Acquisitions and Divestitures

6 Months Ended

Jun. 30, 2020

Note 6. Acquisitions and Divestitures

2019 Acquisitions

During 2019, we completed the acquisitions of all outstanding shares of Aratana Therapeutics, Inc. (Aratana) and Prevtec Microbia Inc. (Prevtec). These transactions were accounted for as business combinations under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our condensed consolidated financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of these acquisitions are included in our condensed consolidated financial statements from the dates of acquisition.

Aratana Therapeutics, Inc.

On July 18, 2019, we acquired Aratana, a pet therapeutics company focused on innovative therapies for dogs and cats, for stock and cash-based contingent value rights. Aratana is the creator of the canine osteoarthritis medicine, Galliprant™, the rights to which we acquired in 2016. The acquisition enhances our presence in the areas of appetite stimulants in dogs, pain relief in dogs and cats, and treatments of other conditions in the U.S. and internationally. In connection with the acquisition, we issued approximately 7.2 million shares with a value of $238.0 million to Aratana shareholders, based on our stock price on the last trading day immediately prior to the closing date. The purchase consideration also included up to $12 million in contingent value rights, which represent the rights of Aratana shareholders to receive a contingent payment of $0.25 per share in cash upon the achievement of a specified milestone as outlined in the merger agreement. We calculated an immaterial fair value for the contingent value rights using the Monte Carlo simulation model.

Contingent consideration liabilities that we previously recorded for future royalty and milestone payments in relation to the 2016 acquisition of rights to Galliprant were settled upon the closing of our acquisition of Aratana. The liabilities were valued at $84.7 million as of the acquisition date using the Monte Carlo simulation model. The resulting $7.5 million loss upon settlement was recorded in other - net, (income) expense in the consolidated and combined statement of operations for the year ended December 31, 2019.

The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:


Estimated Fair Value at July 18, 2019
Cash and cash equivalents	$	26.4
Inventories	10.3
Acquired in-process research and development	31.9
Marketed products ⁽¹⁾	36.7
Other intangible assets ⁽¹⁾	13.2
Other assets and liabilities - net	4.1
Total identifiable net assets	122.6
Goodwill ⁽²⁾	30.7
Settlement of existing contingent consideration liabilities	84.7
Total consideration transferred	$	238.0

⁽¹⁾These intangible assets, which are being amortized on a straight-line basis over their estimated useful lives, are expected to have a weighted average useful life of approximately 12.5 years.

⁽²⁾The goodwill recognized from this acquisition is attributable primarily to expected synergies from combining the operations of Aratana with our legacy business. The majority of goodwill associated with this acquisition is not deductible for tax purposes.

The accounting for this acquisition is complete. A $19.1 million measurement period adjustment was recorded to establish a deferred tax liability for the preexisting Galliprant contingent consideration liability during the three and six months ended June 30, 2020.

We issued 0.1 million shares and recorded $3.6 million of stock-based compensation expense for the vesting of Aratana equity awards that was accelerated upon the closing of the acquisition during 2019.

Had Aratana been acquired on January 1, 2018, the unaudited pro forma combined revenues and income before income taxes of Elanco and Aratana would have been $1,520.6 million and $82.3 million, respectively, for the six months ended June 30, 2019.

Prevtec Microbia Inc.

On July 31, 2019, we acquired Prevtec in a cash transaction for approximately $60.3 million, inclusive of certain post-closing adjustments. Prevtec is a Canadian biotechnology company specializing in the development of vaccines intended to help prevent bacterial diseases in food animals. The acquisition allows us to expand on our previous distribution arrangement for Coliprotec™and is consistent with our efforts to explore innovative antibiotic alternatives.

The purchase consideration included up to $16.3 million in additional cash consideration, contingent upon the achievement of specific sales milestones by December 31, 2021. We recorded a $4.7 million liability on the condensed consolidated balance sheet as of the acquisition date based on the fair value of the contingent consideration as calculated using the Monte Carlo simulation model.

A previously existing $0.7 million receivable owed from Prevtec to Elanco Animal Health UK Limited was settled upon the closing of our acquisition of Prevtec. The resulting immaterial gain upon settlement was recorded in other - net, (income) expense in the consolidated and combined statement of operations for the year ended December 31, 2019.

The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:


Estimated Fair Value at July 31, 2019
Cash and cash equivalents	$	0.9
Property and equipment	0.5
Acquired in-process research and development	2.8
Marketed products ⁽¹⁾	58.9
Other intangible assets	1.1
Other assets and liabilities - net	(9.3)
Total identifiable net assets	54.9

Goodwill ⁽²⁾	10.1
Total consideration transferred	$	65.0

⁽¹⁾These intangible assets, which are being amortized on a straight-line basis over their estimated useful lives, are expected to have a weighted average useful life of 10 years.

⁽²⁾The goodwill recognized from this acquisition is attributable primarily to expected synergies from combining the operations of Prevtec with our legacy business and future unidentified projects and products. The goodwill associated with this acquisition is not deductible for tax purposes.

The accounting for this acquisition is complete. An immaterial measurement period adjustment to deferred taxes was recorded during the three and six months ended June 30, 2020.

Pending Acquisition

Bayer Animal Health Business

On August 19, 2019, we entered into a Share and Asset Purchase Agreement (Purchase Agreement) with Bayer, a German corporation, to acquire Bayer's animal health business. Bayer's animal health business is a provider of products intended to improve the health and well-being of pets and farm animals. This acquisition is expected to expand our Companion Animal product category, advancing our planned intentional portfolio mix transformation and creating a better balance between our Food Animal and Companion Animal product categories. Pursuant to the Purchase Agreement and subject to the satisfaction of certain customary closing conditions, including the absence of any law or order enjoining or otherwise prohibiting the transaction in specified jurisdictions, we will purchase Bayer’s animal health business for $5.3 billion in cash and shares of our common stock equal to approximately $2.3 billion divided by the 20-day volume-weighted average stock price as of the last day of trading before the closing of the acquisition (but subject to a 7.5% symmetrical collar centered on the volume-weighted average price for the 30 trading days ended August 6, 2019 of $33.60). The transaction is expected to close in August 2020. See Note 14: Commitments and Contingencies for discussion regarding certain commitments related to this transaction.

Divestitures

In January 2020, we signed agreements to divest the worldwide rights to Osurnia™ and the U.S. rights to Capstar™, and in February 2020, we signed an agreement to divest the worldwide rights to Vecoxan™, for an aggregate of $285 million in all cash transactions. The agreements were signed with the intent to advance our efforts to secure the necessary regulatory clearances for the pending acquisition of the Bayer animal health business. The closing of these transactions is contingent on us entering into consent decrees with certain agencies in connection with the pending acquisition as well as customary closing conditions. On July 27, 2020, we completed the sale of our remaining interest in Osurnia. Cash proceeds from the sale were approximately $141.6 million. The divestitures of Capstar and Vecoxan, along with certain other immaterial divestitures, are expected to close contemporaneously with our acquisition of Bayer's animal health business.

The related assets for all three divestitures met the assets held for sale criteria as of June 30, 2020 and the assets for the Osurnia and Capstar divestitures met the assets held for sale criteria as of December 31, 2019. No adjustments were required to record the assets at the lower of their carrying amounts or fair values less costs to sell on the condensed consolidated balance sheet. Assets and liabilities considered held for sale in connection with the divestitures were included in the respective line items on the consolidated balance sheet as follows:


	June 30, 2020		December 31, 2019
Inventories	$	7.0	$	10.6
Other intangibles, net	100.0		61.2
Property and equipment, net	0.2		0.2
Total assets held for sale	$	107.2	$	72.0

Deferred taxes	$	(3.4)	$	(1.4)
Total liabilities held for sale	$	(3.4)	$	(1.4)

Other intangibles, net classified as held for sale primarily consist of marketed products. We determined that the disposal of these net assets does not qualify for reporting as a discontinued operation because it does not represent a strategic shift that has or will have a major effect on our operations and financial results.