3. Acquisitions

Acquisition of SWH Holdings, Inc.

Pursuant to the July 13, 2017 Agreement and Plan of Merger (“the SWH Agreement”), on October 31, 2017 the Company acquired (the “SWH Acquisition”) all of the outstanding equity interests of SWH Holdings, Inc. (“SWH”). SWH is a healthcare company focused on serving complex, high-risk populations, providing Medicare and Medicaid dual-eligible benefits to members in Massachusetts and New York.

As consideration for the Acquisition, Magellan Healthcare paid $400.0 million in cash, inclusive of a $10.0 million payment based on SWH’s Medicare plan in Massachusetts receiving a Centers for Medicare & Medicaid Services 2018 Star Rating of at least 4, subject to adjustments as provided in the SWH Agreement.

The Company will report the results of operations of SWH in its Healthcare segment. The consolidated statements of income include total revenues and Segment Profit for SWH of $186.6 million and $9.5 million, respectively, for the two 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 $124.1 million, consisting of customer contracts in the amount of $86.5 million, which is being amortized over four to six years, trade name in the amount of $30.0 million, which has an indefinite life, provider networks in the amount of $7.2 million, which is being amortized over three years, and licenses of $0.4 million, which have an indefinite life. The acquisition resulted in $260.1 million in goodwill related primarily to anticipated synergies and the expanded presence in the managed long-term care (“MLTC”) market. The goodwill is included in the Company’s Government reporting unit. None of the goodwill or identified intangible assets are deductible for tax purposes.

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


Assets acquired:
Current assets (includes $169,397 and $12,669 of cash and accounts receivable, respectively)	$	193,542
Property and equipment, net		3,395
Other assets		2,789
Identified intangible assets		124,140
Goodwill		260,139
Total assets acquired		584,005
Liabilities assumed:
Current liabilities (includes $96,398 of medical claims payable)		139,769
Deferred tax liabilities		45,913
Total liabilities assumed		185,682
Net assets acquired	$	398,323

The Company’s estimated fair values of SWH’s 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. 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, 2017, the Company established a working capital receivable of $0.3 million that was reflected as a reduction to the transaction price.

In connection with the SWH acquisition, the Company incurred $1.0 million of acquisition related costs that were expensed during the year ended December 31, 2017. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of income.

Acquisition of Veridicus Holdings, LLC and Granite Alliance Insurance Company

Pursuant to the November 19, 2016 purchase agreements (the “Veridicus Agreements”) with Veridicus Holdings, LLC and Granite Alliance Insurance Company (collectively “Veridicus”) and Veridicus Health, LLC, on December 13, 2016 and February 7, 2017 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 Agreements was $74.5 million, subject to working capital adjustments. The Company reports the results of operations of Veridicus within its Pharmacy Management segment.

During the year ended December 31, 2017, the Company made net measurement period adjustments of $2.3 million to increase the goodwill related to the Veridicus acquisition. The measurement period adjustments included a decrease to the customer contracts identified intangible assets of $2.9 million, partially offset by other measurement period adjustments of $0.6 million.

Acquisition of AFSC

Pursuant to the May 15, 2016 share purchase agreement (the “AFSC Agreement”) with 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. The Company reports the results of operations of AFSC within its Healthcare segment. 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.

As of December 31, 2017, the Company had a working capital receivable of $3.9 million.

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.

Other Acquisitions

Pursuant to the February 9, 2016 purchase agreement (the “TMG Agreement”) with The Management Group, LLC (“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.

Pro Forma Financial Information

The following unaudited supplemental pro forma financial information represents the Company’s consolidated results of operations for the year ended December 31, 2016 as if the acquisition of Senior Whole Health had occurred on January 1, 2016, and for the year ended December 31, 2017, as if the acquisition of Senior Whole Health had occurred on January 1, 2017, in all cases after giving effect to certain adjustments including interest income, depreciation, and amortization.

Such pro forma information does not purport to be indicative of operating results that would have been reported had the acquisition of Senior Whole Health occurred on January 1, 2016 and 2017 (in thousands, expect per share amount):


		Year Ended
		December 31,
		2016		2017
		(unaudited)		(unaudited)

Net revenue	$	5,617	$	6,685
Net income attributable to Magellan	$	86	$	117
Income per common share attributable to Magellan
Basic	$	3.72	$	5.02
Diluted	$	3.57	$	4.79