T-CELL FACTORY ACQUISITION

6 Months Ended

Jun. 30, 2015

Business Combinations [Abstract]

T-CELL FACTORY ACQUISITION

NOTE 13—T-CELL FACTORY ACQUISITION

On March 17, 2015, the Company entered into a stock purchase agreement (the “SPA”) with TCF and the shareholders of TCF (collectively, the “Sellers”), to acquire all of the outstanding capital stock of TCF.  The signing and closing of the transaction happened concurrently whereupon TCF became the Company’s wholly-owned subsidiary and was renamed Kite Pharma EU B.V.  The SPA contains certain representations, warranties, covenants and indemnities by the parties thereto, in each case customary for a transaction of this nature and scope. The Company acquired TCF for the opportunity to significantly expand its pipeline of TCR-based product candidates.  Using its proprietary TCR-GENErator technology platform, TCF may be able to rapidly and systematically discover tumor-specific TCRs. 

Pursuant to the SPA, the Company paid approximately $15.1 million in cash and issued $4.2 million in shares of its common stock, which equated to 66,120 shares of its common stock, to the Sellers.  The cash paid to the Sellers is subject to customary adjustments for net working capital.  At the closing, €2.0 million was withheld from the Sellers to satisfy any potential indemnity claims arising under the SPA, the balance of which will be paid to the Sellers upon the termination of an indemnity holdback period of 18 months. 

The Company is obligated to pay up to €242.5 million upon the achievement of certain clinical, regulatory and sales milestones relating to TCR-based product candidates that may be developed by TCF. A portion of these milestone payments will be made to TCF directly to pay its licensors and employees.  At the Company’s option, a portion of the clinical and regulatory milestones may be paid in shares of the Company’s common stock to the Sellers. In connection with the acquisition, each of the Sellers entered into non-competition and non-solicitation agreements with the Company, and certain of the Sellers and other key scientists entered into employment agreements with Kite Pharma EU B.V.

The TCF acquisition has been accounted for as a business combination in accordance with ASC 805. Accordingly, the Company has estimated the purchase price allocation based on the fair values of the assets acquired and liabilities assumed.  Intangible assets were valued using the relief from royalty method under the income approach for license agreements, and using the with-and-without method for non-compete agreements. In connection with the acquisition, the Company acquired an exclusive license agreement with IBA GmbH, or IBA, for intellectual property rights relating to certain methods of selecting TCRs.  Additionally, a non-exclusive license agreement with Sanquin Blood Supply Foundation relating to certain methods of detecting and selecting TCRs was acquired. Lastly, the Company acquired a license agreement with the Netherlands Cancer Institute-Antoni Van Leeuwenhoek (“NKI-AVL”) for know-how, materials and protocols, and the right of first negotiation for certain intellectual property rights with relevance to TCRs that may be developed in Dr. Schumacher’s lab at the NKI-AVL over the next several years.  NKI-AVL, IBA and Sanquin Blood Supply Foundation have a right to a certain portion of the milestone payments that may be paid under the SPA.  These license agreements are estimated to have a useful life of ten years.

The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, the purchase price allocation and related tax attributes are preliminary and are subject to change based on any relevant factors, and may be adjusted within a period not to exceed one year.

The following table presents the calculation of the purchase price (in thousands):

Cash and stock consideration	$	19,260
Contingent consideration		16,622
Working capital adjustment		(59	)
	$	35,823

The purchase price is allocated between the tangible and intangible assets and assumed liabilities based on their estimated fair values at March 17, 2015. Based on the Company’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price is allocated as follows (in thousands):

Non-compete agreements	$	12,400
Licensing agreements		3,000
Goodwill		24,692
Tangible current assets		361
Tangible non-current assets		214
Liabilities assumed		(4,844	)
	$	35,823

In connection with the non-compete agreements and license agreements acquired, the Company established a corresponding deferred tax liability of $3.8 million, which is included in the liabilities assumed in the table above.

The following table presents amortizable intangible assets acquired and their amortization periods (in thousands):

	Estimated		Amortization
	Fair Value		Period
Non-compete agreements	$	12,400	3 Years
Licensing agreements		3,000	10 Years
	$	15,400

During the three months ended June 30, 2015, following the end of the measurement period, one of the non-compete agreements with a non-employee Seller was terminated.  As a result, the Seller likewise forfeited the future receipt of funds due under the contingent consideration agreement. As a result, the Company reduced its non-compete agreement intangible asset by $1.1 million as well as the deferred tax liability related to the non-compete agreement by $0.3 million, and also reduced its contingent consideration liability by $1.3 million, which would no longer be payable to this Seller. This resulted in a $0.5 million adjustment that was recorded as other income within the condensed consolidated statement of operations.