Acquisitions, License Agreements and Other Investments

9 Months Ended

Sep. 28, 2018

Business Combination Disclosure [Text Block]



5.	Acquisitions

Sucampo Pharmaceuticals, Inc.

On February 13, 2018, the Company acquired Sucampo Pharmaceuticals, Inc. ("Sucampo") through the acquisition of all the outstanding common stock of Sucampo. Consideration for the transaction consisted of approximately $1.2 billion, including the assumption of Sucampo's third-party debt ("the Sucampo Acquisition"). The acquisition was funded through the issuance of $600.0 million aggregate principal amount of senior secured notes, a $900.0 million borrowing under the Company's revolving credit facility, as discussed further in Note 12, and cash on hand. Sucampo's commercialized products include Amitiza, a leading global product in the branded constipation market, and Rescula^® (unoprostone isopropyl ophthalmic solution) 0.15% ("Rescula"), which is indicated for ocular hypertension and open-angle glaucoma, and marketed solely in Japan. Through this acquisition, the Company acquired VTS-270, a Phase 3 development product for Niemann-Pick Type C, a rare, neurodegenerative and ultimately fatal disease that can present at any age. Also acquired was an option to exercise a collaborative agreement with Cancer Prevention Pharmaceuticals ("CPP") associated with the development of CPP-1X/sulindac, a Phase 3 development product for Familial Adenomatous Polyposis ("FAP").

Upon completion of the Sucampo Acquisition, Sucampo's 3.25% convertible senior notes due 2021 ("the Sucampo Notes") became eligible to receive increased consideration in conjunction with a make-whole fundamental change, such that each $1,000 principal face amount of Sucampo Notes could be converted into $1,221 in cash. As of September 28, 2018, the issued convertible debt of $300.0 million had been converted and paid in full by the Company.

Fair value allocation

The following amounts represent the preliminary allocations of the fair value of the identifiable assets acquired and liabilities assumed for the Sucampo Acquisition, including preliminary goodwill, intangible assets and the related deferred tax balances. The Company expects to complete its valuation analysis and finalize deferred tax balances as of the acquisition date no later than twelve months from the date of the acquisition. The changes in the purchase price allocation and preliminary goodwill based on the final valuation may include, but are not limited to, finalization of working capital settlements, the impact of U.S. state tax rates in determining the deferred tax balances and changes in assumptions utilized in the preliminary valuation report.



Cash and cash equivalents	$	149.6
Accounts receivable	35.7
Inventory	153.2
Intangible assets	919.5
Goodwill	244.7
Other current and non-current assets	25.9
Total assets acquired	1,528.6
Current liabilities	108.3
Deferred tax liabilities, net (non-current)	170.2
Debt	366.3
Other noncurrent liabilities	36.2
Total liabilities assumed	681.0
Net assets acquired	$	847.6

The following is a reconciliation of the total consideration to net assets acquired:



Total consideration, net of cash	$	698.0
Plus: cash assumed in acquisition	149.6
Total consideration/net assets acquired	$	847.6

Intangible assets acquired consist of the following:



	Amount		Amortization Period	Discount Rate
Completed technology - Amitiza	$	634.0	9 years	14.0%
Completed technology - Rescula	11.0		8 years	14.0%
In-process research and development - VTS-270	274.5		Non-Amortizable	15.0%

The fair value of the completed technology and in-process research and development ("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 commensurate with the level of risk associated with each asset or its projected cash flows. The discount rates were developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the U.S. Food and Drug Administration ("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.

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



	Three Months Ended					Nine Months Ended
	September 28, 2018			September 29, 2017		September 28, 2018			September 29, 2017
Net sales	$	50.7		$	—	$	124.5		$	—
Operating loss	(32.2		)	—		(99.9		)	—

The following was included within cost of sales for the periods presented:



	Three Months Ended				Nine Months Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
Intangible asset amortization	$	18.0	$	—	$	45.0	$	—
Inventory fair value step-up expense	31.0		—		77.5		—

Acquisition-related costs incurred for the acquisition of $3.2 million were recognized during the nine months ended September 28, 2018.

Licenses

On April 5, 2018 (the "Exercise Date"), the Company exercised the option under its collaborative agreement with CPP to negotiate terms of an exclusive license to develop and commercialize CPP-1X/sulindac in North America. In addition, the Company provided CPP with a $10.0 million upfront R&D payment for expenses related to the FAP pivotal trial incurred during the "Negotiation Period," or the period from the Exercise Date through the execution of such license agreement. CPP shall return to the Company any portion of the R&D payment that is not utilized during the Negotiation Period. Of the $10.0 million upfront payment, $7.3 million was utilized during the nine months ended September 28, 2018 and recorded as R&D expense within the condensed consolidated statement of income. The remaining $2.7 million was included in prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet as of September 28, 2018.

On August 4, 2018, the license agreement with CPP was executed and the Company paid $5.0 million upfront with cash on hand and gained exclusive rights to develop and commercialize the product in North America, if approved. The agreement includes additional payments of up to $185.0 million dependent on developmental, regulatory and sales milestones, subject to reduction up to $15.0 million related to amounts provided by the Company in advance of entering into this agreement, and provides for both parties' reimbursement of R&D expenses from future profits. Following the commercialization of the product, CPP and the Company will share profits in accordance with the agreement. The Company will manage the development of the product in North America.