Acquisitions and Divestiture

6 Months Ended

Jun. 30, 2019

In February 2019, we completed the acquisition of Loxo Oncology, Inc. (Loxo). This transaction, as further discussed in this note below in Acquisition of a Business, was accounted for as a business combination under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated condensed financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of this acquisition have been included in our consolidated condensed financial statements from the date of acquisition.

Additionally, we acquired assets in development which are further discussed in this note below in Asset Acquisitions. Upon acquisition, the acquired in-process research and development (IPR&D) charges related to these products were immediately expensed because the products had no alternative future use. We incurred acquired IPR&D charges of $25.0 million and $161.9 million for the three and six months ended June 30, 2019, respectively, and $1.62 billion for the three and six months ended June 30, 2018.

Acquisition of a Business

Loxo Acquisition

Overview of Transaction

In February 2019, we acquired all shares of Loxo for a purchase price $6.92 billion, net of cash acquired. The accelerated vesting of Loxo employee equity awards was recognized as transaction expense included in asset impairment, restructuring, and other special charges during the six months ended June 30, 2019.

Under the terms of the agreement, we acquired a pipeline of investigational medicines, including LOXO-292, an oral RET inhibitor that has been granted Breakthrough Therapy designation by the U.S. Food and Drug Administration, and LOXO-305, an oral BTK inhibitor.

Assets Acquired and Liabilities Assumed

Our access to Loxo information was limited prior to the acquisition. As a consequence, we are in the process of determining fair values and tax bases of a significant portion of the assets acquired and liabilities assumed, including the identification and valuation of intangible assets, accrued expenses, and tax exposures. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date. The final determination may result in asset and liability fair values and tax bases that differ from the preliminary estimates and require changes to the preliminary amounts recognized.

The following table summarizes the preliminary amounts recognized for assets acquired and liabilities assumed as of the acquisition date:



Estimated Fair Value at February 15, 2019
Acquired in-process research and development	$	4,670.0
Definite-lived intangibles ⁽¹⁾	960.0
Deferred income taxes	(1,134.3		)
Other assets and liabilities - net	(31.4		)
Total identifiable net assets	4,464.3
Goodwill ⁽²⁾	2,453.4
Total consideration transferred - net of cash acquired	$	6,917.7

⁽¹⁾Contract-based intangibles, which are being amortized to cost of sales on a straight-line basis over their estimated useful lives, were expected to have a weighted average useful life of approximately 12 years from the acquisition date.

⁽²⁾The goodwill recognized from this acquisition is attributable primarily to future unidentified projects and products and the assembled workforce for Loxo and is not deductible for tax purposes.

Asset Acquisitions

The following table summarizes our asset acquisitions during the six months ended June 30, 2019 and June 30, 2018.



Counterparty	Compound(s) or Therapy	Acquisition Month	Phase of Development ⁽¹⁾	Acquired IPR&D Expense
AC Immune SA	Tau aggregation inhibitor small molecules for the potential treatment of Alzheimer's disease and other neurodegenerative diseases	January 2019	Pre-clinical	$	96.9
ImmuNext, Inc.	Novel immunometabolism target	March 2019	Pre-clinical	40.0
Avidity Biosciences, Inc.	Potential new medicines in immunology and other select indications	April 2019	Pre-clinical	25.0

Sigilon Therapeutics	Encapsulated cell therapies for the potential treatment of type 1 diabetes	April 2018	Pre-clinical	66.9
AurKa Pharma, Inc.	AK-01, an Aurora kinase A inhibitor	June 2018	Phase I	81.8
ARMO Biosciences, Inc.	Cancer therapy - pegilodecakin	June 2018	Phase III	1,475.8

⁽¹⁾The phase of development presented is as of the date of the arrangement and represents the phase of development of the most advanced asset acquired, where applicable.

In connection with these arrangements, our partners may be entitled to future royalties and/or commercial milestones based on sales should products be approved for commercialization and/or milestones based on the successful progress of compounds through the development process.

Divestiture

In April 2019, we announced an agreement to sell the rights in China for two legacy antibiotic medicines, as well as a manufacturing facility in Suzhou, China to Eddingpharm, a China-based specialty pharmaceutical company. Under terms of the agreement, we received a deposit of $75.0 million, and will receive a payment of $300.0 million upon successful closing of the transaction. The transaction is subject to customary closing conditions and regulatory approval.

Subsequent Event

In July 2019, we entered into a license agreement with Centrexion Therapeutics Corporation for CNTX-0290, a novel, small molecule somatostatin receptor type 4 agonist. CNTX-0290 is being studied in phase I clinical testing as a potential non-opioid treatment for chronic pain conditions. Under the terms of the agreement, we acquired worldwide rights for CNTX-0290 for an upfront payment of $47.5 million and success-based milestones and royalties. As a result of the transaction, we will record an acquired IPR&D charge of $47.5 million in the third quarter of 2019.