USWM Acquisition

6 Months Ended

Jun. 30, 2020

On June 9, 2020 (the Closing Date), the Company completed its acquisition of all of the outstanding equity of USWM Enterprises, LLC (USWM Enterprises), a privately-held biopharmaceutical company, pursuant to a Sale and Purchase Agreement with US WorldMeds Partners, LLC (Seller), dated April 28, 2020 (the Agreement). Under the terms of the Agreement, the Company specifically acquired the right to further develop and commercialize APOKYN, XADAGO and the Apomorphine Infusion Pump in the U.S. and MYOBLOC worldwide (the Products). The Company paid the Seller $297.2 million in cash. For the three and six months ended June 30, 2020, the Company incurred transaction costs of $7.4 million and $8.3 million, respectively, to complete the acquisition which were included in Selling, general and administrative expense in the condensed consolidated statements of earnings.

Contingent payments of up to $230.0 million are due to the Seller upon the achievement of certain milestones related to the development and sale of the Products. In connection therewith, the Company recorded a contingent consideration liability of $115.7 million as of the date of acquisition to reflect the estimated fair value of the contingent consideration. The estimated fair value of the contingent consideration was determined using the Monte Carlo simulation for the sales-based milestones and income approach for the other milestones. The key assumptions considered include the estimated amount and timing of projected cash flows, probability of milestone achievement, volatility, estimated discount rates and risk-free interest rate. In each reporting period after the acquisition, the Company will revalue the contingent consideration liability and will record increases or decreases in the fair value of the liability in its consolidated statements of earnings. Changes in fair value will result from changes in actual and projected milestone achievement, as well as changes to forecasts. The inputs and assumptions may not be observable in the market, but reflect the assumptions the Company believes would be made by a market participant. The possible outcomes for the contingent consideration range from $0 to $230.0 million on an undiscounted basis.

The acquisition is being accounted for as a business combination under the acquisition method of accounting, in accordance with ASC 805, Business Combinations. The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information. The allocation of the purchase price is subject to change within the measurement period (up to one year from the Closing Date) as additional information concerning final asset and liability valuations is obtained. During the measurement period, if the Company obtains new information about facts and circumstances that existed as of the Closing Date that, if known, would have resulted in revised estimated values of those assets or liabilities, the Company will revise the preliminary purchase price allocation. The effect of measurement period adjustments on the estimated fair value elements will be reflected as if the adjustments had been completed as of the Closing Date. Any changes to the initial estimates of the fair value of assets and liabilities will be recorded as adjustments to those assets and liabilities. Residual amounts will be allocated to goodwill. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.

The Company expects to finalize its purchase price allocation within one year of the Closing Date. In addition, The Company continues to analyze and assess relevant information necessary to determine, recognize and record at fair value the assets acquired and liabilities assumed in the following areas: intangible assets, lease assets and liabilities, tax assets and liabilities, and certain existing or potential reserves, including those for legal or contract-related matters. The activities the Company is currently undertaking, include but are not limited to the following: review of acquired contracts and other contract-related and legal matters; review and evaluation of the accounting policies, tax positions, and other tax-related matters. Further, the Company is in the process of obtaining input from third party valuation firms with respect to the fair value of the acquired tangible and intangible assets, and other information necessary to record and measure the assets acquired and liabilities assumed. Accordingly, the preliminary recognition and measurement of assets acquired and liabilities assumed as of Closing Date are subject to change.

The following preliminary purchase price allocation table presents the Company’s preliminary estimates of the fair value of the assets acquired and liabilities assumed at the Closing Date (dollars in thousands):


Cash and cash equivalents	$	6,994
Accounts receivable	18,474
Inventories	10,400
Prepaid expenses and other current assets	3,564
Property and equipment	454
Finance lease asset⁽¹⁾	22,747
Intangible assets	387,000
Other assets	340
Total fair value of assets acquired	449,973
Accounts payable	(2,573)
Accrued expenses and other current liabilities	(23,339)
Finance lease liability⁽¹⁾	(22,747)
Deferred income tax liabilities	(69,515)
Total fair value of liabilities assumed	(118,174)
Total identifiable net assets	$	331,799
Goodwill	88,095
Total purchase price	$	419,894

Cash consideration paid⁽²⁾	$	297,200

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⁽¹⁾ Refer to Note 10 for further discussion of the acquired finance lease asset and assumed lease liability.

⁽²⁾ Represents total purchase price, less cash and cash equivalents acquired and contingent consideration liabilities recorded at the Closing Date

The Company determined the fair value of the inventory using the comparative sales method, which estimates the expected sales price of the product, reduced by all costs expected to be incurred to complete or dispose of the inventory, with a profit on sale.

The acquired intangible assets include an intangible asset associated with the IPR&D related to an infusion pump product candidate and intangible assets associated with the acquired developed technology and product rights. The Company determined the estimated fair values for the acquired intangible assets as of the Closing Date using the income approach. This is a valuation technique that provides an estimate of fair value of the assets, based on the market participant's expectations of the cash flows that the assets are forecasted to generate. The cash flows were discounted at a rate commensurate with the level of risk associated with its projected cash flows. The projected cash flows from these intangible assets were based on various assumptions, including: estimates of revenues, expenses, and operating profits; and risks related to the viability of and potential alternative treatments for any future target markets. In addition to the aforementioned factors, the Company also considered the following factors specific to the valuation of the IPR&D: the stage of development as of the Closing Date; the time and resources needed to complete the development and regulatory approval of the product candidate; the inherent difficulties and uncertainties in developing a product candidate, such as obtaining marketing approval from the U.S. Food and Drug Administration and other regulatory agencies; the economic life of the potential commercialized product; and associated commercialization risks. The Company believes the assumptions are representative of those a market participant would use in estimating fair value.

Acquired intangible assets, excluding the acquired IPR&D, will be amortized over their estimated useful lives on a straight-line basis. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. The following table summarizes the preliminary purchase price allocation, and the preliminary average remaining useful lives, for identifiable intangible assets acquired (dollars in thousands):


	Estimated Fair Value		Estimated Useful Lives (in years)
Acquired In-process Research & Development	$	150,000	n/a
Acquired Developed Technology and Product Rights	237,000		10.5 - 12.5
Total intangible assets	$	387,000

Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Goodwill is primarily attributable to the additional growth platforms and an expanded revenue base with the addition of the commercial and late-stage CNS assets from the USWM Acquisition. The goodwill is not expected to be deductible for tax purposes.

The operations of MDD US Enterprises and its subsidiaries have been included in the Company's condensed consolidated statements of earnings for the period subsequent to the Closing Date, and through June 30, 2020. Total revenues of $10.6 million and net earnings of $1.7 million were recorded for the three and six months ended June 30, 2020.

The following table presents the unaudited pro forma combined financial information for each of the periods presented, as if the USWM Acquisition had occurred on January 1, 2019 (dollars in thousands):


	Three Months ended June 30,						Six Months ended June 30,
	2020		2019		2020		2019
	(unaudited)						(unaudited)
Pro forma total revenues	$	151,803	$	142,238	$	284,965	$	260,542
Pro forma net earnings	38,841		34,940		61,959		44,254

The unaudited pro forma combined financial information is based on historical financial information and the Company's preliminary allocation of purchase price; therefore, it is subject to subsequent adjustment upon finalization of the purchase price allocation. In order to reflect the occurrence of the acquisition on January 1, 2019, the unaudited pro forma combined financial information reflects the adoption of ASC 842, Leases; the recognition of additional amortization expense, net of removal of historical amortization charges, related to the acquired intangible assets; and the elimination of non-recurring acquisition-related transaction costs of $10.1 million incurred from the fourth quarter of 2019 through the second quarter of 2020. The unaudited pro forma combined financial information should not necessarily be considered indicative of the results that would have occurred if the acquisition had been consummated on the assumed completion date, nor are they indicative of future results.