Acquisition of Proteolix

6 Months Ended

Jun. 30, 2011

Acquisition of Company [Abstract]

Acquisition of Proteolix

Note 5. Acquisition of Proteolix

In November 2009, the Company acquired Proteolix Inc., or Proteolix, a privately-held biopharmaceutical company located in South San Francisco, California. Proteolix focused primarily on the discovery and development of novel therapies that target the proteasome for the treatment of hematological malignancies, solid tumors and autoimmune disorders. This acquisition provided the Company with an opportunity to expand into the hematological malignancies market.

Under the Agreement and Plan of Merger, or the Merger Agreement, the aggregate consideration paid by the Company to former Proteolix stockholders at closing consisted of $276.0 million in cash, less $27.6 million that was temporarily held in an escrow account subject to terms described below under Escrow Account Liability. In addition, a $40.0 million earn-out payment, less $4.0 million that was temporarily held in the escrow account, was made in April 2010 related to the achievement of a development milestone. The escrow amounts were paid to the former Proteolix stockholders in February 2011. The Company may be required to pay up to an additional $535.0 million in earn-out payments as outlined below under Liability for Contingent Consideration.

Goodwill

The excess of the consideration transferred over the fair values assigned to the assets acquired and liabilities assumed was $193.7 million, which represents the goodwill amount resulting from the acquisition. None of the goodwill is expected to be deductible for income tax purposes. The Company tests goodwill for impairment on an annual basis or sooner, if deemed necessary. As of June 30, 2011, there were no changes in the recognized amount of goodwill resulting from the acquisition of Proteolix.

Liability for Contingent Consideration

Under the terms of the Merger Agreement, the aggregate cash consideration paid to former Proteolix stockholders at closing was $276.0 million and an additional $40.0 million earn-out payment was made in April 2010. The Company may also be required to pay up to an additional $535.0 million in earn-out payments payable in up to four installments upon the achievement of certain regulatory approvals for carfilzomib in the United States and Europe within pre-specified timeframes. Under the Merger Agreement, the first of these additional earn-out payments would have been in the amount of $170.0 million if achieved by the date originally contemplated, and would have been triggered by accelerated marketing approval for carfilzomib in the United States for relapsed/refractory multiple myeloma. In January 2011, the Company entered into Amendment No. 1 to the Merger Agreement. Amendment No. 1 modified this first payment if the milestone is not achieved by the date originally contemplated on a sliding scale basis, as follows:

• if accelerated marketing approval in the United States for relapsed/refractory multiple myeloma is achieved after the date originally contemplated, but within six months of the original date, subject to extension under certain circumstances, then the amount payable will be reduced to $130.0 million; and

• if accelerated marketing approval in the United States for relapsed/refractory multiple myeloma is achieved more than six months after the date originally contemplated, but within 12 months of the original date, subject to extension under certain circumstances, then the amount payable will be reduced to $80.0 million.

The remaining earn-out payments will continue to become payable in up to three additional installments as follows:

• $65.0 million would be triggered by specified marketing approval in the European Union for relapsed/refractory multiple myeloma;

• $150.0 million would be triggered by specified marketing approval in the United States for relapsed multiple myeloma; and

• $150.0 million would be triggered by specified marketing approval for relapsed multiple myeloma in the European Union.

The range of the undiscounted amounts the Company could be required to pay for the remaining earn-out payments is between zero and $535.0 million. On the acquisition date, the fair value of the liability for the contingent consideration recognized was $199.0 million, of which $40.0 million related to the first milestone payment that was paid in full in April 2010 and the remaining balance of $159.0 million was classified as a non-current liability in the Condensed Consolidated Balance Sheet. The Company determined the fair value of the non-current liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. These inputs include the probability of technical and regulatory success (“PTRS”) for unapproved product candidates considering their stages of development. During the three and six months ended June 30, 2011, the Company recorded contingent consideration expense of $5.7 million and $17.2 million, respectively, compared to $92.0 million and $95.5 million in the same period last year. The change was primarily associated with the change in the PTRS, a significant input in the discounted cash flow analysis used to calculate the fair value of the non-current liability, and also the passage of time.

Escrow Account Liability

In accordance with the Merger Agreement, 10% of each of the total cash consideration payment in November 2009 and the first earn-out payment made to former Proteolix stockholders in April 2010 was temporarily placed in an escrow account to secure the indemnification rights of the Company and other indemnitees with respect to certain matters, including breaches of representations, warranties and covenants of Proteolix included in the Merger Agreement. This amount was reported as restricted cash on the accompanying Condensed Consolidated Balance Sheets at December 31, 2010 and was paid to former Proteolix stockholders in February 2011.