Contrave Acquisition

9 Months Ended

Sep. 30, 2017

Business Combinations [Abstract]

Contrave Acquisition

5. Contrave Acquisition

In March 2016, the Company entered into a separation agreement with Takeda, or the Separation Agreement, which terminated the amended and restated collaboration agreement between the Company and Takeda, or the Restated Collaboration Agreement, and the manufacturing services agreement between the Company and Takeda (see Note 12). The Separation Agreement provided for the transfer of certain rights and assets to the Company and provided for the transition of activities under the collaboration agreement from Takeda to the Company during the transition period. On August 1, 2016, the transition period under the Separation Agreement between the Company and Takeda terminated and the Company reacquired all commercial rights to Contrave in the United States. The Company made an initial payment of $60.0 million, or the Initial Payment, to Takeda in March 2016 and paid an additional $15.0 million to Takeda in January 2017, or the January 2017 Payment. The source of funds for the Initial Payment and the January 2017 Payment was from the Company’s cash on hand. The Company may also be obligated to pay Takeda milestone payments of $10 million, $20 million, $30 million and $50 million, based on the achievement of annual Contrave net sales milestones of $200 million, $300 million, $400 million and $600 million, respectively, in any future year. Each such milestone payment shall be payable only once but more than one may be payable with respect to net sales in a single year. The contingent consideration liability will be remeasured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings. See Footnote 6 for valuation methodology of contingent consideration. As a result of the Contrave acquisition and the resulting settlement of its pre-existing relationship with Takeda, the Company recorded a settlement gain of $80.2 million representing the remaining Contrave deferred revenue on August 1, 2016.

Purchase Consideration

The estimated fair value of the total consideration at the date of acquisition (August 1, 2016) is as follows (in thousands):

Prepaid purchase price payment to Takeda in March 2016	$	60,000
Fair value of contingent consideration due to Takeda		18,800
Payment due to Takeda for Contrave inventory		7,762
Estimated payment due to Takeda for charge-backs and rebates		823
Cash received from Takeda for estimated returns as of August 1, 2016		(1,667	)
Total Purchase Price	$	85,718

On the acquisition date, the estimated fair value of net assets acquired was $85.7 million. As of June 30, 2017, the Company finalized its purchase price allocation. The allocation as of the date of the acquisition is as follows (in thousands):

Developed technology intangible	$	74,967
Tradename		4,400
Inventory		14,261
Assumption of accrued expenses (savings card program)		(5,687	)
Assumption of accrued expenses (returns reserve)		(2,223	)
Total Fair Value of Assets Acquired and Liabilities Assumed	$	85,718

The fair value of intangible assets (developed technology intangible and tradename) is determined primarily using the “income method,” which starts with a forecast of all expected future cash flows. Some of the more significant assumptions inherent in the intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including net revenue, cost of product sales, research and development costs, sales and marketing expenses, capital expenditures and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, among other factors.

The remaining estimated amortization expense related to the intangible assets recorded in connection with the Contrave acquisition for 2017 through 2021 and thereafter is as follows (in thousands):

2017	$	1,983
2018		7,938
2019		7,938
2020		7,938
2021		7,938
Thereafter		36,373
	$	70,108

Pro forma

The following unaudited pro forma financial information presents results as if the acquisition of Contrave had occurred on January 1, 2016 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenues	$	18,903		$	10,965		$	61,404		$	42,677
Net loss		(20,829	)		(36,040	)		(120,434	)		(147,504	)
Net loss per share - basic and diluted		(1.35	)		(2.47	)		(7.94	)		(10.12	)

For purposes of the pro forma disclosures above, the primary adjustments for the three and nine months ended September 30, 2016 include the amortization of the intangible assets, reversal of collaborative and royalty revenue and the elimination of existing Contrave deferred revenue.