Acquisition of Proteolix

6 Months Ended

Jun. 30, 2013

Acquisition of Proteolix

Acquisition of Proteolix

Note 6. Acquisition of Proteolix

On November 16, 2009, or the Acquisition Date, the Company acquired Proteolix under the terms of an Agreement and Plan of Merger, or the Merger Agreement, entered into in October 2009. Under the Merger Agreement, the aggregate consideration payable by the Company to former Proteolix stockholders consisted of $276.0 million in cash at closing, and several earn-out payments. The three remaining earn-out payments, that potentially total $365.0 million, are contingent upon the achievement of certain regulatory approvals for Kyprolis in the U.S. and Europe within pre-specified timeframes, as follows:

· $65.0 million would be triggered by specified marketing approval on or before December 31, 2013 in the European Union for relapsed/refractory multiple myeloma;

· $150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the United States for relapsed multiple myeloma; and

· $150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the European Union for relapsed multiple myeloma.

Under certain circumstances, including if the Company fails to satisfy regulatory approval-related diligence obligations under the Merger Agreement, the Company may be required to make one or more earn-out payments even if the associated regulatory approvals are not received. Subject to the terms and conditions set forth in the Merger Agreement, the Company may, in its sole discretion, make any of the remaining earn-out payments that become payable to former holders of Proteolix preferred stock in the form of cash, shares of the Company’s common stock or a combination thereof.

The range of the undiscounted amounts the Company could be required to pay for the remaining earn-out payments is between zero and $365.0 million. The liability for contingent consideration is recorded at fair value at each reporting date based on a probability-weighted discounted cash flow analysis that includes 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. As of June 30, 2013, the liability for contingent consideration was $155.1 million.

Contingent consideration expense/(benefit) is recognized for any changes in the fair value of the liability for contingent consideration. Changes to the estimates and assumptions used to estimate this liability could result in significant fluctuations to contingent consideration expense/(benefit) recognized in the Company’s Consolidated Statements of Operations.

During the three months and six months ended June 30, 2013, the Company recognized a contingent consideration expense of $3.0 million and $6.0 million, respectively, compared to $53.2 million and $56.4 million for the same periods in the prior year. For the three months and six months ended June 30, 2012, the increase in the fair value of the contingent consideration liability was primarily a result of changes made to the PTRS and reflects the expense recorded for the period following the June 20, 2012 vote by the U.S. Food and Drug Administration (FDA) Oncology Drug Advisory Committee (CDAC) in favor of the approval of Kyprolis. The expense recorded for the three and six month periods ended June 30, 2013 relate to the time value of the liability.