Acquisitions

9 Months Ended

Sep. 30, 2023

Reata Pharmaceuticals, Inc.

On September 26, 2023, we completed the acquisition of all of the issued and outstanding shares of Reata, a biopharmaceutical company focused on developing therapeutics that regulate cellular metabolism and inflammation in serious neurologic diseases. As a result of this transaction we acquired SKYCLARYS, the first and only drug approved by the FDA for the treatment of Friedreich's Ataxia in adults and adolescents aged 16 years and older, as well as other clinical and preclinical pipeline programs. The acquisition of Reata is expected to complement our global portfolio of neuromuscular and rare disease therapies. The addition of SKYCLARYS is anticipated to provide potential operating synergies with SPINRAZA and QALSODY.

Under the terms of this acquisition, we paid Reata shareholders $172.50 in cash for each issued and outstanding Reata share, which totaled approximately $6.6 billion. In addition, we agreed to pay approximately $983.9 million in cash for Reata's outstanding equity awards, inclusive of employer taxes, of which approximately $590.5 million was attributable to pre-acquisition services and is therefore reflected as a component of total purchase price paid. Of the $983.9 million paid to Reata's equity award holders, we recognized approximately $393.4 million as compensation attributable to the post-acquisition service period, of which $196.4 million was recognized as a charge to selling, general and administrative expense with the remaining $197.0 million as a charge to research and development expense within our condensed consolidated statements of income for the three and nine months ended September 30, 2023. These amounts were associated with the accelerated vesting of stock options and RSUs previously granted to Reata employees and required no future services to vest. Approximately $980.0 million of the $983.9 million payment to the equity award holders was made in October 2023.

We funded this acquisition through available cash, cash equivalents and marketable securities, supplemented by the issuance of a $1.0 billion term loan under our term loan credit agreement. For additional information on our term loan credit agreement, please read Note 13, Indebtedness, to these condensed consolidated financial statements.

We accounted for this acquisition as a business combination using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, and recorded assets acquired and liabilities assumed at their respective fair values as of the acquisition date.

Purchase Price Consideration

Total consideration transferred for the acquisition of Reata is summarized as follows:


(In millions)	As of September 26, 2023
Cash consideration paid to Reata shareholders(1)	$	6,602.9
Fair value of Reata equity compensation pre-acquisition services and related taxes(2)	590.5
Total consideration	$	7,193.4

(1) Represents cash consideration transferred of $172.50 per outstanding Reata ordinary share based on 38.3 million Reata shares outstanding at closing.

(2) Represents the fair value of Reata stock options and stock units issued to Reata equity award holders and the related taxes attributable to pre-acquisition vesting services.

Preliminary Purchase Price Allocation

The following table summarizes the preliminary purchase price allocation of the separately identifiable assets acquired and liabilities assumed as of September 26, 2023:


(In millions)	As of September 26, 2023
Cash and cash equivalents	$	267.3
Accounts receivable	15.9
Inventory	1,692.0
Other current assets	53.6
Intangible assets:
Completed technology for SKYCLARYS (U.S.)	3,600.0
In-process research and development (omaveloxolone)	1,900.0
Priority review voucher	100.0
Other clinical programs	20.0
Operating lease assets	122.4
Accrued expense and other	(98.9)
Debt payable	(159.9)
Contingent payable to Blackstone(1)	(300.0)
Deferred tax liability	(922.5)
Operating lease liabilities	(151.8)
Other assets and liabilities, net	(2.0)
Total identifiable net assets	6,136.1
Goodwill	1,057.3
Total assets acquired and liabilities assumed	$	7,193.4

(1) For additional information on the contingent payable to Blackstone, please read Note 18, Other Consolidated Financial Statement Detail, to these condensed consolidated financial statements.

Inventory: Total inventory acquired was approximately $1.7 billion, which reflects a step-up in the fair value of finished goods and work-in-process inventory for SKYCLARYS. The fair value was determined based on the estimated selling price of the inventory, less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts. This fair value step-up adjustment will be amortized to cost of sales within our condensed consolidated statements of income when the inventory is sold, which is expected to be within approximately 3 years from the acquisition date.

Intangible assets: Intangible assets are comprised of $3.6 billion related to SKYCLARYS commercialization rights in the U.S., $1.9 billion of IPR&D related to the omaveloxolone program outside the U.S., $100.0 million related to a rare pediatric disease priority voucher which may be used to obtain priority review by the FDA for a future regulatory submission or sold to a third party and $20.0 million related to other clinical programs. The estimated fair values of the program related intangible assets were determined using a probability adjusted discounted cash flow analysis approach utilizing a discount rate of 17.0% and the estimated fair value of the priority review voucher was based on recent external purchase and sale transactions of similar vouchers.

The more significant assumptions utilized in our asset valuations included the estimated net cash flows for each year for each asset or product, including net revenue, cost of sales, research and development and other operating expense, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream as well as other factors. Our valuation of the SKYCLARYS commercialization rights reflects the assumption that, using an economic consumption model, the related $3.6 billion intangible asset will be amortized over its expected economic life. Our valuation of the $1.9 billion IPR&D asset related to omaveloxolone, which has been submitted to the EMA and is currently under review, reflects the assumption that, if regulatory approval is obtained, sales would commence in certain countries in Europe during 2024.

These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 fair value measurements.

Leases: We assumed responsibility for a single-tenant, build-to-suit building of approximately 327,400 square feet of office and laboratory space located in Plano, Texas, with an initial lease term of 16 years. We recorded a lease liability of approximately $151.8 million, which represents the net present value of rental expense over the remaining lease term of approximately 15 years, with a corresponding right-of-use asset of approximately $122.4 million, which represents our estimate of the fair value for a market participant of the current rental market in the Dallas, Texas area. Included in our estimate of the market rental rate is the value of any leasehold improvements or tenant allowances related to the building. We do not intend to occupy this building and are evaluating opportunities to sublease the property.

Goodwill: Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. We recognized goodwill of approximately $1.1 billion, which is not deductible for tax purposes. The goodwill recognized from our acquisition of Reata is primarily the result of the deferred tax consequences from the transaction recorded for financial statement purposes.

Acquisition-related expenses: Acquisition-related expenses, which were comprised primarily of regulatory, advisory and legal fees, and other transaction costs, totaled approximately $26.3 million and are included within selling, general and administrative expense within our condensed consolidated statements of income for the three and nine months ended September 30, 2023.

Assumptions in the Allocations of Purchase Price

The results of operations of Reata, along with the estimated fair values of the assets acquired and liabilities assumed in the Reata acquisition, have been included in our condensed consolidated financial statements since the closing of the Reata acquisition on September 26, 2023.

Our preliminary estimate of the fair value of the specifically identifiable assets acquired and liabilities assumed as of the date of acquisition is subject to the finalization of management's analysis related to certain matters, such as finalizing our assessment of intangible assets, inventory, goodwill, leases and income taxes. The final determination of these fair values will be completed as additional information becomes available but no later than one year from the acquisition date. The final determination may result in asset and liability fair values that are different than the preliminary estimates.

Subsequent to the acquisition date, our results of operations include the results of operations of Reata. The Reata operations had an immaterial impact to our results of operations for the three and nine months ended September 30, 2023, given the proximity of the acquisition date to quarter-end. Due to the immateriality of Reata's revenues and expenses, additional pro forma information combining the results of operations of Biogen and Reata have not been included.