes.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is currently confined to our cash and cash equivalents. We currently do not hedge interest rate exposure or foreign currency exchange exposure, and the movement of foreign currency exchange rates could have an adverse or positive impact on our results of operations. We have not used derivative financial instruments for speculation or trading purposes. 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, but any increase in market rates would likely increase the interest expense associated with our debt.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2016. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2016, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

As of June 30, 2016, we completed the implementation of the enterprise resource planning ("ERP") system for our Biodefense business segment along with Aptevo. In connection with the implementation, we updated the processes that constitute our internal control over financial reporting, as necessary, to accommodate related changes to our business processes and accounting procedures.

Although the processes that constitute our internal control over financial reporting have been materially affected by the implementation of this system and will require testing for effectiveness as the implementation progresses, we do not believe that the implementation has had or will have a material adverse effect on our internal control over financial reporting.

Except as otherwise described above, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 1A. RISK FACTORS

You should carefully consider, among other matters, the following risk factors in addition to the other information in this Quarterly Report on Form 10-Q when evaluating our business because these risk factors may have a significant impact on our business, financial condition, operating results or cash flow. If any of the risks described below or in subsequent reports we file with the SEC actually occur, they may materially harm our business, financial condition, operating results or cash flow. Additional risks and uncertainties that we have not yet identified or that we presently consider to be immaterial may also materially harm our business, financial condition, operating results or cash flow.

THE SPIN-OFF OF OUR BIOSCIENCES BUSINESS

We may not realize some or all of the anticipated benefits of the spin-off of Aptevo due to a number of factors.

On August 1, 2016, the company completed the spin-off of Aptevo Therapeutics Inc. Aptevo is now an independent public company trading under the symbol "APVO" on the NASDAQ Global Select Market.  We may not realize some or all of the anticipated strategic, financial or other benefits from the spin-off. The two independent companies are smaller, less diversified with a narrower business focus and may be more vulnerable to changing market conditions, which could materially and adversely affect Emergent's business, financial condition and results of operations. Further, the combined value of the common stock of the two publicly-traded companies may not be equal to or greater than what the value of our common stock would have been had the spin-off not occurred.

If our distribution on August 1, 2016 of all of the outstanding shares of Aptevo common stock to our stockholders, together with certain related transactions, does not qualify as a tax-free transaction for U.S. federal income tax purposes, we and our stockholders could be subject to significant tax liabilities.

 

It is intended that our distribution on August 1, 2016 of all of the outstanding shares of Aptevo common stock to our stockholders, or the Distribution, together with certain related transactions, qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended, or the Code.  In anticipation of the Distribution, we received a favorable private letter ruling from the Internal Revenue Service, or the IRS, regarding certain U.S. federal income tax matters relating to the Distribution and certain related transaction and an opinion of counsel substantially to the effect that, for U.S. federal income tax purposes, the Distribution, together with certain related transactions, will qualify as a transaction described under Sections 355 and 368(a)(1)(D) of the Code. However, the IRS private letter ruling is based on certain facts and representations submitted by us to the IRS and the opinion of counsel was based upon and relied on, among other things, the IRS private letter ruling and certain facts and assumptions, as well as certain representations and covenants of Emergent and Aptevo contained in a tax matters agreement and certain representations contained in representation letters provided by Emergent, Aptevo and certain stockholders to such counsel, including representations and covenants relating to the past and future conduct of Emergent, Aptevo and such stockholders. If any of these facts, assumptions, representations, or covenants are, or become, inaccurate or incomplete, the IRS private letter ruling and/or the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized and, as a result, the Distribution, together with certain related transactions, could fail to qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the Code for U.S. federal income tax purposes.

 

In addition, the IRS private letter ruling only addresses certain limited matters relevant to determining whether the Distribution, together with certain related transactions, qualifies as a transaction described under Sections 355 and 368(a)(1)(D) of the Code, and the opinion of counsel only represents the judgment of such counsel, which is not binding on the IRS or any court. Accordingly, notwithstanding the IRS private letter ruling and the opinion of counsel, there can be no assurance that the IRS will not assert that the Distribution, together with certain related transactions, should be treated as a taxable transaction for U.S. federal income tax purposes or that a court would not sustain such a challenge.

 

If the Distribution, together with certain related transactions, fails to qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the Code, for U.S. federal income tax purposes, in general, (i) we would recognize taxable gain on the Distribution equal to the amount by which the fair market value of the Aptevo shares distributed to our shareholders exceeded our tax basis in the Aptevo shares and (ii) each of our shareholders who received Aptevo shares in the Distribution would be treated as receiving a taxable distribution equal to the fair market value of the Aptevo shares received by such shareholder.

 

Under the tax matters agreement that we entered into with Aptevo in connection with the spin-off, Aptevo may be required to indemnify us against any tax liabilities and related expenses resulting from the failure of the Distribution, together with certain related transactions, to qualify as a transaction described under Sections 355 and 368(a)(1)(D) of the Code to the extent that the failure to so qualify is attributable to actions, events or transactions relating to Aptevo's stock, assets or business, or a breach of the relevant representations or covenants made by Aptevo in the tax matters agreement or the IRS private letter ruling or in the representation letters provided  to our counsel for purposes of their opinion. Any such indemnity obligations could be material, and there can be no assurance that Aptevo will be able to pay any such indemnification.   

GOVERNMENT CONTRACTING RISKS

We derive the majority of our revenue from sales of BioThrax to our principal customer, the U.S. government. If the U.S. government's demand for and funding for procurement of BioThrax is reduced or our next generation anthrax vaccine candidate NuThrax is not selected for advanced development and procurement under the recent U.S. government solicitation seeking a next generation vaccine for post-exposure prophylaxis of anthrax disease, our business, financial condition, operating results and cash flow could be materially harmed.

We have derived and expect for the foreseeable future to derive the majority of our revenue from sales of BioThrax, our anthrax vaccine licensed by the U.S. Food and Drug Administration, or the FDA, to the U.S. government. We are currently party to a contract with the Centers for Disease Control and Prevention, or the CDC, for the supply of up to 44.75 million doses of BioThrax for placement into the Strategic National Stockpile, or the SNS, over a five-year period, which is scheduled to expire on September 30, 2016.

On June 21, 2016, the U.S. Department of Health and Human Service, or HHS, issued two solicitation notices with respect to the development and procurement of anthrax vaccines for the SNS. HHS issued a Sole Source Notification indicating its intention by September 23, 2016 to award Emergent a follow-on contract for the purchase of 29.4 million doses of BioThrax with a period of performance of five years. The solicitation does not state the number of doses expected to be procured per year. The terms of the contract, including the price per dose and the timing of deliveries, remain subject to contract negotiation, and there can be no assurance that an agreed follow-on contract will be in place by September 23, 2016, or at all. In addition, the procurement of doses of BioThrax by the CDC remains subject to the availability of funding. For example, by letter dated April 26, 2016, the CDC indicated that it anticipates that the quantity of BioThrax it plans to purchase for the remaining term of the existing contract will be less than the total remaining doses available to be purchased under the existing contract, and the CDC did not quantify the reduced number of doses it intends to purchase under the existing contract.

In conjunction with the Sole Source Notification with respect to BioThrax, on June 21, 2016, HHS issued a request for proposal seeking a next generation anthrax vaccine for post-exposure prophylaxis of anthrax disease. The company has submitted its response to the HHS request for proposal with respect to its NuThrax vaccine candidate. The vaccine candidate, as outlined in the solicitation, must have the ability to confer protection in one or two doses, a favorable safety profile following completion of clinical studies through Phase 2, demonstrated efficacy in non-clinical studies and manufacturing consistency necessary to advance towards approval by Emergency Use Authorization, or EUA. The contract is for the development of the vaccine candidate to licensure as well as for the purchase and delivery of an initial two million doses of a next generation anthrax vaccine to the SNS, with potential additional procurement of 12 million doses up to 25 million dose regimens of final drug product, which is the equivalent of up to 50 million doses of NuThrax.

There can be no assurance that HHS will select our next generation anthrax vaccine candidate NuThrax for advanced development and procurement. There is also no assurance that HHS will proceed with selecting any vaccine candidate or that if we are selected, HHS's decision will not be the subject of a protest, which, if successful, could lead to delays or denials of any awarded contract. Our existing contract with the CDC for BioThrax does not, and any follow-on procurement contract for BioThrax or for the advanced development and procurement of NuThrax (if selected) will not, guarantee that funding for the procurement of doses will be made available. In addition, if the SNS priorities change, funding to procure doses of BioThrax, or NuThrax (if selected), may be limited or not available, and our business, financial condition and operating results could be materially harmed. The success of our business and our operating results for the foreseeable future are significantly dependent on the level of funding for the procurement of BioThrax or NuThrax (if selected) and the terms of our BioThrax or NuThrax sales to the U.S. government, including the price per dose, the number of doses and the timing of deliveries. If the U.S. government's demand for and level of funding for procurement of BioThrax is reduced, or if our next generation vaccine candidate NuThrax is not selected for advanced development and procurement, our business, financial condition, operating results and cash flow could be materially harmed.

Our U.S. government procurement and development contracts require ongoing funding decisions by the U.S. government. Non-selection of our products or product candidates, or reduced or discontinued funding of these contracts could cause our business, financial condition, operating results and cash flow to suffer materially.

Our principal customer for BioThrax, BAT, Anthrasil, VIGIV and RSDL is the U.S. government. We anticipate that the U.S. government will also be a principal customer for other Biodefense products that we successfully acquire or develop. Additionally, a significant portion of our revenue comes from U.S. government development contracts and grants. Over its lifetime, a U.S. government procurement or development program may be implemented through the award of many different individual contracts and subcontracts. The funding for such government programs is subject to Congressional appropriations, generally made on a fiscal year basis, even for programs designed to continue for several years. For example, sales of BioThrax supplied under our current multi-year procurement contract with the CDC as well as sales of BioThrax to be supplied under our expected follow-on procurement contract with the CDC are subject to the availability of funding, mostly from annual appropriations. These appropriations can be subject to political considerations and stringent budgetary constraints. For example, in April 2016, we were notified by BARDA that, after prioritization of its development funding, BARDA would not be exercising the clinical trial option for our PreviThrax rPA vaccine development program. As a consequence of this decision, we determined to cease further development work on our PreviThrax vaccine product candidate. Additionally, our government-funded development contracts typically give the U.S. government the right, exercisable in its sole discretion, to extend these contracts for successive option periods following a base period of performance. The value of the services to be performed during these option periods may constitute the majority of the total value of the underlying contract. For example, the development contract we were awarded in September 2014 for the development of a dry formulation of NuThrax consists of a two-year base period of performance valued at approximately $7.3 million and thirteen options over a five-year period for a total contract value of approximately $29 million. In addition, in response to the June 21, 2016 HHS request for proposal seeking a next generation anthrax vaccine for post-exposure prophylaxis of anthrax disease, we have responded to this HHS request for proposal with respect to our NuThrax vaccine candidate. If our next generation vaccine candidate NuThrax is not selected for advanced development and procurement or if levels of government expenditures and authorizations for biodefense decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government otherwise declines to exercise its options under our contracts, our business, revenues and operating results would suffer.

The government contracting process is typically a competitive bidding process and involves unique risks and requirements.

Our business involves government contracts and grants, which may be awarded through competitive bidding. Competitive bidding for government contracts presents a number of risks and requirements, including:

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the commitment of substantial time and attention of management and key employees to the preparation of bids and proposals for contracts that may not be awarded to us;

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the need to accurately estimate the resources and cost structure that will be required to perform any contract that we might be awarded;

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the possibility that we may be ineligible to respond to a request for proposal issued by the government;

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the submission by third parties of protests to our responses to requests for proposal that could result in delays or withdrawals of those requests for proposal; and

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in the event our competitors protest or challenge contract or grant awards made to us pursuant to competitive bidding, the potential that we may incur expenses or delays, and that any such protest or challenge would result in the resubmission of bids based on modified specifications, or in the termination, reduction or modification of the awarded contract.

The U.S. government may choose not to award us future contracts for the development of our Biodefense product candidates or for the procurement of our Biodefense products, and may instead award such contracts to our competitors. If we are unable to secure particular contracts, we may not be able to operate in the market for products that are provided under those contracts. Additionally, if we are unable to consistently win new contract awards over an extended period, or if we fail to anticipate all of the costs or resources that we will be required to secure and, if applicable, perform under such contract awards, our growth strategy and our business, financial condition and operating results could be materially and adversely affected.

Laws and regulations affecting government contracts make it more costly and difficult for us to successfully conduct our business. Failure to comply with these laws could result in significant civil and criminal penalties and materially damage our relationship with the U.S. government.

We must comply with numerous laws and regulations relating to the procurement, formation, administration and performance of government contracts. Among the most significant government contracting regulations that affect the business of our Biodefense division are:

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the Federal Acquisition Regulation, or FAR, and agency-specific regulations supplemental to FAR, which comprehensively regulate the award, formation, administration and performance of government contracts;

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the Defense Federal Acquisition Regulations, or DFARs, and agency-specific regulations supplemental to DFARs, which comprehensively regulate the award, formation, administration and performance of U.S. Department of Defense, or DoD, government contracts;

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business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees, restrict the granting of gratuities and funding of lobbying activities and incorporate other requirements such as the Anti-Kickback Act, the Procurement Integrity Act, the False Claims Act and the Foreign Corrupt Practices Act;

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export and import control laws and regulations, including but not limited to ITAR (International Traffic in Arms Regulations); and

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laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

U.S. government agencies routinely audit and investigate government contractors for compliance with applicable laws and standards. If we are audited and such audit were to uncover improper or illegal activities, we could be subject to civil and criminal penalties, administrative sanctions, including suspension or debarment from government contracting and significant reputational harm.

The amount we are paid under our fixed price government procurement contracts is based on estimates we have made of the time, resources and expenses required for us to perform under those contracts. If our actual costs exceed our estimates, we may not be able to earn an adequate return or may incur a loss under these contracts, which could harm our operating results and materially reduce our net income.

Some of our current contracts with the U.S. Department of Health and Human Services, or HHS, and the DoD for the procurement of our Biodefense products are fixed price contracts. We expect that our potential future contracts with the U.S. government for our Biodefense products also may be fixed price contracts. Under a fixed price contract, we are required to deliver our products at a fixed price regardless of the actual costs we incur. Estimating costs that are related to performance in accordance with contract specifications is difficult, particularly where the period of performance is over several years. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed price contract could reduce the profitability of such a contract or cause a loss, which could harm our operating results and materially reduce our net income.

Unfavorable provisions in government contracts, some of which may be customary, may subject our business to material limitations, restrictions and uncertainties and may have a material adverse impact on our financial condition and operating results.

Government contracts customarily contain provisions that give the U.S. government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the U.S. government to:

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terminate existing contracts, in whole or in part, for any reason or no reason;

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unilaterally reduce or modify contracts or subcontracts, including by imposing equitable price adjustments;

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cancel multi-year contracts and related orders, if funds for contract performance for any subsequent year become unavailable;

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decline, in whole or in part, to exercise an option to purchase product under a procurement contract or to fund additional development under a development contract;

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decline to renew a procurement contract;

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claim rights to facilities or to products, including intellectual property, developed under the contract;

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require repayment of contract funds spent on construction of facilities in the event of contract default;

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take actions that result in a longer development timeline than expected;

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direct the course of a development program in a manner not chosen by the government contractor;

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suspend or debar the contractor from doing business with the government or a specific government agency;

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pursue civil or criminal remedies under acts such as the False Claims Act and False Statements Act; and

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control or prohibit the export of products.

Generally, government contracts, including our contract for procurement of BioThrax, contain provisions permitting unilateral termination or modification, in whole or in part, at the U.S. government's convenience. Under general principles of government contracting law, if the U.S. government terminates a contract for convenience, the government contractor may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the U.S. government terminates a contract for default, the government contractor is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. Our CDC contract for the procurement of BioThrax is, our expected follow-on contract for the procurement of BioThrax and our future U.S. government procurement and development contracts are likely to be, terminable at the U.S. government's convenience with these potential consequences.

Our U.S. government contracts grant the U.S. government the right to use technologies developed by us under the government contract or the right to share data related to our technologies, for or on behalf of the U.S. government. Under our U.S. government contracts, we might not be able to prohibit third parties, including our competitors, from accessing such technology or data, including intellectual property, in providing products and services to the U.S. government.

COMMERCIALIZATION RISKS

We face substantial competition, which may result in others developing or commercializing products before or more successfully than we do.

The development and commercialization of new biopharmaceutical products is highly competitive and subject to rapid technological advances. We may face future competition with respect to our products, any products that we acquire, our current product candidates and any products we may seek to develop or commercialize in the future from other companies and governments, universities and other non-profit research organizations. Our competitors may develop products that are safer, more effective, more convenient or less costly than any products that we may develop or market. Our competitors may devote greater resources to market or sell their products, adapt more quickly to new technologies, scientific advances or patient preferences and needs, initiate or withstand substantial price competition more successfully than we can, or more effectively negotiate third-party licensing and collaborative arrangements.

There are a number of companies with biodefense products or product candidates competing with us for both U.S. government procurement and development resources. For example, in terms of additional procurement of anthrax countermeasures, HHS awarded an SNS procurement contract to GlaxoSmithKline plc for ABThrax™ (raxibacumab), an FDA-approved anthrax monoclonal antibody therapeutic, and recently awarded an SNS procurement contract to Elusys Therapeutics, Inc. for Anthim (obiltoxaximab), an FDA-approved anthrax monoclonal antibody therapeutic. On June 21, 2016, HHS issued a request for proposal seeking a next generation anthrax vaccine for post-exposure prophylaxis of anthrax disease. There can be no assurance that HHS will select our next generation anthrax vaccine candidate NuThrax for advanced development and procurement under this solicitation.

Any reduction in demand for our products as a result of a competing product could lead to reduced revenues, reduced margins, reduced levels of profitability and loss of market share for our products. These competitive pressures could adversely affect our business and operating results.

Our Biologic Products may face risks of competition from biosimilar manufacturers.

Competition for BioThrax, BAT, Anthrasil, and VIGIV or our "Biologic Products," may be affected by follow-on biologics, or "biosimilars," in the United States and other jurisdictions. Regulatory and legislative activity in the United States and other countries may make it easier for generic drug manufacturers to manufacture and sell biological drugs similar or identical to our Biologic Products, which might affect the profitability or commercial viability of our Biologic Products. Under the Biologics Price Competition and Innovation Act of 2010, the FDA cannot approve a biosimilar application until the 12-year exclusivity period for the innovator biologic has expired. Regulators in the European Union and in other foreign jurisdictions have already approved biosimilars, although the European Medicines Agency has expressly excluded blood or plasma-derived products and their recombinant alternatives from the biosimilar pathway for a period of time. Vaccine and allergen products are considered on a case-by-case basis. The specific regulatory framework for this new approval pathway, whether the FDA will permit biosimilars for blood products and vaccines, and the extent to which an approved biosimilar would be substituted for the innovator biologic are not yet clear and will depend on many factors that are currently unknown. If a biosimilar version of one of our Biologic Products were approved, it could have a material adverse effect on the sales and gross profits of the affected Biologic Product and could adversely affect our business and operating results.

Political or social factors may delay or impair our ability to market our products and may require us to spend significant management time and financial resources to address these issues.

Products developed to treat diseases caused by or to combat Chemical, Biological, Radiological, Nuclear and Explosives, or CBRNE, threats are subject to changing political and social environments. The political responses and social awareness of the risks of biowarfare and bioterrorism attacks on military personnel or civilians may vary over time. If the threat of terrorism were to decline, then the public perception of the risk of bioterrorism may be reduced. This perception, as well as political or social pressures, could delay or cause resistance to bringing our products to market or limit pricing or purchases of our products, any of which could negatively affect our revenues.

In addition, substantial delays or cancellations of purchases could result from protests or challenges from third parties. Lawsuits brought against us by third parties or activists, even if not successful, could require us to spend significant management time and financial resources defending the related litigation and could potentially damage the public's perception of us and our products. Any publicity campaigns or other negative publicity may adversely affect the degree of market acceptance of our Biodefense products and thereby limit the demand for our Biodefense products, which would adversely affect our revenues.

REGULATORY AND COMPLIANCE RISKS

Our long term success depends, in part, upon our ability to develop, receive regulatory approval for and commercialize product candidates and, if we are not successful, our business and operating results may suffer.

Our product candidates and the activities associated with their development, including testing, manufacture, recordkeeping, storage and approval, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Except under limited circumstances related to certain government sales, failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have limited experience in preparing, filing and prosecuting the applications necessary to gain regulatory approvals and expect to rely on third-party contract research organizations and consultants to assist us in this process.

In the United States, to obtain approval from the FDA to market any of our future biologic products, we will be required to submit a biologics license application, or BLA, to the FDA. Ordinarily, the FDA requires a sponsor to support a BLA with substantial evidence of the product's safety and efficacy in treating the targeted indication based on data derived from adequate and well-controlled clinical trials, including Phase III safety and efficacy trials conducted in patients with the disease or condition being targeted.

However, NuThrax or any of our biodefense product candidates, for example, is subject to a different regulatory approval pathway. Specifically, because humans are rarely exposed to anthrax toxins under natural conditions, and cannot be intentionally exposed, statistically significant efficacy for these product candidates cannot be demonstrated in humans. Instead, efficacy must be demonstrated, in part, by utilizing animal models instead of testing in humans. This is known as the FDA's "Animal Rule." We cannot guarantee that the FDA will permit us to proceed with licensure of NuThrax or any Biodefense product candidates under the Animal Rule. Even if we are able to proceed pursuant to the Animal Rule, the FDA may decide that our data are insufficient to support approval and require additional preclinical, clinical or other studies, refuse to approve our products, or place restrictions on our ability to commercialize those products. Furthermore, products approved under the Animal Rule are subject to certain additional post-marketing requirements. For example, to the extent feasible and ethical, manufacturers of products approved pursuant to the Animal Rule must conduct post-marketing studies, such as field studies, to verify and describe the product candidate's clinical benefit and to assess its safety when used as indicated. We cannot guarantee that we will be able to meet this regulatory requirement even if one or more of our product candidates are approved under the Animal Rule.

The process of obtaining these regulatory approvals is expensive, often takes many years if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidate involved. Changes in the regulatory approval process during the development period, changes in or the enactment of additional statutes or regulations, or changes in the regulatory review process may cause delays in the approval or rejection of an application.

The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient to support approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate.