Acquisitions | 9 Months Ended |
Sep. 30, 2014 |
Acquisitions [Abstract] | ' |
Acquisitions | ' |
2. Acquisitions |
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Cangene Corporation |
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On February 21, 2014, the Company acquired 100% of the voting interest of Cangene for $3.24 per share in cash (on a fully-diluted basis), which represents a total purchase price of $221.8 million. This transaction was accounted for by the Company under the acquisition method of accounting, with the Company as the acquirer. Under the acquisition method of accounting, the assets and liabilities of Cangene were recorded as of the acquisition date, at their respective fair values, and combined with those of the Company. This acquisition diversified the product portfolio of the Company's Biodefense and Biosciences divisions and expanded the Company's manufacturing capabilities. |
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The table below summarizes the preliminary allocation of the purchase price based upon estimated fair values of assets acquired and liabilities assumed at February 21, 2014. As of the date of this filing, the valuation of acquired intangible assets, deferred taxes and other fair value adjustments are not complete as the Company is obtaining and analyzing additional information related to the aforementioned items. As such, the purchase price allocation is subject to change. |
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(in thousands) | | 21-Feb-14 | | | | | |
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Fair value of tangible assets acquired and liabilities assumed: | | | | | | | |
Cash | | $ | 43,631 | | | | | |
Accounts receivable | | | 19,649 | | | | | |
Inventory (i) | | | 52,619 | | | | | |
Prepaid expenses and other assets | | | 2,375 | | | | | |
Property, plant and equipment | | | 40,264 | | | | | |
Deferred taxes, net | | | 18,371 | | | | | |
Income tax receivable | | | 2,940 | | | | | |
Accounts payable and accrued liabilities | | | (22,918 | ) | | | | |
Provision for chargebacks | | | (2,447 | ) | | | | |
Contingent purchase consideration | | | (1,089 | ) | | | | |
Deferred revenue | | | (6,378 | ) | | | | |
Total fair value of tangible assets acquired and liabilities assumed | | | 147,017 | | | | | |
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Acquired in-process research and development | | | 8,500 | | | | | |
Acquired intangible assets | | | 40,400 | | | | | |
Goodwill | | | 25,883 | | | | | |
Total purchase price | | $ | 221,800 | | | | | |
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(i) Acquired inventory reflects a $6.2 million adjustment to record inventory at fair value, referred to as a step-up adjustment. The $6.2 million step-up is estimated to be amortized through cost of product sales and contract manufacturing over the next five years based on expected inventory turnover, which will increase cost of product sales and contract manufacturing during such period. |
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During the three months ended September 30, 2014 the Company updated its fair value determination for contingent purchase consideration and the provision for chargebacks resulting in a reduction to goodwill of $5.9 million and a reduction to contingent purchase consideration and the provision of chargebacks. |
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The table below summarizes the preliminary estimated fair value of intangible assets acquired and the estimated amortization periods: |
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| | | | | Amortization | |
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( in thousands) | | Amount | | | in years | |
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Corporate Trade Name | | $ | 2,800 | | | | 5 | |
Marketed Products | | | 8,300 | | | | 10 | |
Licensed Products | | | 3,300 | | | | 7 | |
Biodefense Products | | | 20,400 | | | | 12 | |
Contract Manufacturing | | | 5,600 | | | | 8 | |
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Total identified intangible assets | | $ | 40,400 | | | | | |
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The Company determined the estimated fair value of the intangible assets using the income approach, which is based on the present value of future cash flows. The fair value measurements are based on significant unobservable inputs that are developed by the Company using estimates and assumptions of the respective market and market penetration of the Company's products. |
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A portion of the assets acquired from Cangene consisted of intangible assets. The Marketed Products intangible asset consists of WinRho® SDF [Rho(D) Immune Globulin Intravenous (Human)] and VARIZIG® (Varicella Zoster Immune Globulin (Human)]. The Licensed Products intangible asset primarily consists of HepaGam B® (Hepatitis B Immune Globulin Intravenous (Human). The Biodefense intangible asset consist of BATTM [Botulism Antitoxin Heptavalent (A, B, C, D, E, F, G)-Equine], AIGIV (Anthrax Immune Globulin Intravenous (Human)) and VIGIV (Vaccinia Immune Globulin Intravenous (Human)). The Contract Manufacturing intangible asset is primarily related to contract manufacturing contracts with current and expected future third-party customers. |
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The Company estimated the fair value of the Marketed, Licensed and Biodefense Product intangible assets using the income approach with a present value discount rate of 15%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Cangene. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value these intangible assets. The projected cash flows from these Marketed, Licensed and Biodefense Product intangible assets were based on key assumptions including: estimates of revenues and operating profits; the life of the potential commercialized product and associated risks; and risks related to the viability of and potential alternative treatments in any future target markets. |
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The Company estimated the fair value of the Contract Manufacturing intangible asset using the income approach with a present value discount rate of 15%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Cangene. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value this intangible asset. The projected cash flows from the Contract Manufacturing intangible asset were based on key assumptions including: estimates of revenues and operating profits; and viability of attaining/maintaining future third-party manufacturing relationships with the Company's customers. |
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The Company estimated the fair value of the Corporate Trade Name intangible asset using the relief of royalty method with a present value discount rate of 15%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Cangene. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value this intangible asset. |
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The weighted average amortization period of the intangible assets from the Cangene acquisition is 115 months. For the three and nine months ended September 30, 2014, the Company recorded amortization expense of $1.0 million and $2.6 million, respectively, for intangible assets acquired from Cangene, which has been recorded in cost of product sales and contract manufacturing. Amortization expense of $620,000 and $1.5 million, respectively, was recorded within the Biosciences segment for the three and nine months ended September 30, 2014. Amortization expense of $425,000 and $1.0 million, respectively, was recorded within the Biodefense segment for the three and nine months ended September 30, 2014. |
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The intangible asset associated with in-process research and development ("IPR&D") acquired from Cangene is the IXINITY product candidate. Management determined that the estimated acquisition-date fair value of intangible assets related to IPR&D was $8.5 million. The estimated fair value was determined using the income approach, which discounts expected future cash flows to present value. The Company estimated the fair value using a present value discount rate of 16%, which is based on the estimated weighted-average cost of capital for companies with that profiles substantially similar to that of Cangene and IPR&D assets at a similar stage of development as IXINITY. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value the IPR&D. The projected cash flows for IXINITY was based on key assumptions including: estimates of revenues and operating profits, considering its stage of development on the acquisition date; the time and resources needed to complete the development and approval of the product candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a product candidate, such as obtaining marketing approval from the U.S. Food and Drug Administration ("FDA") and other regulatory agencies; and risks related to the viability of and potential for alternative treatments in any future target markets. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts (see Note 6). |
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The Company recorded approximately $25.9 million in goodwill related to the Cangene acquisition, representing the purchase price paid in the acquisition that was in excess of the fair value of the tangible and intangible assets acquired. None of the goodwill generated from the Cangene acquisition is expected to be deductible for tax purposes. |
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The Company has incurred transaction costs related to the Cangene acquisition of approximately $3.7 million for the nine months ended September 30, 2014, which has been recorded in selling, general and administrative expenses within the Company's Biosciences segment. The Company has incurred to date a total of $7.0 million in transaction costs associated with the Cangene acquisition through September 30, 2014, of which $3.3 million was incurred in the second half of 2013. |
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From the date of acquisition to September 30, 2014, the Company has recognized revenue of $82.1 million and a net loss attributable to Emergent BioSolutions Inc. of $4.8 million from the operations of Cangene. |
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The following pro forma information is presented as if the acquisition had occurred on January 1, 2013, and combines the historical results of operations of the Company and Cangene for the nine month periods ended September 30, 2014 and 2013. |
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| | September 30, | |
(in thousands) | | 2014 | | | 2013 | |
Pro forma revenue | | $ | 329,642 | | | $ | 304,164 | |
Pro forma net income | | $ | 9,109 | | | $ | 468 | |
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Healthcare Protective Products Division |
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On August 1, 2013, the Company acquired substantially all of the assets and liabilities of Healthcare Protective Products Division ("HPPD"), a division of Bracco Diagnostics Inc. ("Bracco"), for $25.9 million in cash along with contingent purchase consideration obligations to Bracco. The assets and liabilities acquired include HPPD's product, RSDL, and a majority of the customer and distributor agreements associated with RSDL along with $1.5 million of manufacturing equipment. In addition, the Company assumed a $1.5 million liability associated with the Canadian Technology Development Fund ("TDF"). The acquisition diversified the product portfolio of the Biodefense segment by adding product sales from RSDL. |
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The contingent purchase consideration obligation due to Bracco is based on a percentage of RSDL net sales, ranging from 5-10%, for the period August 1, 2013 through July 31, 2028. At August 1, 2013, the contingent purchase consideration obligation was recorded at a fair value of $16.2 million. The Level 3 fair value of this obligation is based on management's assessment of the potential future realization of the contingent purchase consideration payments. This assessment is based on inputs that have no observable market. The obligation is measured using the income approach (a discounted cash flow model). |
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The total purchase price is summarized below: |
(in thousands) | | | | | | | |
Amount of cash paid to Bracco Diagnostics Inc. | | $ | 25,873 | | | | | |
Fair value of contingent purchase consideration at date of acquisition | | | 16,232 | | | | | |
Total purchase price | | $ | 42,105 | | | | | |
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The table below summarizes the allocation of the purchase price based upon fair values of assets acquired and liabilities assumed at August 1, 2013. |
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(in thousands) | | | | | | | |
Acquired intangible assets | | $ | 32,099 | | | | | |
Goodwill | | | 9,916 | | | | | |
Acquired equipment | | | 1,543 | | | | | |
Other | | | 11 | | | | | |
Assumed liabilities | | | (1,464 | ) | | | | |
Total purchase price | | $ | 42,105 | | | | | |
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During the nine months ended September 30, 2014, the Company updated its purchase price to include an assumed liability from the TDF resulting in additional goodwill of $1.5 million. |
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A substantial portion of the assets acquired from Bracco consisted of intangible assets associated with RSDL. As of the date of acquisition, the Company recorded intangible assets of approximately $28.6 million related to RSDL, which is being amortized over 8 years, and $3.5 million related to a manufacturing agreement with Bracco, which is being amortized over 3 years. For the three and nine months ended September 30, 2014, the Company recorded $1.2 million and $3.5 million, respectively, of amortization expense for intangible assets acquired from Bracco which was recorded in cost of product sales and contract manufacturing within the Company's Biodefense segment. The weighted average remaining amortization period for the intangible assets is 77 months. |
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The Company recorded approximately $9.9 million in goodwill related to the HPPD acquisition representing the purchase price paid in the acquisition in excess of the fair value of the tangible and intangible assets acquired. This goodwill is included in the Company's biodefense segment. None of the goodwill generated from the HPPD acquisition is expected to be deductible for tax purposes. |
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The Company has determined the historical results of HPPD were not significant to the Company's results of operations, and as such no proforma disclosures have been presented. |