

5.	Acquisitions and License Agreements

Business Acquisitions

Stratatech

On August 31, 2016, the Company acquired a developmental program from Stratatech Corporation - which includes StrataGraft®, a regenerative skin tissue and a technology platform for genetically enhanced skin tissues - for upfront consideration of $76.0 million, and contingent milestone payments, which are primarily regulatory, and royalty obligations that could result in up to $121.0 million of additional consideration ("the Stratatech Acquisition"). Stratatech is a regenerative medicine company focused on the development of unique, proprietary skin substitute products. Developmental products include StrataGraft® regenerative skin tissue ("StrataGraft") and a technology platform for genetically enhanced skin tissues. The Stratatech Acquisition was funded through cash on hand.

Hemostasis Products

On February 1, 2016, the Company acquired three commercial stage topical hemostasis drugs from The Medicines Company ("the Hemostasis Acquisition") - RECOTHROM® Thrombin topical (Recombinant) ("Recothrom"), PreveLeak^TM Surgical Sealant ("PreveLeak"), and RAPLIXA^TM (Fibrin Sealant (Human)) ("Raplixa") - for upfront consideration of $173.5 million, inclusive of existing inventory, and contingent sales-based milestone payments that could result in up to $395.0 million of additional consideration. The fair value of the contingent consideration and acquired contingent liabilities associated with the transaction were $52.0 million and $10.6 million, respectively, at February 1, 2016. The Hemostasis Acquisition was funded through cash on hand.

Therakos, Inc.

On September 25, 2015, the Company acquired Therakos, Inc. ("Therakos") through the acquisition of all the outstanding common stock of TGG Medical Solutions, Inc., the parent holding company of Therakos, in a transaction valued at approximately $1.3 billion, net of cash acquired ("the Therakos Acquisition"). Consideration for the transaction consisted of approximately $1.0 billion in cash paid to TGG Medical Solutions, Inc. shareholders and the assumption of approximately $0.3 billion of Therakos third-party debt, which was repaid in conjunction with the Therakos Acquisition. The acquisition and repayment of debt was funded through the issuance of $750.0 million aggregate principal amount of senior unsecured notes, a $500.0 million borrowing under a revolving credit facility and cash on hand. Therakos' primary immunotherapy products relate to the administering of extracorporeal photopheresis therapies through its UVAR XTS®and Cellex^TM Photopheresis Systems.

Ikaria, Inc.

On April 16, 2015, the Company acquired Ikaria, Inc. ("Ikaria") through the acquisition of all the outstanding common stock of Compound Holdings II, Inc., the parent holding company of Ikaria, in a transaction valued at approximately $2.3 billion, net of cash acquired ("the Ikaria Acquisition"). Consideration for the transaction consisted of approximately $1.2 billion in cash paid to Compound Holdings II, Inc. shareholders and the assumption of approximately $1.1 billion of Ikaria third-party debt, which was repaid in conjunction with the Ikaria Acquisition. The acquisition and repayment of debt was funded through the issuance of $1.4 billion aggregate principal amount of senior unsecured notes, a $240.0 million borrowing under the Revolver, which was repaid subsequent to the transaction, and cash on hand. Ikaria's primary product is INOMAX®(nitric oxide) for inhalation ("Inomax"), a vital treatment option in neonatal critical care.

Questcor Pharmaceuticals

On August 14, 2014, the Company acquired all of the outstanding common stock of Questcor Pharmaceuticals, Inc. ("Questcor"), a pharmaceutical company, for total consideration of approximately $5.9 billion, comprised of cash consideration of $30.00 per share, 0.897 ordinary shares of the Company for each share of Questcor common stock owned and the portion of outstanding equity awards deemed to have been earned as of August 14, 2014 ("the Questcor Acquisition"). The acquisition was funded through the issuance of approximately 57 million common shares, proceeds from the issuance of $900.0 million aggregate principal of senior unsecured notes, proceeds from a $700.0 million senior secured term loan facility, $150.0 million of cash from a receivable securitization program and cash on hand. H.P. Acthar® Gel (repository corticotropin injection) ("Acthar"), Questcor's primary product, is focused on the treatment of patients with serious, difficult-to-treat autoimmune and rare diseases. Acthar is an injectable drug that is approved by the U.S. Food and Drug Administration ("FDA") for use in 19 indications, including the areas of neurology, rheumatology, nephrology, ophthalmology and pulmonology. Questcor also supplied specialty contract manufacturing services to the global pharmaceutical and biotechnology industry through its wholly-owned subsidiary, BioVectra Inc.

Cadence Pharmaceuticals

On March 19, 2014, the Company acquired all of the outstanding common stock of Cadence Pharmaceuticals, Inc. ("Cadence"), a pharmaceutical company focused on commercializing products principally for use in the hospital setting, for total consideration of approximately $1.3 billion ("the Cadence Acquisition"). The acquisition was primarily funded through a $1.3 billion senior secured term loan credit facility. Cadence's sole product, OFIRMEV® (acetaminophen) injection ("Ofirmev"), is a proprietary intravenous formulation of acetaminophen for the management of mild to moderate pain, the management of moderate to severe pain with adjunctive opioid analgesics and the reduction of fever.

Fair Value Allocation

The following amounts represent the preliminary allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Stratatech Acquisition and Hemostasis Acquisition, and final allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Therakos Acquisition, Ikaria Acquisition, Questcor Acquisition and Cadence Acquisition:



	Stratatech		Hemostasis		Therakos		Ikaria		Questcor		Cadence
Cash	$	0.2	$	3.3	$	41.3	$	77.3	$	445.1	$	43.2
Inventory	—		94.6		23.5		26.3		67.9		21.0
Intangible assets	99.8		132.7		1,170.0		1,971.0		5,601.1		1,300.0
Goodwill (non-tax deductible)	57.3		3.3		429.9		795.0		1,789.4		318.1
Other assets, current and non-current⁽¹⁾	3.2		7.9		40.2		174.3		274.3		18.0
Total assets acquired	160.5		241.8		1,704.9		3,043.9		8,177.8		1,700.3
Current liabilities	4.3		3.6		24.7		33.0		168.9		48.8
Unpaid purchase consideration (current)	—		—		—		—		128.8		—
Other liabilities (non-current)	—		10.6		0.6		15.8		186.8		—
Deferred tax liabilities, net (non-current)	24.3		2.1		315.7		620.5		1,906.8		292.3
Contingent consideration (non-current)	54.9		52.0		—		—		—		—
Total debt	1.0		—		344.8		1,121.0		—		30.0
Total liabilities assumed	84.5		68.3		685.8		1,790.3		2,391.3		371.1
Net assets acquired	$	76.0	$	173.5	$	1,019.1	$	1,253.6	$	5,786.5	$	1,329.2


(1)	This amount includes $1.3 million, zero, $22.0 million, $73.8 million, $87.3 million, and $14.7 million of accounts receivable for the Stratatech Acquisition, Hemostasis Acquisition, Therakos Acquisition, Ikaria Acquisition, Questcor Acquisition and Cadence Acquisition, respectively, which is also the gross contractual value.

The following reconciles the total consideration to net assets acquired:



	Stratatech			Hemostasis			Therakos		Ikaria		Questcor			Cadence
Total consideration, net of cash	$	130.7		$	222.2		$	977.8	$	1,176.3	$	5,470.2		$	1,286.0
Plus: cash assumed in acquisition	0.2			3.3			41.3		77.3		445.1			43.2
Total consideration	130.9			225.5			1,019.1		1,253.6		5,915.3			1,329.2
Less: unpaid purchase consideration	—			—			—		—		(128.8		)	—
Less: non-cash contingent consideration	(54.9		)	(52.0		)	—		—		—			—
Net assets acquired	$	76.0		$	173.5		$	1,019.1	$	1,253.6	$	5,786.5		$	1,329.2

Intangible assets acquired consist of the following:



Stratatech	Amount		Amortization Period
In-process research and development - StrataGraft	$	99.8	Non-Amortizable

The IPR&D intangible asset relates to StrataGraft. The fair value of the IPR&D was determined using the income approach, which is a valuation technique that provides an estimate of fair value of the assets based on the market participant expectations of cash flows the asset would generate. The cash flows were discounted at a rate of 16.5%. The IPR&D discount rate for StrataGraft was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDA approval process and risks associated with commercialization of a new product. Based on the Company's preliminary estimate, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents future product development, the assembled workforce, and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.



Hemostasis Products	Amount		Amortization Period
Raplixa - Completed technology	$	73.0	15 years
Recothrom - Completed technology	42.7		13 years
PreveLeak - Completed technology	17.0		13 years
	$	132.7

The completed technology intangible assets relate to each of the acquired drugs. The fair value of the intangible assets were determined using the income approach. The cash flows were discounted commensurate with the level of risk associated with each asset or its projected cash flows. The completed technology intangible assets utilized a discount rate of 17.0%, 16.0% and 17.0% for Raplixa, Recothrom and PreveLeak, respectively. All assets acquired are included within the Company's Specialty Brands segment.



Therakos	Amount		Amortization Period
Completed technology	$	1,170.0	15 years

The completed technology intangible asset relates to extracorporeal photopheresis treatment therapies. The fair value of the intangible asset was determined using the income approach. The completed technology intangible asset utilized a discount rate of 17.0%. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, future product and device development, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.



Ikaria	Amount		Amortization Period
Completed technology	$	1,820.0	15 years
Trademark	70.0		22 years
In-process research and development - terlipressin	81.0		Non-Amortizable
	$	1,971.0

The completed technology and trademark intangible assets relate to Inomax. The fair value of the intangible assets were determined using the income approach. Completed technology, trademark and IPR&D terlipressin intangibles utilized discount rates of 14.5%, 14.5%, and 17.0%, respectively. The IPR&D discount rate for terlipressin was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDA approval process and risks associated with commercialization of a new product. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, future product and device development, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.



Questcor	Amount		Weighted-Average Amortization Period
Completed technology	$	5,343.3	18 years
Trademark	5.2		13 years
Customer relationships	34.3		12 years
In-process research and development - Synacthen	218.3		Non-Amortizable
	$	5,601.1

The completed technology intangible asset relates to Acthar. The trademark and customer relationship intangible assets relate to BioVectra, Inc. The IPR&D relates to the U.S. development of Synacthen, a synthetic pharmaceutical product. The fair value of the intangible assets were determined using the income approach. Completed technology, customer relationships, trademark and in-process research and development intangibles utilized discount rates of 14.5%, 10.0%, 10.0% and 16.0%, respectively. The in-process research and development discount rate was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDA approval process and risks associated with commercialization of a new product. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. The majority of assets acquired are included within the Company's Specialty Brands segment. Assets related to BioVectra, Inc. are included within the Company's Specialty Generics segment.



Cadence	Amount		Amortization Period
Completed technology	$	1,300.0	8 years

The completed technology intangible asset relates to Ofirmev, the rights to which have been in-licensed from Bristol-Myers Squibb Company ("BMS"). The fair value of the intangible asset was determined using the income approach. The cash flows were discounted at a 13.0% rate. For more information on the BMS license agreement, refer to "License Agreement" below. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.

Financial Results - The amount of net sales and earnings included in the Company's results for the periods presented were as follows:



Net sales	2016			2015			2014
Therakos	$	207.6		$	—		$	—
Ikaria	491.5			191.9			—
Questcor	1,218.4			1,125.9			129.2
Cadence	284.3			263.0			124.4
	$	2,201.8		$	1,580.8		$	253.6
Operating income (loss)
Therakos	$	12.5		$	—		$	—
Ikaria	201.1			47.1			—
Questcor	371.5			223.3			17.4
Cadence	(84.5		)	(97.3		)	(66.9		)
	$	500.6		$	173.1		$	(49.5	)

The amount of amortization on acquired intangible assets included within operating income (loss) for the periods presented was as follows:



Intangible asset amortization	2016		2015		2014
Therakos	$	78.0	$	—	$	—
Ikaria	124.5		57.1		—
Questcor	300.7		301.4		34.9
Cadence	162.5		162.5		85.9
	$	665.7	$	521.0	$	120.8

During fiscal 2016, 2015 and 2014, the Company recognized $24.3 million, $44.1 million and $25.7 million, respectively, of expense associated with fair value adjustments of acquired inventory. This expense was included within cost of sales.

Acquisition-Related Costs - Acquisition-related costs incurred in fiscal 2016, 2015 and 2014 for each of the acquisitions discussed above were as follows:



Acquisition-related costs	2016		2015		2014
Stratatech	$	3.7	$	—	$	—
Hemostasis Products	2.7		—		—
Therakos	0.3		22.5		—
Ikaria	0.2		30.9		—
Questcor	—		—		47.5
Cadence	—		—		17.6
	$	6.9	$	53.4	$	65.1

Unaudited Pro Forma Financial Information - The following unaudited pro forma information presents a summary of the results of operations for the periods indicated as if the Questcor Acquisition and Cadence Acquisition had been completed as of September 29, 2012 and the Ikaria Acquisition and Therakos Acquisition as of September 28, 2013. The pro forma financial information is based on the historical financial information for the Company, Therakos and Ikaria, along with certain pro forma adjustments. These pro forma adjustments consist primarily of:


•	non-recurring costs related to the step-up in fair value of acquired inventory and transaction costs related to the acquisitions;


•	increased amortization expense related to the intangible assets acquired in the acquisitions;


•	elimination of direct acquisition transaction costs from the period of acquisition;

•

increased interest expense to reflect the fixed rate unsecured notes and revolving credit facility (utilizing the interest rate in effect at the date of the acquisition of 2.58%) entered into in connection with the Therakos Acquisition and the fixed rate unsecured notes entered into in connection with the Ikaria Acquisition (assuming no interest related to the revolving credit facility which was paid down subsequent to the Ikaria Acquisition), including interest and amortization of deferred financing costs and original issue discount; and


•	the related income tax effects.

The following unaudited pro forma information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed dates, nor is it necessarily an indication of future operating results. In addition, the unaudited pro forma information does not reflect the cost of any integration activities, benefits from any synergies that may be derived from the acquisitions or revenue growth that may be anticipated.



	2016		2015
Net sales	$	3,380.8	$	3,332.0
Income from continuing operations	499.4		288.9
Basic earnings per share from continuing operations	$	4.52	$	2.49
Diluted earnings from per share continuing operations	4.48		2.47

License Agreements

Ofirmev

As part of the Cadence Acquisition, the Company acquired the exclusive development and commercialization rights to Ofirmev in the U.S. and Canada, as well as the rights to the patents and technology, which were originally in-licensed by Cadence from BMS in March 2006. BMS sublicensed these rights to Cadence under a license agreement with SCR Pharmatop S.A. ("Pharmatop"), and the Company has the right to grant sublicenses to third parties. Under this license agreement, the Company may be obligated to make future milestone payments of up to $25.0 million upon the achievement of certain levels of net sales, of which $10.0 million was paid during fiscal 2015. In addition, the Company is obligated to pay royalties on sales of the product. During fiscal 2016, 2015 and 2014, the Company paid royalties of $46.3 million, $43.9 million and $13.2 million, respectively.

Exalgo

In 2009, the Company's Specialty Brands segment acquired the rights to market and distribute the pain management drug EXALGO® (hydromorphone HCl) extended-release tablets (CII) ("Exalgo") in the U.S. Under the license agreement, the Company is obligated to make additional payments of up to $73.0 million based on the successful completion of specified development and regulatory milestones. Through fiscal 2016, $65.0 million of additional payments had been made, with $55.0 million being capitalized as an intangible asset. The Company is also required to pay royalties on sales of the product. During fiscal 2016, 2015 and 2014, the Company paid royalties of $0.9 million, $3.2 million and $22.0 million, respectively.

In January 2014, the Company purchased certain royalty rights associated with Exalgo for $7.2 million, which have been capitalized as an intangible asset.

Depomed

In 2009, the Company's Specialty Brands segment licensed worldwide rights to utilize Depomed, Inc.'s ("Depomed") Acuform gastric retentive drug delivery technology for the exclusive development of four products. Under this license agreement, the Company may be obligated to pay up to $64.0 million in development milestone payments. Through fiscal 2016, approximately $22.0 million of these payments have been made by the Company. During fiscal 2014, upon approval by the FDA for XARTEMIS™ XR (oxycodone HCl and acetaminophen) extended release tablets CII ("Xartemis XR"), the Company made a milestone payment of $10.0 million, which has been capitalized as an intangible asset.

Pennsaid

In 2009, the Company's Specialty Brands segment entered into a licensing agreement which granted it rights to market and distribute Pennsaid and Pennsaid 2%, a formulation of diclofenac sodium topical solution which was approved in February 2014 by the FDA and indicated for the treatment of pain associated with osteoarthritis of the knee. The Company was responsible for future development activities and expenses and were required to make milestone payments of up to $120.0 million based upon the successful completion of specified regulatory and sales milestones, of which $15.0 million of these payments were made, which were capitalized as an intangible asset. During the fourth quarter of fiscal 2014, the Company reached an agreement in principle with Nuvo to settle various claims associated with our license of Pennsaid obtained from Nuvo. As part of the legal settlement, the Company agreed to return the license to Nuvo, which resulted in the Company recording an impairment of $11.1 million during the fourth quarter of fiscal 2014.