Acquisition of Trubion Pharmaceuticals, Inc.

12 Months Ended

Dec. 31, 2011

Acquisition of Trubion Pharmaceuticals, Inc. [Abstract]

Acquisition of Trubion Pharmaceuticals, Inc.

3.   Acquisition of Trubion Pharmaceuticals, Inc.

On October 28, 2010, the Company acquired 100% of the voting interest in and obtained control of Trubion. Trubion merged with a wholly-owned subsidiary of Emergent in accordance with a merger agreement dated August 12, 2010. This transaction has been accounted for under the acquisition method of accounting, with Emergent as the acquiror. Under the acquisition method of accounting, the assets and liabilities of Trubion have been recorded as of the acquisition date at their respective fair values and combined with those of Emergent. The combined financial condition and results of operations of Emergent after the merger reflects these fair values.

Under the terms and conditions of the merger agreement, each share of Trubion common stock was converted into the right to receive:

§ $1.365 in cash, without interest;

§ 0.1641 of a share of Emergent common stock; and

§ one CVR issued by Emergent.

Holders of vested and unvested stock options with an exercise price below $4.55 per share received for each share of Trubion common stock subject to such stock option:

§ a cash payment equal to the difference between $4.55 and the exercise price of the stock option, as applicable; and

§ one CVR issued by Emergent.

Stock options with an exercise price above $4.55 per share were cancelled and extinguished.

Each CVR entitles its holder to receive a pro rata portion of the following payments:

§ $6.25 million upon initiation of dosing in the first Phase III clinical study for the first major indication for a CD20 candidate;

§ $5.0 million upon initiation of dosing in the first Phase III clinical study for the second major indication for a CD20 candidate;

§ $750,000 upon initiation of dosing in the first Phase II clinical study for a product candidate directed towards a non-CD 20 target;

§ $1.7 million upon initiation of the first Phase II clinical study for TRU-016;

§ $15.0 million upon initiation of the first Phase III clinical study in an oncology indication for TRU-016; and

§ $10.0 million upon release of TRU-016 manufactured material for use in clinical studies.

At October 28, 2010, the CVR obligations were recorded at fair value of $14.5 million. The fair value of the CVR obligations are based on management’s assessment of the potential future realization of the CVR payments. This assessment is based on inputs that have no observable market (Level 3).  The obligation is measured using a discounted cash flow model. The obligation to make CVR payments expires on October 28, 2013.

The merger expanded the Company’s pipeline of product candidates and broadened the Company’s Biosciences portfolio. Additionally, the Company expects to realize cost savings and synergies.

The total purchase price is summarized as follows:

(in thousands)
Amount of cash received by Trubion stockholders and stock option holders	$	31,743
Value of shares of Emergent common stock issued		61,204
Fair value of CVRs		14,532
Total estimated purchase price	$	107,479

The table below summarizes the allocation of the purchase price based upon fair values of assets acquired and liabilities assumed at October 28, 2010. The Company adjusted the preliminary purchase price allocation based on the final determination of deferred tax assets acquired.

(in thousands)
Cash	$	13,870
Investments		8,547
Accounts receivable		3,548
Prepaid expenses and other assets		1,366
Property, plant and equipment		3,948
Deferred taxes		39,387
Acquired research and development assets		51,400
Goodwill		5,502
Accounts payable and accrued liabilities		(3,857	)
Accrued compensation		(2,842	)
Deferred revenue		(12,792	)
Other long-term liabilities		(598	)
Total purchase price	$	107,479

A substantial portion of the assets acquired from Trubion consisted of intangible assets from in-process research and development programs.  As of the date of acquisition, Trubion primarily had two programs: 1) TRU-016, a novel CD37-directed therapy for B-cell malignancies, such as chronic lymphocytic leukemia and non-Hodgkin’s lymphoma; and 2) SBI-087, humanized, CD20-directed product candidate for the treatment of rheumatoid arthritis and systemic lupus erythematosus.  Both of these acquired research and development programs are currently in development and as such are deemed to be indefinite-lived assets and will remain as indefinite lived assets on the Company’s balance sheet until completion or abandonment of the associated research and development efforts. The Company determined the fair value of TRU-016 and SBI-087 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 developed products. As of the date of acquisition, the Company recorded IPR&D assets of approximately $41.8 million related to TRU-016 and $9.6 million related to SBI-087.

The value of the deferred tax assets were based on management’s assessment of the anticipated future utilization of the tax positions. The estimated fair value of the remaining contractual obligation acquired resulted in a $16.5 million reduction in the carrying balance of historical Trubion deferred revenue at date of acquisition. The fair value of the deferred revenue was determined using unobservable inputs in which no market data exists and is based on the Company’s expected future obligations under its collaborations with Abbott and Pfizer. The cost basis of all other assets acquired and liabilities assumed approximates fair value.

The Company recorded approximately $5.5 million in goodwill related to the Trubion acquisition representing the purchase price paid in the acquisition that was in excess of the fair value of the tangible and intangible assets acquired, which is included in the Company’s Biosciences segment. None of the goodwill generated from the Trubion acquisition is expected to be deductible for tax purposes.

The Company incurred approximately $2.8 million of transaction costs for the year ended December 31, 2010, related to the acquisition, which is included in selling, general and administrative expenses in the Company’s consolidated statement of operations.

From the date of the acquisition to December 31, 2010, the Company has recognized revenues of $3.4 million and a net loss attributable to Emergent BioSolutions Inc. of $3.8 million from the operations of the acquired entity.

The unaudited condensed pro forma statements of operations are presented as if the merger had occurred on January 1, 2009, and combines the historical results of operations of Emergent and Trubion for the years ended December 31, 2010 and 2009.

	December 31,
(in thousands, except per share data)	2010		2009
Pro forma revenue	$	303,317	$	252,789
Pro forma net income	$	36,973	$	12,522
Pro forma earnings per share-basic	$	1.16	$	0.37
Pro forma earnings per share-diluted	$	1.14	$	0.36

The table above includes nonrecurring pro forma additions to pro forma net income directly attributable to the Trubion acquisition totaling $8.3 million and $10.6 million for the years ended December 31, 2010 and 2009, respectively. These adjustments are primarily from the utilization of Trubion’s net operating losses.