NOTE 6 – ACQUISITION OF CEREGENE

On August 23, 2013, Sangamo and its wholly-owned subsidiary CG Acquisition Sub, Inc., a Delaware corporation, entered into an Agreement and Plan of Merger (the Merger Agreement) with Ceregene, and a stockholders’ representative. Pursuant to the Merger Agreement, the Company acquired all outstanding shares of Ceregene, a privately held biotechnology company focused on the development of AAV gene therapies. The acquired assets include all of Ceregene’s therapeutic programs, including CERE-110 for the treatment of AD is currently in a Phase 2 clinical trial. In addition to the clinical assets acquired, the Company acquired certain intellectual property rights relating to the manufacturing of AAV, and certain toxicology data and safety and efficacy data from Ceregene’s human clinical trials, which will be used in the preparation and filing of IND applications for Sangamo’s in vivo ZFP Therapeutics, particularly those that target the brain. The acquisition closed on October 1, 2013 (the Closing Date).

Under the Merger Agreement, the aggregate consideration transferred or transferable by Sangamo to former Ceregene stockholders at closing consisted of 100,000 shares of Sangamo common stock, with an approximate fair value of $1.2 million. In addition, Sangamo may be required to make contingent earn-out payments (the Earn-Out Payments) to the stockholders of Ceregene as follows:

•

If the Company grants a third-party license to develop and commercialize Ceregene’s CERE-110 for the treatment of (AD) or CERE-120 for the treatment of Parkinson’s diseases or HD (the Earn-Out Products), the Company is required to pay a double digit percentage of any upfront and milestone payments the Company receives for such license, subject to certain reductions based on expenses incurred by the Company in the development of the Earn-Out Products; and

•

If the Company commercializes any Earn-Out Product itself, the Company is required to pay, for each Earn-Out Product, royalty-like earnout payments as a percentage of net sales that range in the low double digits depending upon the amount of net sales, subject to certain reductions by the Company.

Also on the Closing Date, Sangamo, Ceregene and certain of Ceregene’s stockholders entered into an indemnity escrow agreement, pursuant to which $0.3 million of Ceregene remaining cash was deposited in an escrow account for the benefit of Sangamo to satisfy indemnity obligations of the stockholders under the Merger Agreement.

In accordance with the Merger Agreement, each issued and outstanding share of Ceregene capital stock was cancelled and converted into the right to receive the merger consideration described in the Merger Agreement.

The Ceregene acquisition was accounted for as a business combination in accordance with the guidance ASC Topic 805. The operating results of Ceregene after the Closing Date have been included in the Company’s Consolidated Statements of Operations. The Company’s Consolidated Balance Sheet as of December 31, 2013 reflects the acquisition of Ceregene.

Consideration Transferred

The following table summarizes the estimated fair value of the consideration transferred by Sangamo to the Ceregene stockholders on the Closing Date (in thousands):


Sangamo shares of common stock	$	1,200
Contingent earn-out		1,510

Total purchase consideration	$	2,710

Fair Value Estimate of Assets Acquired and Liabilities Assumed

The following table summarizes the estimated fair value of the net assets acquired as of the Closing Date (in thousands):


Cash and equivalents	$	79
Accounts receivable		22
Identifiable intangible assets		1,870
Goodwill		1,585

Total assets acquired		3,556
Deferred tax liability		(748	)
Accounts payable and accrued liabilities		(98	)

Total liabilities assumed		(846	)
Net assets acquired	$	2,710

Intangible Assets

Intangible assets for in-process research and development (IPR&D) consist of Ceregene’s two clinical product candidates, CERE-110 for the treatment of AD and CERE-120 for the treatment of Parkinson’s disease. The Company determined that the combined Closing Date estimated fair values of CERE-110 and CERE-120 was $1.9 million. The Company used an income approach, which is a measurement of the present value of the net economic benefit or cost expected to be derived from an asset or liability, to measure the fair value of these two product candidates. Under the income approach, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life.

To calculate the fair value of CERE-110 and CERE-120 under the income approach, the Company used probability-weighted cash flows discounted at a rate considered appropriate given the inherent risks associated with this type of asset. The Company estimated a present value discount rate based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Ceregene. This estimates the rate that market participants would use to value this asset. Cash flows were generally assumed to extend either through or beyond the patent life of the asset, depending on the circumstances particular to the asset. In addition, the Company compensated for additional risks, including the phase of development, historical clinical results and the lack of approved gene therapy products, by probability-adjusting the Company’s estimation of the expected future cash flows for these product candidates. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. The projected cash flows from this project were based on key assumptions such as estimates of revenues and operating profits related to the project considering its stage of development; the time and resources needed to complete the development and approval of the related product candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a drug compound such as obtaining marketing approval from the FDA and other regulatory agencies.

A summary of these assets and estimated fair values at the Closing Date is as follows (in thousands):


	Value of Intangible Assets Acquired
CERE-110 for the treatment of Alzheimer’s disease	$	1,640
CERE-120 for the treatment of Parkinson’s disease		230

Total identifiable intangible assets	$	1,870

IPR&D is an intangible asset classified as an indefinite-lived until the completion or abandonment of the associated research and development effort, and will be amortized over an estimated useful life to be determined at the date the project is completed. IPR&D is not amortized during this period, but rather tested for impairment.

Goodwill

The excess of the consideration transferred over the fair values assigned to the assets acquired and liabilities assumed was $1.6 million, which represents the goodwill amount resulting from the acquisition. Goodwill represents benefits that Sangamo believes will result from combining its operations with the operations of Ceregene and any intangible assets that do not qualify for separate recognition, as well as any future, yet unidentified products. Goodwill recorded includes $0.7 million related to a deferred tax liability. The deferred tax liability is due to the Company’s recognition of the acquired IPR&D assets for financial statement purposes but not for tax purposes.

None of the goodwill is expected to be deductible for income tax purposes. The Company will test goodwill for impairment on an annual basis or sooner, if deemed necessary. As of December 31, 2013, there were no changes in the Goodwill recorded from the acquisition of Ceregene.

Liability for Contingent Consideration

In addition to the transfer of Sangamo common stock, the Company may be required to make contingent Earn-Out Payments if the Company grants a third-party license to develop and commercialize the Earn-Out Products or if the Company commercializes any Earn-Out Product itself. These payments are a percentage of any upfront or milestone payments received in the case Sangamo grants a third-party license to develop and commercialize the Earn-Out Products, or are a percentage of net sales in the case Sangamo develops and commercialized the Earn-Out Products itself. The total maximum payment is not limited, other than due to size of the upfront and milestone payments received or the net sales of the products.

The fair value of the liability for the contingent consideration recognized on the Close Date was $1.5 million. The Company determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis.

The fair value of the contingent consideration liability associated with those future earnout payments was based upon reasonable assumptions.

Escrow Account Liability

On the Closing Date, $0.3 million of Ceregene’s remaining cash, payable to the Ceregene stockholders, was placed in an escrow account to be held until October 1, 2014, to secure the indemnification rights of Sangamo and other indemnities with respect to certain matters, including breaches of general representations and warranties included in the Merger Agreement.

Acquisition-Related Transaction Costs

The Company recognized $0.1 million in acquisition-related transaction expenses in the year ended December 31, 2013. These costs are included in the “General and administrative” expense line item in the Consolidated Statement of Operations for the year ended December 31, 2013.

Revenues and Operating Expenses

Ceregene did not record any revenues for the period from the Close Date to December 31, 2013. There were no material operating expenses included in Sangamo’s Consolidated Statement of Operations.

Proforma Information

The following unaudited supplemental pro forma information presents the Company’s financial results as if the acquisition of Ceregene had occurred on January 1, 2012. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2012, nor are they indicative of any future results.


	Year Ended December 31,
	2013			2012
	(In thousands except per share data)
Net loss	$	(30,997	)	$	(27,446	)
Basic net loss per share	$	(0.55	)	$	(0.52	)