BUSINESS COMBINATIONS AND ACQUISITIONS

9 Months Ended

Sep. 30, 2013

BUSINESS COMBINATIONS AND ACQUISITIONS

BUSINESS COMBINATIONS AND ACQUISITIONS

C.   BUSINESS COMBINATIONS AND ACQUISITIONS

On September 11, 2013, Cubist completed its acquisition of Trius, a publicly-held biopharmaceutical company focused on the discovery and development of innovative antibiotics for serious infections. The transaction provides Cubist with an existing late-stage antibiotic candidate, tedizolid phosphate, which is in development for the potential treatment of certain Gram-positive infections.

Under the terms of the merger agreement, Cubist purchased 100% of the issued and outstanding shares of Trius common stock for: (i) $13.50 per share in cash plus (ii) one non-transferable contingent value right, or CVR, per share, which entitles the holder to receive an additional cash payment of up to $2.00 per CVR for a total maximum undiscounted CVR payout of $108.4 million. The CVRs may not be sold, assigned, transferred, pledged, encumbered or disposed of, subject to limited exceptions. Contingent consideration is recorded as a liability and measured at fair value and is based on significant unobservable inputs. See Note E., “Fair Value Measurements,” for additional information.

The acquisition-date fair value of the consideration transferred is as follows:

	Total Acquisition- Date Fair Value
	(in thousands)
Cash transferred, including transaction costs	$	694,426
Contingent consideration (CVRs)	4,603
Total consideration transferred	$	699,029

Cubist paid $13.7 million in transaction costs on behalf of Trius, which are included as cash transferred in total consideration transferred in the table above. The acquisition-date fair value of total consideration transferred above excludes approximately $24.0 million of cash payments made to settle nonvested equity awards of Trius pursuant to the merger agreement, which was recognized as stock-based compensation expense in the postcombination period ended September 30, 2013. The total $24.0 million charge was comprised of $12.4 million of research and development expense and $11.6 million of selling, general and administrative expense.

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

	September 11, 2013
	(in thousands)
Cash	$	22,697
Investments	39,513
IPR&D	659,000
Deferred tax assets	92,567
Goodwill	159,442
Other assets acquired	5,522
Total assets acquired	978,741
Deferred tax liabilities	(249,353		)
Other liabilities assumed	(30,359		)
Total liabilities assumed	(279,712		)
Total net assets acquired	$	699,029

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from September 11, 2013, the acquisition date.

Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

The deferred tax assets of $92.6 million are primarily related to federal NOL carryforwards, capitalized research and development costs and federal research tax credits. See Note L., “Income Taxes,” for additional information. The deferred tax liability of $249.4 million primarily relates to the temporary differences associated with acquired IPR&D, which is not deductible for tax purposes.

The fair value of the acquired IPR&D asset relates to tedizolid phosphate, a novel antibiotic drug candidate, currently in Phase 3 development for the treatment of serious Gram-positive bacterial infections, including those caused by methicillin-resistant staphylococcus aureus, or MRSA. The fair value was determined using an income approach, including a discount rate of 9.5%, applied to the probability-adjusted after-tax cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value.

The operating results of Trius for the period from September 12, 2013 to September 30, 2013, including an operating loss of $4.8 million, have been included in the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2013. The Company incurred a total of $10.2 million in transaction costs in connection with the acquisition, excluding costs paid on behalf of Trius. These transaction costs were included in selling, general and administrative expenses within the condensed consolidated statement of comprehensive income for the three and nine months ended September 30, 2013.

The following supplemental unaudited pro forma information presents Cubist’s financial results as if the acquisition of Trius had occurred on January 1, 2012:

	Nine Months Ended  September 30,
	2013			2012
	(in thousands)
Total revenues, net	$	754,701		$	689,440
Net (loss) income	(27,912		)	52,214

The above unaudited pro forma information was determined based on the historical GAAP results of Cubist and Trius. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been if the acquisition was completed on January 1, 2012. The unaudited pro forma consolidated net (loss) income includes pro forma adjustments primarily relating to the following non-recurring items directly attributable to the business combination:

(i) elimination of $24.9 million of transaction costs for both Cubist and Trius from the nine months ended September 30, 2013, and inclusion of these transaction costs in the nine months ended September 30, 2012;

(ii) elimination of $24.0 million of stock-based compensation expense related to the acceleration of vesting of previously unvested Trius awards in connection with the acquisition from the nine months ended September 30, 2013, and inclusion of this charge in the nine months ended September 30, 2012;

(iii) elimination of $2.1 million of expense related to severance and retention agreements from the nine months ended September 30, 2013, and inclusion of the severance and retention agreements in the nine months ended September 30, 2012;

(iv) tax effect of the unaudited pro forma consolidated net income and adjustments for the nine months ended September 30, 2013 and 2012; and

(v) reclassification of certain Trius revenues related to research and development expense reimbursement to research and development expense for the nine months ended September 30, 2013 and 2012, in accordance with Cubist accounting policy.