Acquisition of Centessa Subsidiaries

6 Months Ended

Jun. 30, 2021

Business Combination and Asset Acquisition [Abstract]

In January 2021, the Company entered into a merger agreement with the Centessa Subsidiaries whereby the Company acquired 100% of the outstanding Centessa Subsidiaries’ shares in exchange for, in aggregate, 44,758,079 ordinary shares of the Company. In addition, the Company issued certain contingent value rights to the selling shareholders of Palladio Biosciences, Inc.

As part of the acquisition, the Company issued replacement equity awards to select employees and consultants of certain Centessa Subsidiaries. The awards consisted of options and restricted shares with vesting provisions generally consistent with the original awards prior to the acquisition. The Company determined that a portion of the fair value of the replacement awards should be a component of consideration paid to acquire the Centessa Subsidiaries, with the remaining value of the award accounted for as post-combination share-based compensation expense.

The acquisition of each Centessa Subsidiary has been treated as a separate asset acquisition as the Company determined that none of the Centessa Subsidiaries meet the definition of a business due to substantially all of the fair value of each entity being concentrated in a single asset or group of assets which represent the IPR&D or the entity did not have the requisite inputs and substantive processes to be considered a business. The Company’s acquired IPR&D expense of $223.6 million, of which $3.1 million was in connection with transaction costs recognized prior to January 30, 2021, and reflects the fair value of consideration ascribed to the product candidates in each subsidiary, as the Company determined the assets had no alternative future use.

The total purchase price for the asset acquisitions was calculated as follows (amounts in thousands):


Estimated fair value of Centessa ordinary shares issued	$	261,387
Estimated fair value of replacement equity awards allocated to consideration paid	1,310
Estimated fair value of contingent value rights	22,618
Transaction costs	4,597
Total consideration given	$	289,912

The following table summarizes the assets acquired and liabilities assumed as of the acquisition date for the asset acquisitions (in thousands):


Assets acquired:
Cash and cash equivalents	$	68,038
Tax incentive receivable	8,752
Prepaid expenses and other current assets	2,551
Other assets	203
In-process research and development assets	223,593
Total assets acquired	303,137


Liabilities assumed:
Accounts payable	3,607
Accrued expenses and other current liabilities	3,128
Convertible notes	6,199
Loan with related party	291
Total liabilities assumed	13,225
Net assets acquired	$	289,912

The Company’s determinations of the fair value of the ordinary shares were performed using methodologies, approaches and assumptions in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, (“Practice Guide”). In accordance with the Practice Guide, the Centessa Successor considered the following methods for allocating the enterprise value across its classes and series of capital shares to determine the fair value of its ordinary shares at each valuation date.

•Option Pricing Method (“OPM”). The OPM estimates the value of the ordinary equity of the Company using the various inputs in the Black-Scholes option pricing model. The OPM treats the rights of the holders of ordinary shares as equivalent to that of call options on any value of the enterprise above certain break points of value based upon the liquidation preferences of the holders of the Company’s convertible preferred shares, as well as their rights to participation, and the share prices of the outstanding options. Thus, the value of the ordinary shares can be determined by estimating the value of its portion of each of these call option rights. Under this method, the ordinary shares have value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event, such as a merger or sale. Given the ordinary shares represents a non-marketable equity

interest in a private enterprise, an adjustment to the preliminary value estimates had to be made to account for the lack of liquidity that a shareholder experiences. This adjustment is commonly referred to as a discount for lack of marketability (“DLOM”).

•Probability-Weighted Expected Return Method (“PWERM”). The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes considered by the Company, as well as the economic and control rights of each share class.

•Hybrid Method. The Hybrid Method is a hybrid between the PWERM and OPM, estimating the probability-weighted value across multiple scenarios, but using the OPM to estimate the allocation of value within one or more of those scenarios. Weighting allocations are assigned to the OPM and PWERM methods factoring possible future liquidity events.

The Company estimated the fair value of its ordinary shares based on the Hybrid Method. Subjective factors considered by the Company’s board of directors and management included the pending addition of new executive members and the election of new independent directors to the Company’s board of directors, as well as definitive plans to undertake an IPO. There are significant judgments and estimates inherent in the determination of the fair value of ordinary shares. These judgments and estimates include assumptions regarding the Company’s future operating performance, the time to complete an initial public offering or other liquidity event and the determination of the appropriate valuation methods. If the Company had made different assumptions, its ordinary shares could have been significantly different.

At the time of the acquisitions, all outstanding unvested share-based awards of the Centessa Predecessor Group vested immediately. The unrecognized compensation expense of $4.1 million was recognized at the time of the acquisitions.

In connection with the acquisition of the Centessa Subsidiaries, the Company issued contingent value rights (CVR), to former shareholders and option holders of Palladio. The CVR represent the contractual rights to receive payment of $39.7 million upon the first patient dosed in a Phase 3 pivotal study of lixivaptan for the treatment of autosomal dominant polycystic kidney disease (“ADPKD”) in any of the United States, France, Germany, Italy, Spain, the United Kingdom and Japan (designated the ACTION Study). The contingent CVR milestone, if triggered, will be settled through the issuance of the Company’s ordinary shares equal to the amount of the total CVR payable based on the per share value of ordinary shares at the milestone date.

The Company determined that the CVR should be accounted for as a liability in accordance with ASC 480. Accordingly, the fair value of the contingent consideration is assessed quarterly until settlement. To estimate the fair value of the contingent consideration, the Company applied a cumulative probability of achieving the clinical milestone and applied it to the potential payout. While the Company will consider the status and on-going results of the Phase 3a safety study (designated the ALERT Study), an open-label study for which enrollment is on-going, the Company intends to commence the Phase 3 pivotal study (designated the ACTION study) in parallel with the ALERT Study. Therefore, the probability of commencing the ACTION study and dosing the first patient is high and the milestone is currently expected in the first quarter of 2022. The cumulative probability of dosing the first patient in the ACTION Study was applied to the CVR payout to arrive at a fair value of $22.6 million as of the acquisition date of the Centessa Subsidiaries. The change in fair value from the date of acquisition to June 30, 2021 of $11.3 million is reflected in the consolidated and combined statement of operations and comprehensive loss, and results in a fair value of the CVR liability as of June 30, 2021 of $33.9 million.