Note 9 — Acquisition

On April 18, 2011, SciClone acquired all the outstanding shares of NovaMed pursuant to the terms of a Share Purchase Agreement (the “Agreement”) dated April 18, 2011 between SciClone, NovaMed, the shareholders of NovaMed and SciClone Pharmaceuticals Hong Kong Limited, a wholly-owned subsidiary of SciClone. The Company acquired NovaMed to bring additional broad sales and marketing, as well as regulatory and extensive business capabilities and pharmaceutical assets, on the market as well as in the regulatory approval stage, to its growing and profitable China focused specialty pharmaceutical business. Under the terms of the Agreement, the purchase price is comprised of up-front payments of approximately $24.6 million in cash, 8,298,110 shares of SciClone common stock and a contingent right to receive additional cash consideration of up to $43.0 million (the “earn out” or “contingent consideration”), based upon achievement of revenue and earnings targets for the 2011 and 2012 fiscal years.

Under the Agreement, the earn-out is based upon certain financial performance metrics, including a revenue-based formula and an adjusted EBITDA (earnings before interest, depreciation and taxes) based formula. The earn-out provisions provide that: (i) if cumulative revenue in China for legacy NovaMed products for the two fiscal years ending December 31, 2012 exceed $94.2 million, a cash payment ranging from $9.2 million to $11.5 million will be paid, with the full amount payable if such revenue is $117.8 million or more; and (ii) if adjusted EBITDA for the two year period ending December 31, 2012 exceeds $91.8 million, a cash payment from $17.2 million to $21.5 million will be paid with the full amount payable if such adjusted EBITDA is $137.8 million or more. Adjusted EBITDA is defined in the Agreement to exclude certain expenses which are not generally related to operating results in China, including SciClone’s US research and development expense, certain share-based compensation, license fees paid by SciClone for new products, certain legal and advisory fees related to the Agreement or to change-in-control transactions, and certain fees and expenses, including legal fees and governmental fines or settlements paid with respect to the pending formal, non-public investigation being conducted by the US Securities and Exchange Commission (“SEC”).

The earn-out provisions were subject to a number of adjustments and acceleration provisions. The total earn-out payments described above could have been increased by $10.0 million (a total maximum contingent cash consideration of $43.0 million) or reduced by $10.0 million, depending upon whether the Company was able to achieve targets relating to the renewal of the Depakine services agreement with Sanofi. The earn-out payments would be due 20 business days after completion of the Company’s audit for the fiscal year ending December 31, 2012. The earn-out provisions are subject to various limitations and conditions specified in the Agreement.

The fair value of the earn-out was re-measured each period, and changes in the fair value were recorded to “contingent consideration” in operating expenses. As of December 31, 2012, the earn-out was determined to be zero. Through September 30, 2012, the Company used the assistance of a third-party valuation expert to estimate the fair value of the contingent consideration using a Monte Carlo simulation model. The estimated fair value of the contingent consideration was subject to fluctuations as a result of adjustments to certain performance metric projections used to estimate the fair value. As of December 31, 2011, the significant unobservable inputs used in the fair value measurement of the contingent consideration were revenue volatility of 40%; revenue discount rate of 20%; risk free rate of 0.15%; earn-out discount rate, including counterparty risk of 5%; estimates of projected revenues and earnings before taxes; and other assumptions regarding customer conditions, and employment termination considerations. Significant increases (decreases) in the estimated revenues, earnings before taxes, customer conditions, and revenue volatility would have resulted in a significantly higher (lower) fair value measurement. Generally, an increase (decrease) in the assumption used for revenue discount rate was accompanied by a decrease (increase) in the fair value of the contingent consideration.

The Company initially recorded $18.9 million as the estimated fair value of the contingent consideration. The fair value of the contingent consideration was remeasured each quarter, and changes to the fair value were recorded to contingent consideration expense or gain. As of December 31, 2012 and 2011, the Company estimated the fair value of the contingent consideration to be $0 and $15.4 million, resulting in a non-cash gain of $15.4 million and $3.5 million for the years ended December 31, 2012 and 2011, respectively. The significant reduction in the valuation of the contingent consideration expense for 2012 was primarily due to revenue and EBITDA targets not being achieved and to the reduced probability of renewal relating to NovaMed’s product distribution agreements, including, in particular, the target of renewing the Depakine services agreement with Sanofi for a five-year term. The Depakine services agreement was extended through December 31, 2013, a term less than five years.

The total purchase price of NovaMed was approximately $75.0 million, comprised as follows (in thousands):

Under the purchase method of accounting, the total acquisition-date fair value of the assets and liabilities are recognized as of the closing date, and the excess of the consideration transferred over the acquisition date fair value of net assets acquired is recorded as goodwill. The total purchase price of the net assets acquired and included in the Company’s consolidated balance sheet is as follows (in thousands and restated):


Cash	$	3,322
Accounts receivable		4,827
Inventory		1,724
Prepaid and other assets		486
Property and equipment		80
Deferred tax assets		1,389
Intangible assets - promotion
and distribution contract rights		46,310
Goodwill		32,843
Deferred tax liabilities		(9,352)
Liabilities assumed		(6,651)
Total net assets acquired (Restated)	$	74,978

The fair value of the acquired promotion and distribution contract intangible assets was estimated using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). The Company’s measurement is based on the value indicated by current market expectations about those future amounts. The fair value considered the Company’s estimates at the time of the acquisition of future incremental earnings that could be achieved by the promotion and distribution contract intangible assets, and included estimated acquired useful lives of approximately 13.5 years and a discount rate of 29%.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of NovaMed includes benefits that the Company believes will result from combining the operations of NovaMed with the operations of SciClone and any intangible assets that do not qualify for separate recognition, as well as future, yet unidentified products. Goodwill is not amortized and is not deductible for tax purposes.

The following table represents the changes in goodwill for the years ended December 31, 2012 and 2011 (in thousands and restated):


Balance at December 31, 2010	$	—
Goodwill for the acquisition of NovaMed		32,843
Translation adjustments		1,025
Balance at December 31, 2011 (Restated)	$	33,868
Translation adjustments		445
Balance at December 31, 2012	$	34,313

Deferred tax liabilities as of December 31, 2011, reflected non-deductible amortization expenses associated with the promotion and distribution contract intangible assets recognized as part of the acquisition.

The results of operations of NovaMed are included in the Company’s financial statements from April 18, 2011, the date of acquisition. The following summary, prepared on an unaudited pro-forma basis, reflects consolidated results of operations for the year ended December 31, 2011, and 2010, assuming NovaMed had been acquired on January 1, 2010. The pro forma results of continuing operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the years presented or the results which may occur in the future. (in thousands, except per share data):



	For the Year Ended December 31,
	2011
	Restated
	(Note 2)		2010
Total revenues	$	140,604	$	116,520
Net income	$	24,849	$	20,021
Basic net income per share	$	0.45	$	0.42
Diluted net income per share	$	0.43	$	0.41

The following table presents information for NovaMed that is included in SciClone’s consolidated statement of income from April 18, 2011 through December 31, 2011 and 2012 (in thousands):


	For the Year Ended December 31,
				2011
				Restated
	2012			(Note 2)
Total revenues	$	44,100	$	27,852
Net loss	$	(40,258)	$	(3,835)

For the year ended December 31, 2011, the Company recorded acquisition-related transaction costs of $3.8 million which were included in general and administrative expense in the consolidated statements of income.

Cash consideration

SciClone shares of common stock at estimated fair value on closing date

Contingent consideration (earn-out) at estimated fair value

Total purchase price