BUSINESS COMBINATION

9 Months Ended

Sep. 30, 2022

BUSINESS COMBINATION

BUSINESS COMBINATION

3. BUSINESS COMBINATION

Summary

On November 19, 2021, we completed our previously announced acquisition of all of the interests of Novitium pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated as of March 8, 2021, for cash consideration, 2,466,654 restricted shares of our common stock valued at $91.2 million based on our closing stock price of $43.54 on the date of closing and discounted for lack of marketability due to restrictions on shares, and up to $46.5 million in additional contingent consideration. Additionally, we agreed to pay certain debts of Novitium in the amount of $8.5 million, which we deemed to be paid in consummation of the transaction closing, and not assumed liabilities, and thus were included as additional cash consideration. This acquisition was accounted for as a business combination. The contingent consideration is based on the achievement of certain milestones, including milestones on gross profit of Novitium portfolio products over a 24-month period, regulatory filings completed during this 24-month period, and a percentage of net profits on certain products that are launched in the future. As of the closing of the acquisition, the contingent consideration had a fair value of $30.8 million. Refer to Note 14 for changes in contingent consideration and changes in fair value. Total consideration including cash, restricted shares and contingent consideration was valued at $206.5 million.

Purchase consideration consisted of the following:

	(in thousands)
Cash consideration	$	88,109
Repayment of Novitium debts		8,493
Fair value of restricted shares		91,199
Fair value of contingent consideration		30,800
Gross consideration	$	218,601
Cash acquired		12,076
Net consideration	$	206,525

The cash consideration was funded in part by borrowings under our new credit facility (Note 5) and through issuance of shares of Series A convertible preferred stock (Note 10). We acquired Novitium due to its proven track record of being a research and development growth engine capable of fueling growth, to expand our research and development pipeline via niche opportunities, to enhance our contract development and manufacturing organization (“CDMO”) business and U.S.-based manufacturing capacity, and to diversify our revenue base.

The following presents the final allocation of the purchase price to the assets acquired and liabilities assumed on November 19, 2021:

	(in thousands)
Total Purchase Consideration	$	218,601
Cash and cash equivalents		12,076
Accounts receivable		27,185
Inventories		14,460
Prepaid expenses and other current assets		1,891
Property and equipment		14,331
Intangible assets		139,200
Goodwill		24,641
Other non-current assets		1,413
Total assets acquired		235,197
Accounts payable		1,560
Accrued expense and other current liabilities		6,035
Accrued compensation and other related expenses		4,909
Accrued government rebates		744
Returned goods reserve		2,202
Other non-current liabilities		1,146
Total liabilities assumed		16,596
Net assets acquired	$	218,601

The net assets were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates. In connection with the acquisition, we recognized $46.9 million of indefinite-lived in-process research and development intangible assets, $67.4 million of acquired ANDA intangible assets, and $24.9 million of customer relationship intangible assets.

Goodwill is considered an indefinite-lived asset and relates primarily to intangible assets that do not qualify for separate recognition, such as the assembled workforce and synergies between the entities. Goodwill established as a result of the acquisition is tax deductible in the U.S.

Novitium operations generated $24.0 million and $63.1 million of revenue during the three and nine months ended September 30, 2022, respectively.

Restricted Shares

The Novitium acquisition consideration included 2,466,654 restricted shares, which were valued at $91.2 million. These shares contain restrictions on their transfer for periods from three to 24 months following the completion of the acquisition. A Finnerty model was used to value the restricted shares. It includes inputs of not readily observable market data, which are Level 3 inputs. These unobservable inputs include ANI stock volatility with a range of 65% to 71%, and the discounted lack of marketability with a range of 7.5% to 21.5% depending on the length of restriction.