Discontinued Operations

6 Months Ended

Jun. 30, 2015

Discontinued Operations

Discontinued Operations

2. Discontinued Operations

On October 10, 2013, we entered into a Purchase Agreement with a wholly-owned subsidiary of Mesoblast Limited, pursuant to the terms of which we sold our culture expanded mesenchymal stem cell (ceMSC) business, including Prochymal and other related assets. The Purchase Agreement provides for payment to us of $50 million in initial consideration, and payment of up to an additional $50 million upon the achievement by Mesoblast of certain clinical and regulatory milestones. Additionally, we will be entitled to earn low single to double digit cash royalties on future sales by Mesoblast of Prochymal and other products utilizing the acquired ceMSC technology.

The Purchase Agreement provides for the $50.0 million of initial payments and up to $50.0 million of contingent additional payments to us upon our achievement of milestone events, as follows:

	Amount
Milestone	($000)
Initial consideration
Letter of intent payments	$	3,500
Initial closing payment	16,500
Additional closing payment, received in April 2014	15,000
Delivery of all scheduled assets under the Transfer Agreement	15,000
Total initial consideration	50,000
Contingent Consideration
First marketing authorization received in the U.S.	20,000
First marketing authorization received from France, Germany, or European Union.	10,000
Completion of the enrollment of the Phase 3 Crohn’s Trial or Mesoblast’s election to discontinue the trial	10,000
Receipt of final data for the Crohn’s trial or first marketing approval for Crohn’s	10,000
Total conditional consideration	50,000
Total possible purchase price	$	100,000

Of the $50 million in total initial consideration, we received payment of $35 million in cash, and $15 million in Mesoblast ordinary shares, which were delivered to us upon completed delivery of the ceMSC assets.  Our ability to receive the second $50 million is subject to satisfaction of the milestones indicated above all of which are largely dependent upon the clinical and regulatory success of Mesoblast and other factors not in our control. These include many if not all of the risks and uncertainties that our ceMSC business was subject to prior to its sale to Mesoblast, including product development, efficacy and regulatory risks. We have received no such payments thus far, nor do we have any expectation of receiving any such payments in the foreseeable future. Our ability to earn royalties from Mesoblast is subject to these same risks and will require performance by Mesoblast that results in its meeting some or all of the milestones referred to above, and is thereafter also dependent upon the commercial success of Mesoblast’s ceMSC business. Royalties, if any, are payable to us in cash. Any portion of the second $50 million that becomes payable to us will be payable, at the discretion of Mesoblast, in Mesoblast ordinary shares, based on a then current valuation of such shares.  Any such Mesoblast ordinary shares that we receive will be subject to a one year holding period, with limited downside protection for a drop in the Mesoblast share price over the holding period.

We eliminated the Therapeutics segment from our continuing operations as a result of the disposal transaction and have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods.  Our continuing operations now represent the portion of our business previously referred to as our Biosurgery segment.

During the first fiscal quarter of 2015, we completed all of our responsibilities under a separate transition services agreement with Mesoblast and all involvement in our former Therapeutics business has ceased.  The only continuing cash flows to us related to our former Therapeutics business will be the contingent consideration and royalties provided for under the purchase agreement, as described above.  We received no such contingent payments or royalties in the first six months of fiscal 2015 or full fiscal year 2014.

Summarized operating results of discontinued operations are as follows:

	Three Months Ended					Six Months Ended
	June 30,		June 30,			June 30,		June 30,
	2015		2014			2015		2014
	($000s)		($000s)			($000s)		($000s)
Revenue from collaborative research agreements and royalties	$	—	$	150		$	—	$	150
Operating expenses:
Research and development	$	—	104			$	—	177
Selling, general and administrative	—		72			—		587
	—		176			—		764
Loss from discontinued operations before income taxes	—		(26		)	—		(614		)
Income tax expense	—		431			—		597
Loss from discontinued operations	$	—	$	(457	)	$	—	$	(1,211	)

Revenues from our former Therapeutics business historically consisted primarily of collaborative research agreements and royalties.  Because of the disposition of our Therapeutics business in 2013, we will no longer incur related research and development expenses related to these discontinued operations. Our discontinued operations also earned royalty revenues and cost reimbursement under an adult expanded access program. Royalties were earned on the sale of human mesenchymal stem cells sold for research purposes. We recognized this revenue as sales were made.