3. Acquisitions

Acquisition of Partners Rx Management, LLC

Pursuant to the September 6, 2013 agreement and plan of merger (the "Partners Agreement") with Partners Rx Management, LLC ("Partners Rx"), on October 1, 2013 the Company acquired all of the outstanding ownership interests of Partners Rx. Partners Rx is a full-service commercial PBM with a strong focus on health plans and self-funded employers primarily through sales through third party administrators, consultants and brokers. As consideration for the transaction, the Company paid $99.3 million in cash, including net receipts of $0.7 million for working capital adjustments. The Company funded the acquisition with cash on hand.

During the year ended December 31, 2014, the Company made a measurement period adjustment of $0.3 million to decrease the deferred tax liability related to the Partners Rx acquisition.

Acquisition of AlphaCare Holdings, Inc.

Pursuant to the August 13, 2013 stock purchase agreement (the "AlphaCare Agreement"), on December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, the holding company for AlphaCare, a Health Maintenance Organization ("HMO") in New York that operates a New York Managed Long-Term Care Plan in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in Bronx, New York, Queens and Kings Counties.

Prior to December 31, 2013, the Company held a 7% equity interest in AlphaCare through an equity investment of $2.0 million in preferred membership units of AlphaCare's previous holding company, AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to AlphaCare Holdings, LLC. As part of the AlphaCare Agreement, AlphaCare Holdings, LLC was reorganized into a Delaware corporation, and on December 31, 2013 the preferred membership units and the loan were converted into Series A Participating Preferred Stock ("AlphaCare Series A Preferred") of AlphaCare Holdings and the Company purchased an additional $17.4 million of AlphaCare Series A Preferred. During 2014, the Company purchased $2.2 million in common shares from the minority owners of AlphaCare Holdings. During 2014, the Company also purchased an additional $8.9 million in shares of Series B Participating Preferred Stock and Series C Participating Preferred Stock issued by AlphaCare Holdings. As of December 31, 2014, the Company held a 75% voting interest and the remaining shareholders held a 25% voting interest in AlphaCare Holdings.

Based on the Company's 75% equity and voting interest in AlphaCare Holdings, the Company has included the results of operations in its consolidated financial statements. The Company reports the results of operations of AlphaCare Holdings within the Public Sector segment.

During the year ended December 31, 2014, the Company made net retrospective adjustments to provisional amounts related to the AlphaCare Holdings acquisition that were recognized at the acquisition date that, if known, would have affected the measurement amounts recognized as of that date.

The estimated fair values of AlphaCare Holdings assets acquired and liabilities assumed at the date of acquisition are summarized as follows (in thousands):

	Initial Amounts Recognized at Acquisition Date(1)			Measurement Period Adjustments(2)			Current Amounts Recognized at Acquisition Date
Assets acquired:
Current assets (includes $6,249 of cash and $7,900 of restricted cash)	$	14,766		$	(548	)	$	14,218
Property and equipment, net		310			(39	)		271
Other assets		475			66			541
Other identified intangible assets		4,590			2,600			7,190
Goodwill		20,882			(3	)		20,879

Total assets acquired		41,023			2,076			43,099

Liabilities assumed:
Current liabilities		3,139			1,039			4,178
Deferred tax liabilities		1,830			1,037			2,867

Total liabilities assumed		4,969			2,076			7,045

Net assets acquired		36,054			—			36,054
Less: net assets attributable to noncontrolling interest		(10,554	)		—			(10,554	)

Net consideration	$	25,500		$	—		$	25,500

(1)

As previously reported in the Company's Form 10-K for the year ended December 31, 2013.

(2)

The measurement period adjustments were recorded to reflect a $2.6 million increase in the customer contracts identified intangible and a $1.0 million increase to the deferred tax liability as a result of finalization of the valuation and other net changes of ($1.6) million as a result of changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing at the acquisition date.

Acquisition of CDMI, LLC

Pursuant to the March 31, 2014 purchase agreement (the "CDMI Agreement") with CDMI, on April 30, 2014 the Company acquired all of the outstanding equity interests of CDMI. CDMI provides a range of clinical consulting programs and negotiates and administers drug rebates for managed care organizations and other customers. As consideration for the transaction, the Company paid a base price of $201.1 million, including net receipts of $3.9 million for working capital adjustments. Pursuant to the CDMI Agreement, the sellers and certain key management of CDMI purchased a total of $80.0 million in Magellan restricted common stock, which will generally vest over a 42-month period, conditioned upon continued employment. In addition to the base purchase price, the CDMI Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016.

The Company reports the results of operations of CDMI within its Pharmacy Management segment. The consolidated statements of income include total revenues and Segment Profit (as defined in Note 10—"Business Segment Information") from CDMI of $31.5 million and $27.2 million, respectively, for the eight months subsequent to the acquisition.

The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. A portion of the excess purchase price over tangible net assets acquired has been allocated to identified intangible assets totaling $84.2 million, consisting of customer contracts in the amount of $82.8 million, which is being amortized over 8 years, non-compete agreements in the amount of $1.0 million, which is being amortized over 6.5 years and tradename in the amount of $0.4 million, which is being amortized over 20 months. The entire excess purchase price over tangible net assets acquired is amortizable for tax purposes, although the Company's effective rate will not be impacted by the tax amortization.

The estimated fair values of CDMI assets acquired and liabilities assumed at the date of the acquisition are summarized as follows (in thousands):

Assets acquired:
Current assets (includes $41,892 of accounts receivable)	$	41,996
Property and equipment, net		457
Other assets		9
Other identified intangible assets		84,220
Goodwill		69,092

Total assets acquired		195,774

Liabilities assumed:
Current liabilities		28,985
Contingent consideration		45,778

Total liabilities assumed		74,763

Net assets acquired	$	121,011

As of December 31, 2014, the Company established a working capital receivable of $0.1 million that was reflected as a reduction to goodwill.

The fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, and new contract execution. The projected revenues, gross profits, and client base are derived from the Company's latest internal operational forecasts. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income. As of the acquisition date, the Company estimated undiscounted future contingent payments of $61.7 million. As of December 31, 2014, the Company estimated undiscounted future contingent payments of $65.7 million. The increase is mainly a result of changes in operational forecasts and probabilities of payment. As of December 31, 2014, the fair value of the contingent consideration was $54.9 million and is included in accrued liabilities and contingent consideration in the consolidated balance sheet.

The Company's estimated fair values of CDMI assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed, as detailed above, are subject to adjustment once the analyses are completed. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

In connection with the CDMI acquisition, the Company incurred $1.3 million of acquisition related costs that were expensed during the year ended December 31, 2014. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of income.

Other Acquisitions

Pursuant to the July 1, 2014 purchase agreement (the "Cobalt Agreement") with Cobalt, the Company acquired all of the outstanding equity interests of Cobalt. Cobalt provides computerized cognitive behavioral therapy self-service programs. As consideration for the transaction, the Company paid a base price of $8.0 million in cash, subject to working capital adjustments. In addition to the base purchase price, the Cobalt Agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017. The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. The Company will make appropriate adjustments to the purchase price allocations prior to the completion of the measurement period as required.

The Company reports the results of operations of Cobalt within its Commercial segment.

Pro Forma Financial Information

The following unaudited supplemental pro forma information represents the Company's consolidated results of operations for the year ended December 31, 2013 as if the acquisition of CDMI had occurred on January 1, 2013, and for the year ended December 31, 2014 as if the acquisition of CDMI had occurred on January 1, 2014, in all cases after giving effect to certain adjustments including interest income, depreciation and amortization, and stock compensation expense.

Such pro forma information does not purport to be indicative of operating results that would have been reported had the acquisition of CDMI occurred on January 1, 2013 and 2014 (in thousands, except per share amounts):

	Year Ended December 31,
	2013		2014
	(unaudited)		(unaudited)
Net revenue	$	3,588,975	$	3,771,711
Net income		114,549		75,530
Income per common share attributable to Magellan Health, Inc.:
Basic	$	4.23	$	2.83
Diluted	$	4.12	$	2.75