Business Combinations

9 Months Ended

Mar. 31, 2020

Business Combination Disclosure [Text Block]

BUSINESS COMBINATIONS

Paragon Bioservices, Inc. Acquisition

On May 17, 2019, the Company acquired 100% of the equity interest in Catalent Maryland, Inc. (formerly Paragon Bioservices, Inc., “Gene Therapy”) for an aggregate nominal purchase price of $1,192.1 million, which was subject to adjustment (as further discussed below), in order to enhance the Company’s end-to-end integrated biopharmaceutical solutions. Gene Therapy is a leading contract development and manufacturing organization (“CDMO”) focused on the development and manufacturing of cutting-edge biopharmaceuticals, including viral vectors used in gene therapies.

The Company estimated fair values at the acquisition date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. During the measurement period ending no later than one year after the acquisition date, the Company will continue to obtain information to assist in finalizing the fair values of the net assets acquired, which may differ materially from these preliminary estimates. Amounts subject to finalization include working capital adjustments and income taxes. If any measurement period adjustment is material, the Company will record such adjustment, including any related impact on net income, in the reporting period in which the adjustment is determined. During the first quarter of fiscal 2020, the Company received an escrow refund of $7.6 million related to an assessment of various asset and liability balances and expenses as of the acquisition date. The adjustment is reflected in both goodwill and cash (part of other net assets). This adjustment had no impact on the consolidated statement of operations. There was no other change in these balances related to the acquisition noted during this period.

The Company accounted for the transaction using the acquisition method of accounting for business combinations, in accordance with ASC 805.

Novavax Transaction Overview

On July 31, 2019, Gene Therapy acquired from Novavax Inc. (“Novavax”) certain property, plant and equipment, rights to two facilities under leases in southern Maryland, certain raw material inventory, and the right to assume the employment of more than 100 Novavax employees located at those facilities in the areas of operations, quality, and product development, among other things. Gene Therapy made a cash payment of $18.3 million in connection with the acquisition. The Company considers the transaction to be a business combination under ASC 805, Business Combinations and accounted for it using the acquisition method of accounting. The Company estimated fair values at the acquisition date for the allocation of consideration to the acquired items.

The aggregate purchase consideration was funded with cash on hand. As a result of the preliminary fair value allocations, the Company recognized property, plant, and equipment of $15.6 million and $0.3 million for inventory. The remainder of the fair value, $2.4 million, was allocated to goodwill, primarily the value of the existing organized and trained work force.

The Novavax transaction expanded Gene Therapy’s early-development capabilities and supplemented Gene Therapy’s pool of experienced biologics operatives to support its growth.

Anagni Acquisition

Pursuant to a June 2019 agreement between Operating Company and a unit of Bristol-Myers Squibb Company (“BMS”), Operating Company acquired BMS’s oral solid, biologics, and sterile product manufacturing and packaging facility in Anagni, Italy on January 1, 2020. The Company paid to BMS $55.3 million in cash as part of the purchase consideration and as consideration for the provision of certain services to facilitate the transition from BMS to Company ownership. At the closing of this acquisition, BMS also entered into a five-year agreement for continuing supply by the Company of certain products formerly produced by BMS at the Anagni facility. Due to the variety of activities performed at Anagni, the results of the Anagni facility are allocated between the Oral and Specialty Delivery and Biologics segments.

The total cash consideration was allocated between the facility purchase and the transitional services arrangement, with $52.2 million assigned to the purchase consideration and the balance to transitional services. The Company funded the entire amount with cash on hand and has preliminarily allocated the purchase price among the acquired assets, recognizing property, plant, and equipment of $34.2 million, inventory of $7.0 million, and prepaid expenses and other of $12.4 million. The remainder of the value was allocated to deferred tax assets and certain employee-related liabilities assumed in the acquisition. The Company expects to finalize its allocation over the next several months, but, in any event, within one year from the closing.

MaSTherCell Global Inc.

Acquisition Transaction Overview

On February 10, 2020, the Company acquired 100% of the equity interest in Masthercell Global Inc. (“MaSTherCell”) for an aggregate purchase price of $323.3 million, subject to adjustment, which was funded with the net proceeds of the Company’s February 2020 offering (the “February 2020 Equity Offering”) of its common stock, par value $0.01 (“Common Stock”). See Note 13, Equity and Accumulated Other Comprehensive Income/(Loss). MaSTherCell is a CDMO focused on the development and manufacture of autologous and allogeneic cell therapies for third parties, as well as a variety of related analytical services.

MaSTherCell has a facility in Gosselies, Belgium providing clinical services, and construction is in progress there on a dedicated commercial-scale production and fill-finish facility, which is scheduled to open in the fall of 2021. Its U.S. facility in Houston, Texas, upon completion of validation activities, will focus on development-scale projects.

The Company accounted for the MaSTherCell acquisition using the acquisition method in accordance with ASC 805, Business Combinations. The operating results of MaSTherCell have been included in the Company’s consolidated financial statements for the period following the acquisition date. For the period from the acquisition date through March 31, 2020, MaSTherCell’s net revenue was $5.1 million and pre-tax earnings were $0.5 million. Transaction costs incurred as a result of the acquisition of $3.1 million are included in selling, general, and administrative expenses for the period ended March 31, 2020.

Valuation Assumptions and Preliminary Purchase Price Allocation

The Company has preliminarily estimated fair values at the date of acquisition for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed as part of the MaSTherCell acquisition. During the measurement period ending no later than one year after the acquisition date, the Company will continue to obtain information to assist in finalizing the fair values of the net assets acquired, which may differ materially from these preliminary estimates. Amounts subject to finalization include working capital and income taxes. If any measurement period adjustment is material, the Company will record such adjustment, including any related impact on net income, in the reporting period in which the adjustment is determined.

The preliminary purchase price allocation to assets acquired and liabilities assumed in the transaction is (in millions):


Property, plant, and equipment	$	25.5
Identifiable intangible assets	51.0
Other net assets	2.0
Deferred income tax liabilities	(13.4)
Total identifiable net assets	$	65.1
Goodwill	258.2
Total assets acquired and liabilities assumed	$	323.3

The carrying values of trade receivables, raw materials inventory, and trade payables, as well as certain other current and non-current assets and liabilities generally represented their fair values at the date of acquisition.

Property, plant, and equipment was valued using the cost approach, which is based on the current replacement or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors. The Company then determined the remaining useful life based on the anticipated life of the asset and Company policy for similar assets.

Customer-relationship intangible assets of $46.3 million were valued using the multi-period, excess-earnings method, a method that values the intangible asset using the present value of the after-tax cash flows attributable to the intangible asset only. The significant assumptions used in developing the valuation included the estimated annual net cash flows (including application of an appropriate margin to forecasted revenue, selling and marketing costs, return on working capital, contributory asset charges, and other factors), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, and an assessment of the asset’s life cycle, as well as other factors. The assumptions used in the financial forecasts were based on historical data, supplemented by current and anticipated growth rates, management plans, and market-comparable information. Fair-value determinations require considerable judgment and are sensitive to changes in underlying assumptions, among other things. Preliminary assumptions may change and may result in adjustments to the final valuation. The customer relationship intangible asset has a weighted average useful life of 13 years.

Goodwill has been allocated to our Biologics segment as shown in Note 4, Goodwill. Goodwill is mainly comprised of the following: growth from an expected increase in capacity utilization, potential new customers, and advanced cell therapy development and manufacturing capabilities.