3. Acquisitions

Acquisition of AFSC

Pursuant to the May 15, 2016 share purchase agreement (the “AFSC Agreement”) AFSC, on July 1, 2016 the Company acquired all of the outstanding equity interests of AFSC (the “AFSC Acquisition”). AFSC has extensive experience providing and managing behavioral health and specialty services to various agencies of the federal government, including all five branches of the U.S. Armed Forces.

The base purchase price for the AFSC Acquisition per the AFSC Agreement was $117.5 million, subject to working capital adjustments. Pursuant to the AFSC Agreement, certain members of AFSC’s management, who were also shareholders of AFSC, purchased a total of $4.0 million in Magellan restricted common stock, which will vest over a two-year period, conditioned upon continued employment with the Company. Consideration for the AFSC Acquisition includes a net payment for the net base purchase price of $113.5 million in cash, subject to working capital adjustments, including adjustments for cash acquired. Proceeds from the sale of restricted common stock are recorded as stock compensation expense over the requisite service period.

In addition to the base purchase price, the AFSC Agreement provides for potential contingent payments up to a maximum aggregate amount of $10.0 million. The potential contingent payments are based on the retention of certain core business by AFSC.

The Company reports the results of operation of AFSC within the Healthcare segment. The consolidated statements of income include total revenues and Segment Profit for AFSC of $88.1 million and $14.5 million for the six months subsequent to the acquisition, respectively.

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 $51.7 million, consisting of customer contracts in the amount of $47.7 million, which is being amortized over seven years, trade name in the amount of $3.9 million, which has an indefinite life, and non-compete agreements in the amount of $0.1 million, which is being amortized over four years. The acquisition resulted in $76.7 million in goodwill related primarily to anticipated synergies and the expanded presence in the PBM market. The goodwill is included in the Company’s Government reporting unit. None of the goodwill or other identified intangibles assets are deductible for tax purposes.

The Company’s total consideration for this transaction, as of the date of acquisition, totaled $140.4 million, including an accrual for estimated contingent consideration of $8.2 million.

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


Assets acquired:
Current assets (includes $32,143 and $18,188 of accounts receivable and cash, respectively)	$	54,255
Property and equipment, net		945
Other assets		25
Other identified intangible assets		51,721
Goodwill		76,736
Total assets acquired		183,682
Liabilities assumed:
Current liabilities		23,690
Deferred tax liabilities		19,569
Other liabilities		64
Total liabilities assumed		43,323
Net assets acquired	$	140,359

The Company’s estimated fair values of AFSC’s accounts receivable acquired at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the accounts receivable acquired are subject to adjustment once the analyses are completed. In addition, the amount recognized for deferred tax liabilities may be impacted by the determination of these items. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

As of December 31, 2016, the Company established a working capital receivable of $3.2 million that was reflected as a reduction to the transaction price.

The fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates and projected contract retention. The Company used a probability weighted discounted cash flow method to arrive at the fair value of contingent consideration. Changes in the probabilities of payment, discount rates or projected payment dates may result in a 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 consideration payments of $9.0 million. As of December 31, 2016, the fair value of the contingent consideration was $8.5 million and is included in short-term contingent consideration in the accompanying consolidated balance sheets. The change in the present value of the contingent consideration was $0.3 million for the year ended December 31, 2016 and was recorded as direct service costs and other operating expenses in the consolidated statements of income.

In connection with the AFSC acquisition, the Company incurred $1.9 million of acquisition related costs that were expensed during the year ended December 31, 2016. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of income.

Acquisition of Veridicus Holdings, LLC.

Pursuant to the November 19, 2016 purchase agreement (the “Veridicus Agreement”) with Veridicus Holdings, LLC (“Veridicus”) and Veridicus Health, LLC, on December 13, 2016 the Company acquired all of the outstanding equity interests of Veridicus (the “Veridicus Acquisition”). Veridicus is a PBM with a unique set of clinical services and capabilities.

The base purchase price for the Veridicus Acquisition per the Veridicus Agreement was $72.5 million, subject to working capital adjustments. The Company reports the results of operations of Veridicus within its Pharmacy Management segment.

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 $34.4 million, consisting of total customer contract intangible assets in the amount of $33.8 million, which are being amortized over six to eight years, trade name in the amount of $0.4 million, which is being amortized over 1 year, and non-compete agreements in the amount of $0.3 million, which is being amortized over five years. The acquisition resulted in $30.7 million in goodwill related primarily to anticipated synergies and the assembled workforce of Veridicus. 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 value of Veridicus assets acquired and liabilities assumed at the date of the acquisition are summarized as follows (in thousands):


Assets acquired:
Current assets (includes $5,625, $1,569 and $1,564 of accounts receivable, cash and inventory, respectively)	$	8,961
Property and equipment, net		6,323
Other assets		42
Other identified intangible assets		34,440
Goodwill		30,705
Total assets acquired		80,471
Liabilities assumed:
Current liabilities		6,083
Total liabilities assumed		6,083
Net assets acquired	$	74,388

The Company’s estimated fair values of Veridicus 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.

As of December 31, 2016, the Company established a working capital receivable of $0.1 million that was reflected as a reduction to the transaction price.

In connection with the Veridicus acquisition, the Company incurred $0.5 million of acquisition related costs, of which $0.2 million and $0.3 million were expensed during the years ended December 31, 2015 and 2016, respectively. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of income.

Acquisition of 4D Pharmacy Management Systems, Inc.

Pursuant to the March 17, 2015 Purchase Agreement (the “4D Agreement”) with 4D, on April 1, 2015 the Company acquired (the “4D Acquisition”) all of the outstanding equity interests of 4D. 4D was a privately held, full-service PBM serving managed care organizations, employers and government-sponsored benefit programs, such as Medicare Part D plans.

As consideration for the 4D Acquisition, the Company paid a base price of $54.7 million, including net receipts of $0.3 million for working capital adjustments. In addition to the base purchase price, the Company made additional contingent payments of $20.0 million. The contingent payments were based on the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and for the retention of certain business. The Company reports the results of operations of 4D within its Pharmacy Management segment.

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.

During the year ended December 31, 2015, the Company purchased an additional $23.6 million in shares of Series B Participating Preferred Stock and Series C Participating Preferred Stock. During the year ended December 31, 2016, the Company purchased an additional $7.5 million in shares of Series C Participating Preferred Stock. As of December 31, 2016, the Company held an 84% interest and the remaining shareholders held a 16% interest in AlphaCare Holdings.

Based on the Company’s 84% equity 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 Healthcare segment.

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 $201.0 million, including net receipts of $4.0 million for working capital adjustments. In addition to the base purchase price, the Company made additional contingent payments of $100.0 million. The contingent payments were based upon CDMI meeting certain client retention and gross profit milestones. The Company reports the results of operations of CDMI within its Pharmacy Management segment.

Other Acquisitions

Pursuant to the February 9, 2016 purchase agreement (the “TMG Agreement”) with TMG, on February 29, 2016 the Company acquired all of the outstanding equity interests of TMG. TMG is a company with 30 years of expertise in community-based long-term care services and supports. As consideration for the transaction, the Company paid a base price of $14.8 million in cash, including net receipts of $0.2 million for working capital adjustments. In addition to the base purchase price, the TMG agreement provides for potential contingent payments up to a maximum aggregate of $15.0 million. The potential future payments are contingent upon the Company being awarded additional managed long-term services and supports contracts. The Company reports the results of operations of TMG within its Healthcare segment.

Pursuant to the January 15, 2015 purchase agreement (the “HSM Agreement”) with HSM Physical Health, Inc. (“HSM”) and HSM Companies Inc., on January 31, 2015 the Company acquired all of the outstanding equity interests of HSM. HSM provides cost containment and utilization management services focused on physical and musculoskeletal health specialties. As consideration for the transaction, the Company paid a base price of $13.6 million in cash, including net payments of $0.1 million for working capital adjustments. The Company reports the results of operations of HSM within its Healthcare segment.

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 $7.8 million in cash, including net receipts of $0.2 million for 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 Company reports the results of operations of Cobalt within its Healthcare 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, 2015 as if the acquisitions of AFSC, TMG, and Veridicus had occurred on January 1, 2015, and for the year ended December 31, 2016, as if the acquisitions of AFSC, TMG and Veridicus had occurred on January 1, 2016, in all cases after giving effect to certain adjustments including interest income, depreciation, 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 acquisitions of AFSC, TMG and Veridicus occurred on January 1, 2015 and 2016 (in thousands, except per share amounts):


		Year Ended
		December 31,
		2015		2016
		(unaudited)		(unaudited)

Net revenue	$	4,912	$	5,084
Net income attributable to Magellan Health, Inc.	$	37	$	80
Income per common share attributable to Magellan Health, Inc.:
Basic	$	1.48	$	3.45
Diluted	$	1.42	$	3.31