ACQUISITION OF ACTIENT

6 Months Ended

Jun. 30, 2013

ACQUISITION OF ACTIENT

ACQUISITION OF ACTIENT

2.     ACQUISITION OF ACTIENT

The Company views the acquisition of Actient on April 26, 2013 as a major step forward in its strategy to expand its specialty therapeutic offerings and expects to benefit from greater leverage in its commercial infrastructure and significant cross-selling opportunities. The total consideration for Actient included base cash consideration of $585,000 plus adjustments for working capital and cash acquired, contingent consideration based on future sales of certain acquired products, and the issuance of 1,250,000 warrants to purchase the Company common stock. The Company funded the cash payments with cash on hand and a $225,000 senior secured term loan (the “Term Loan”) (see Note 8).

The following table summarizes the fair value of the total consideration at April 26, 2013:

	Total
	Acquisition-
	Date
	Fair value
Base cash consideration	$	585,000
Cash and working capital adjustment	15,431
Contingent consideration	40,958
Warrants	12,000
Total consideration	653,389
Consideration representing compensation	(8,309		)
Consideration allocated to net assets acquired	$	645,080

The above consideration representing compensation is the amount payable to former management of Actient upon completion of their retention period with the Company. This amount will be amortized to expense by the Company as compensation cost over such retention period.

The above contingent consideration represents a risk adjusted net present value relating to the following cash payments on achievement of the following sales milestones for Actient urology products as defined in the purchase agreement:

· $15 million if cumulative net sales of Actient’s urology products from and after the Closing equal $150 million;

· $10 million if cumulative net sales of Actient’s urology products during the twelve-month period commencing May 1, 2013 exceed $150 million; and

$25 million if cumulative net sales of Actient’s urology products during the twenty four month-period commencing May 1, 2013 exceed $300 million.

The warrants issued in the acquisition have a strike price of $17.80 and a ten year life. The fair value assigned to the warrants was determined using the Black-Scholes valuation model, applying an expected term of ten years equal to the life of the warrants, the Company’s historical volatility of 50% as the expected volatility, a ten year risk-free interest of 1.70% and an expected zero percent dividend yield.  In accordance with governing accounting guidance, the Company concluded that the warrants were indexed to our stock and therefore they have been classified as an equity instrument.

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill.

The Company has preliminarily valued the acquired assets and liabilities based on their estimated fair value. These estimates are subject to change as additional information becomes available, including finalization of certain tax matters and finalization of the working capital adjustment. The preliminary fair values included in the balance sheet as of June 30, 2103 are based on the best estimates of management. The completion of the valuation may result in adjustments to the carrying value of Actient’s assets and liabilities, revision of useful lives of intangibles assets, the determination of any residual amount that will be allocated to goodwill and the related tax effects. The related amortization of acquired assets is also subject to revision based on the final valuation. Any adjustments to the preliminary fair values will be made as soon as practicable but no later than one year from the April 26, 2013 acquisition date.

The following table summarizes the estimated fair values of the net assets acquired.

	April 26,
	2013
Cash	$	11,514
Accounts recievable, trade	25,631
Inventory	21,704
Prepaid expenses and other current assets	4,061
Property and equipment	3,028
Purchased intangibles	667,000
Goodwill	113,369
Other long-term assets	6,116
Total assets acquired	852,423
Contingent consideration assumed	(72,900		)
Other liabilities assumed	(29,906		)
Deferred tax liabilities	(104,537		)
Total net assets acquired	$	645,080

The purchased intangibles represent acquired product rights. The costs of these purchased product rights are being amortized to income on a straight-line basis over the below disclosed estimated lives and are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recovered. The following is a summary of the fair value assigned to the product rights acquired and the amortization period assigned to these rights.

	Fair value		Estimated life in years
TESTOPEL	$	491,000	12
Edex	70,000		11
Timm Medical	23,000		10
Striant	8,000		10
Theo-24	39,000		9
Semprex-D	32,000		10
Other products	4,000		2
Total	$	667,000

The contingent consideration assumed is earn-out consideration relating to acquisitions that were previously undertaken by Actient and principally represent royalties on future sales of Actient products. Of the amount shown in the above summary of net assets, $60,848 and $7,052 represent royalties payable on future sales of TESTOPEL and Edex, respectively. The TESTOPEL obligation is a 12% royalty payable on net sales of TESTOPEL through December 31, 2017, at which time such royalty obligation ceases. The Edex obligation is a 15% royalty payable on annual net sales in excess of $20,000. The Edex obligation will cease upon a generic market launch. The remaining amount of contingent consideration represent 6% to 15% royalty obligations on various Actient products, of which approximately $3,000 of such royalty obligation will cease in November 2013, and certain milestone obligations associated with the Company launch of implantable TRT products defined in Actient’s purchase agreements.

The difference between the total consideration and the fair value of the net assets acquired of $113,369 was recorded to Goodwill in the Consolidated balance sheet. This goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, principally representing the tax attributes of the acquisition and certain operational synergies. Approximately $400,000 of the intangibles and Goodwill are expected to be deductible for tax purposes.

In accordance with the relevant accounting guidance, goodwill is not amortized. However, it must be assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review. The balance of Goodwill has been assigned to the Company’s single reporting unit, which is the single operating segment by which the chief decision maker manages the Company. For purposes of assessing the impairment of goodwill, the Company uses its market capitalization as an input to its determination of fair value. If the carrying amount of the net assets of the Company exceeds the fair value, then a goodwill impairment test is performed to measure the amount of the impairment loss, if any.

The operating results of Actient are reported in the Company’s financial statements beginning on April 26, 2013. The following table provides pro forma results of operations for the three and six month periods ended June 30, 2013 and 2012, as if Actient had been acquired as of January 1, 2012, and both the issuance of the Term Loan and the 2018 Convertible Notes used to fund the Transaction had also occurred on January 1, 2012. The pro forma results include certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on the acquired tangible and intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the integration of Actient.  Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the dates indicated or which may occur in the future.

	Unaudited pro forma consolidated results
	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net revenues	$	115,113		$	108,620		$	215,830		$	212,129
Net income (loss) attributable to the Company	$	(33,964	)	$	(23,349	)	$	(36,612	)	$	19,388
Net income (loss) per common share-
Basic	$	(0.69	)	$	(0.48	)	$	(0.74	)	$	0.40
Diluted	$	(0.69	)	$	(0.47	)	$	(0.74	)	$	0.39