3. DIVESTITURE

On March 7, 2015, the Company entered into a definitive agreement to sell the Gainesville, GA facility, the related manufacturing and royalty revenue associated with certain products manufactured at the facility, and the rights to IV/IM and parenteral forms of Meloxicam to Recro Pharma, Inc. (“Recro”) and Recro Pharma LLC (together with Recro, the “Purchasers”). The sale was completed on April 10, 2015 and, under the terms of the agreement, Recro paid the Company $54.0 million in cash and issued warrants to purchase an aggregate of 350,000 shares of Recro common stock at a per share exercise price of $19.46, which was two times the closing price of Recro’s common stock on the day prior to closing. The Company is also eligible to receive low double-digit royalties on net sales of IV/IM and parenteral forms of Meloxicam and up to $120.0 million in milestone payments upon the achievement of certain regulatory and sales milestones related to IV/IM and parenteral forms of Meloxicam.

The gain on the Gainesville Transaction was determined as follows:


	April 10, 2015
	(In thousands)
Sales Proceeds:
Cash	$	54,010
Fair value of warrants		2,123
Fair value of contingent consideration		57,600
Total consideration received	$	113,733
Less net assets sold		(101,373)
Less transaction costs		(2,423)
Gain on Gainesville Transaction	$	9,937

The Company recorded the gain on the Gainesville Transaction within the accompanying condensed consolidated statement of operations and comprehensive loss. The Company determined that the sale of assets in connection with the Gainesville Transaction did not constitute a strategic shift and that it did not and will not have a major effect on its operations and financial results. Accordingly, the operations from the Gainesville Transaction are not reported in discontinued operations.

During the three and nine months ended September 30, 2015, the Gainesville, GA facility and associated intellectual property (“IP”) generated income before income taxes of none and $7.6 million, respectively, and during the three and nine months ended September 30, 2014, generated income before income taxes of $4.1 million and $17.8 million, respectively.

The Company determined the value of the Gainesville Transaction’s contingent consideration using the following valuation approaches:

The fair value of the two regulatory milestones were estimated based on applying the likelihood of achieving the regulatory milestone and applying a discount rate from the expected time the milestone occurs to the balance sheet date. The Company expects the regulatory milestone events to occur within the next two and three years, respectively, and used a discount rate of 3.6% and 4.5%, respectively, for each of these events.

To estimate the fair value of future royalties on net sales of IV/IM and parenteral forms of Meloxicam, the Company assessed the likelihood of IV/IM and parenteral forms of Meloxicam being approved for sale and estimated the expected future sales given approval and IP protection. The Company then discounted these expected payments using a discount rate of 16.0%, which the Company believes captures a market participant’s view of the risk associated with the expected payments.

The sales milestones were determined through the use of a real options approach, where net sales are simulated in a risk-neutral world. To employ this methodology, the Company used a risk-adjusted expected growth rate based on its assessments of expected growth in net sales of the approved IV/IM and parenteral forms of Meloxicam, adjusted by an appropriate factor capturing their respective correlation with the market. A resulting expected (probability-weighted) milestone payment was then discounted at a cost of debt plus an alpha, which ranged from 11.6% to 13.4%.

At September 30, 2015, the Company determined that the value of the Gainesville Transaction’s contingent consideration increased to $60.3 million due primarily to a shorter time to payment on the milestones and royalties included in the contingent consideration. Accordingly, the Company recorded an increase of $1.2 million and $2.7 million as “Change in the fair value of contingent consideration” in the three and nine months ended September 30, 2015, respectively, in the accompanying condensed consolidated statements of operations and comprehensive loss.

The warrants the Company received to purchase 350,000 shares of Recro common stock were determined to have a fair value of $2.1 million on the closing date of the transaction. At September 30, 2015, the Company determined that the value of these warrants had increased to $2.7 million and are being recorded within “Other long-term assets” in the accompanying condensed consolidated balance sheets. The company used a Black-Scholes model with the following assumptions to determine the fair value of these warrants at September 30, 2015:


Closing stock price at September 30, 2015	$	12.03
Warrant strike price	$	19.46
Expected term (years)		6.53
Risk-free rate		1.74	%
Volatility		80.0	%

The decrease in the fair value of the warrants of $0.3 million during the three months ended September 30, 2015 and the increase in the fair value of the warrants of $0.6 million during the nine months ended September 30, 2015, was recorded within “Other income (expense), net” in the accompanying condensed consolidated statements of operations and comprehensive loss.