Business Combination

12 Months Ended

Dec. 31, 2020

On December 12, 2018, the Company completed the Merger with Keryx. Keryx’s proprietary product, Auryxia, is approved by the FDA for two indications: (1) the control of serum phosphorus levels in adult patients with DD-CKD, or the Hyperphosphatemia Indication and (2) the treatment of iron deficiency anemia in adult patients with NDD-CKD, or the IDA Indication.

Pursuant to the terms and conditions of the Merger Agreement, each outstanding Keryx Share, excluding the Baupost Additional Shares, as defined below, and each outstanding Keryx equity award were converted into Akebia Shares and substantially similar Akebia equity awards, respectively, at an exchange ratio of 0.37433 for a total fair value consideration of $527.8 million consisting of the following (in thousands):


Fair value of 57,773,090 Akebia Shares	$	516,492
Fair value of 602,752 Akebia RSUs	304
Fair value of 3,967,290 Akebia stock options	10,958
Total consideration	$	527,754

Immediately prior to the Merger, Baupost Group Securities, L.L.C., or Baupost, agreed to convert its $164.7 million of Keryx’s Convertible Notes into 35,582,335 Keryx Shares, in accordance with the terms of the governing indenture agreement, in exchange for an additional 4,000,000 Keryx Shares, or the Baupost Additional Shares. The aggregate 39.6 million Keryx Shares were then converted into Akebia Shares at the 0.37433 exchange ratio. The fair value of the Baupost Additional Shares, on an as-converted basis, of $13.4 million has been excluded from the purchase price and recorded within selling, general and administrative expenses in the Company’s consolidated financial statements, as the issuance of those shares by Keryx is considered to be a separate transaction under ASC 805, since it was entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity.

The Company allocated the $527.8 million purchase price to the identifiable assets acquired and liabilities assumed in the business combination at their fair values as of December 12, 2018 as follows (in thousands):


Cash and cash equivalents	$	5,257
Inventory	235,597
Trade accounts receivable, net	15,834
Prepaid expenses and other current assets	8,399
Goodwill	55,053
Intangible assets:
Developed product rights for Auryxia	329,130
Other intangible assets	545
Property and equipment, net	3,646
Other assets	14,441
Accounts payable	(17,570)
Accrued expenses	(42,972)
Deferred tax liability	(35,096)
Debt	(15,000)
Fair value of unfavorable executory contract	(29,510)
Total purchase price	$	527,754

In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analysis of historical financial performance and estimates of future performance of Keryx’s business.

As part of the purchase price allocation, the Company identified developed product rights for Auryxia as the primary intangible asset. The fair value of the developed product rights for Auryxia was determined using the multi-period excess earnings method which is a variation of the income approach, and is a valuation technique that provides an estimate of the fair value of an asset based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable to the asset, after taking charges for the use of other assets employed by the business. Key estimates and assumptions used in this model were projected revenues and expenses related to the asset, estimated contributory asset charges, and a risk-adjusted discount rate of 20.0% used to calculate the present value of the future expected cash inflows from the asset. The intangible asset is being amortized on a straight-line basis over its estimated useful life, which at the time of the Merger was estimated to be nine years. During the second quarter of 2020, the Company identified indicators of impairment related to the developed product rights for Auryxia and recorded an impairment charge of $115.5 million and made a corresponding adjustment to the estimated useful life of the developed product rights for Auryxia from nine years to seven years. As part of the Company’s routine forecasting process during the fourth quarter of 2020, the Company prospectively adjusted the estimated useful life of the developed product rights for Auryxia from seven years to six years. This was not deemed an impairment indicator as of December 31, 2020 (see Note 9 for additional information).

The Company also identified executory contracts in the commercial supply agreements between Keryx and its contract manufacturers for Auryxia, which include future firm purchase commitments. These executory contracts were deemed to have an off-market element related to the amount of purchase commitments that exceed the current forecast and as such, the Company recorded a liability in purchase accounting. As of the acquisition date, the fair value of the off-market element was $29.5 million. During the year ended December 31, 2020, the Company recorded a $25.6 million increase to the liability for excess purchase commitments, and a corresponding charge to cost of goods sold largely driven by reductions in the short-term and long-term Auryxia revenue sales forecast. As of December 31, 2020 and 2019, the Company's liability for excess purchase commitments was $55.8 million and $30.2 million (see Note 16 for additional information).

The goodwill represents the excess of the purchase price over the estimated fair value of net assets acquired. The factors contributing to the recognition of goodwill were based on several strategic and synergistic benefits that were expected to be realized from the Merger. These benefits included the expectation that the combined company would establish itself as a leading renal company with enhanced position and large market opportunity, synergistic utilization of Keryx’s commercial organization, and strengthening the combined company’s financial profile. Such goodwill is not deductible for tax purposes.

In connection with the Merger, the Company identified a deferred tax liability of $35.1 million as a result of the difference in the book basis and tax basis related to the identifiable inventory, other intangible assets, net and other liability. In determining the deferred tax liability to be recorded the Company elected to first consider the recoverability of the deferred tax assets acquired in the acquisition before considering the recoverability of the acquirer’s existing deferred tax assets.