Goodwill and Other Intangible Assets

3 Months Ended

Mar. 31, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangible Assets

3. Goodwill and Other Intangible Assets

On September 15, 2020, Former Adicet completed its merger with resTORbio. The merger was accounted for as a business combination which requires that assets acquired, and liabilities assumed be recognized at their fair value as of the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations.

As part of the transaction the Company recognized goodwill of $19.5 million, which is not tax deductible and represents the excess of the consideration paid over the fair value of assets acquired and liabilities assumed. Goodwill is mainly attributable to the enhanced value of the combined company.

The fair value of acquired in-process research and development (IPR&D) is related to the research and development of RTB101 for a COVID-19 related indication. The RTB101 compound IPR&D project was valued using an income approach, specifically a projected discounted cash flow method, adjusted for the probability of technical success (PTS). The projected discounted cash flow models used to estimate the Company’s IPR&D reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including the following:

•Estimates of potential cash flows to be generated by the project and resulting asset, which was developed utilizing estimates of total patient population, market penetration rates, demand risk adjustment factors, and product pricing;

•Estimates regarding the timing of and the expected costs of goods sold, research and development expenses, selling, general and administrative expenses to advance the clinical programs to commercialization, cash flow adjustments and partner profit split;

•The projected cash flows were then adjusted using PTS factors that were selected considering both the current state of clinical development and the nature of the proposed indication, (i.e., respiratory therapeutics); and

•Finally, the resulting probability adjusted cash flows were discounted to a present value using a risk-adjusted discount rate, developed considering the market risk present in the forecast and the size of the asset.

This IPR&D intangible asset is not amortized, but rather is reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed, abandoned, or transferred to a third party. On July 27, 2021, the Company sent Novartis a termination notice. Termination will automatically take effect as of 60 days from the date of delivery of the termination notice to Novartis, but in no event later than October 1, 2021 without any further notice or action required of either Novartis or the Company. Upon the review of impairment of IPR&D during the second quarter of 2021, the Company concluded that the IPR&D was fully impaired and recorded an impairment charge within research and development expenses in the consolidated statement of operations and comprehensive loss for the remaining balance of the IPR&D intangible asset as of June 30, 2021. The Company recognized IPR&D impairment charges of $2.3 million, $0.5 million, and $0.7 million for the quarters ended as of December 31, 2020, March 31, 2021, and June 30, 2021.

In connection with the merger, the Company entered into a Contingent Value Rights Agreement (the CVR Agreement). The contingent consideration for the contingent value right (CVR) was valued using an income approach, leveraging the probability adjusted discounted cash flow used in the valuation of the IPR&D and then deducting the administrative fee to be retained by the combined company and other permitted deductions in order to arrive at the net cash expected to be paid out to the CVR holders. The probability adjusted cash flow includes significant estimates and assumptions pertaining to commercialization events and cash consideration received by the Company for the grant of rights to commercialize RTB101 during the term of the CVR Agreement. These cash flows were then discounted to present value using the same discount rate applied in the valuation of the IPR&D. For additional background on the CVR Agreement and IPR&D, see to Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The following tables present changes in the Company’s IPR&D and CVR since the merger (in thousands):

	Acquisition Date Fair value as of September 15, 2020		Change in Fair value			As of December 31, 2020		Change in Fair value			As of December 31, 2021
In-process research and development	$	3,490	$	(2,300	)	$	1,190	$	(1,190	)	$	—
Contingent Value Rights	$	2,880	$	(1,900	)	$	980	$	(980	)	$	—