USWM Acquisition

9 Months Ended

Sep. 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 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 at the Closing Date. As of September 30, 2020, the Company recorded an additional payable to the Seller of $1.0 million as a result of the resolution of contingencies that increased the original cash consideration paid to the Seller. For the nine months ended September 30, 2020, the Company incurred transaction costs of $8.3 million in completing the acquisition. These costs 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. The possible outcomes for the contingent consideration range from $0 to $230.0 million on, an undiscounted basis.

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 a Monte Carlo simulation for the sales-based milestones, and the income approach for the other milestones. The key assumptions considered in estimating the value of contingent consideration include: the estimated

amount and timing of projected cash flows; probability of milestone achievement; volatility of prospective cash flows; the 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 can result from changes in actual and projected milestone achievement, as well as changes to forecasts. The inputs and assumptions may or may not be observable in the market, and reflect assumptions the Company believes would be made by a market participant. During the three months ended September 30, 2020, the Company recorded an increase to the contingent consideration liabilities of $0.2 million.

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 during 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 regarding 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 accordingly 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 made as of the Closing Date. 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 tax 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 table presents the Company’s preliminary estimates of the fair value of the assets acquired and liabilities assumed as of the Closing Date, and subsequent measurement period adjustments recorded during the third quarter of 2020 (dollars in thousands):


	As Initially Reported		Measurement Period Adjustments		As Adjusted
Cash and cash equivalents	$	6,994	$	—	$	6,994
Accounts receivable	18,474		—		18,474
Inventories	10,400		—		10,400
Prepaid expenses and other current assets	3,564		—		3,564
Property and equipment	454		—		454
Finance lease asset(1)	22,747		—		22,747
Intangible assets	387,000		—		387,000
Other assets	340		—		340
Total fair value of assets acquired	449,973		—		449,973
Accounts payable	(2,573)		—		(2,573)
Accrued expenses and other current liabilities	(23,339)		—		(23,339)
Finance lease liability(1)	(22,747)		—		(22,747)
Deferred income tax liabilities, net(2)	(69,515)		—		(69,515)
Total fair value of liabilities assumed	(118,174)		—		(118,174)
Total identifiable net assets	$	331,799	$	—	$	331,799
Goodwill	88,095		1,048		89,143
Total purchase price	$	419,894	$	1,048	$	420,942

Cash consideration to Seller(3)	$	297,200	$	1,048	$	298,248

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

(2) Includes tax attributes that are subject to tax limitations.

(3) 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 estimated the expected sales price of the product, reduced by all costs expected to be incurred to complete or to dispose of the inventory, with a profit on sale.

The acquired intangible assets include an intangible asset associated with the IPR&D related to the infusion pump product candidate, as well as intangible assets associated with the acquired developed technology and product rights. The Company determined the estimated fair value of the acquired intangible assets as of the Closing Date using the income approach. This is a valuation technique that is based on the market participant's expectations of the cash flows that the intangible assets are forecasted to generate. The projected cash flows from these intangible assets were based on various assumptions, including: estimates of revenues, expenses, and operating profit; and risks related to the viability of and commercial potential for alternative treatments. The cash flows were discounted at a rate commensurate with the level of risk associated with the projected cash flows. In addition to the aforementioned factors, the Company also considered the following factors specific to the valuation of the acquired IPR&D intangible asset: 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 successful 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 (dollars in thousands):


	Estimated Fair Value		Estimated Useful Lives as of Closing Date (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 paid consequent to completing the acquisition, compared to the net assets recognized. Goodwill represents the future economic benefits arising from the other acquired assets, and which could not be individually identified and separately valued. Goodwill is primarily attributable to the additional acquired growth platforms and an expanded revenue base. Goodwill is not expected to be deductible for tax purposes.

The operations of MDD US Enterprises, LLC 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 September 30, 2020. Total revenues of $40.9 million and $51.5 million and net earnings of $5.1 million and $6.8 million were recorded for the three and nine months ended September 30, 2020, respectively.

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 September 30,				Nine Months ended September 30,
	2020		2019		2020		2019
	(unaudited)				(unaudited)
Pro forma total revenues	$	155,135	$	140,791	$	440,100	$	401,332
Pro forma net earnings	39,984		31,599		102,226		76,540

The unaudited pro forma combined financial information is based on historical financial information as well as 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 as if it occurred on January 1, 2019, the unaudited pro forma combined financial information reflects the adoption of ASC 842, Leases; the recognition of additional amortization expense on intangible assets, the removal of historical amortization charges and the elimination of non-recurring acquisition-related transaction costs. Approximately $10.1 million of acquisition-related transaction costs were incurred from the fourth quarter of 2019 through the second quarter of 2020.

The unaudited pro forma combined financial information should not 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.