BUSINESS COMBINATIONS

As part of our strategy to expand our product and service portfolio, in August 2015, we acquired CBR and the CBR Services and in November 2014, we acquired Lumara Health and its product Makena. In addition, in June 2013, we entered into a license agreement (the “MuGard License Agreement”) with Abeona Therapeutics, Inc. (“Abeona”) pursuant to which we acquired the U.S. commercial rights to MuGard for the management of oral mucositis and stomatitis (the “MuGard Rights”).

CBR Acquisition

On August 17, 2015 (the “CBR Acquisition Date”), we acquired CBR for $700.0 million in cash consideration, subject to estimated working capital, indebtedness and other adjustments. We believe CBR is a strong strategic fit for our growing business and offers a unique opportunity to reach a broader population of expectant mothers who may benefit from our product offerings in the maternal health space, including Makena.

We accounted for the acquisition of CBR as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price of an acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. We have allocated the purchase price to the net tangible and intangible assets acquired and liabilities assumed, based on available information and various assumptions we believed were reasonable, with the remaining purchase price recorded as goodwill.

The following table summarizes the components of the total purchase price paid for CBR, as adjusted for the final net working capital, indebtedness and other adjustments (in thousands):



	Total Acquisition Date Fair Value
Cash consideration	$	700,000
Estimated working capital, indebtedness and other adjustments	(17,837		)
Purchase price paid at closing	682,163
Cash paid on finalization of the net working capital, indebtedness and other adjustments	193
Total purchase price	$	682,356

The following table summarizes the fair values assigned to the CBR assets acquired and liabilities assumed by us along with the resulting goodwill at the CBR Acquisition Date, as adjusted for certain measurement period adjustments for CBR recorded since the CBR Acquisition Date (in thousands):



	Total Acquisition Date Fair Value
Accounts receivable	$	8,660
Inventories	3,825
Prepaid and other current assets	8,480
Restricted cash - short-term	30,752
Property, plant and equipment	29,401
Customer relationships	297,000
Trade name and trademarks	65,000
Favorable lease asset	358
Deferred income tax assets	5,062
Other long-term assets	496
Accounts payable	(2,853		)
Accrued expenses	(13,770		)
Deferred revenues - short-term	(3,100		)
Payable to former CBR shareholders	(37,947		)
Deferred income tax liabilities	(149,873		)
Other long-term liabilities	(506		)
Total estimated identifiable net assets	$	240,985
Goodwill	441,371
Total	$	682,356

During 2016, we recorded measurement period adjustments related to the filing of pre-acquisition federal and state income tax returns and the finalization of other tax-related matters. These measurement period adjustments resulted in a net increase to goodwill of $0.3 million and were reflected as current period adjustments during the second quarter of 2016 in accordance with the guidance in ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”).

The gross contractual amount of accounts receivable at the CBR Acquisition Date of $11.7 million was adjusted to its fair value of $8.7 million. The fair value amounts for CBR’s customer relationships, trade names and trademarks were determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the assets (i.e., its highest and best use). We determined the fair value of the customer relationships, using an income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining life. Some of the more significant assumptions used in the income approach from the perspective of a market participant include the estimated net cash flows for each year for the identifiable intangible asset, the discount rate that measures the risk inherent in each cash flow stream, as well as other factors. The fair value of the trade names and trademarks was determined using the relief from royalty method, which is also an income approach. We believe the fair values assigned to the CBR customer relationships, and the trade names and trademarks are based upon reasonable estimates and assumptions given available facts and circumstances as of the CBR Acquisition Date. If these assets are not successful, sales and profitability may be adversely affected in future periods, and as a result, the value of the assets may become impaired.

The customer relationships will be amortized to selling, general and administrative expenses based on an economic consumption model over an expected useful life of approximately 20 years. The trade names and trademark intangible asset is deemed to be an indefinite-lived asset, which is not amortized but will be subject to periodic assessments of impairment.

Based on the fair value adjustments primarily related to deferred revenue and identifiable intangible assets acquired, we recorded a net deferred tax liability of $144.8 million in acquisition accounting using a combined federal and state statutory income tax rate of 37.0%. The net deferred tax liability represents the $149.9 million of deferred tax liabilities recorded in acquisition accounting, primarily related to the fair value adjustments to CBR’s deferred revenue and identifiable intangible assets, partially offset by $5.1 million of deferred tax assets acquired from CBR.

During the third quarter of 2016, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the CBR Acquisition Date.

Lumara Health Acquisition

On November 12, 2014, the Lumara Health Acquisition Date, we acquired Lumara Health at which time Lumara Health became our wholly-owned subsidiary. By virtue of the acquisition, we acquired Lumara Health’s existing commercial product, Makena. Under the terms of the acquisition agreement, we acquired 100% of the equity ownership of Lumara Health, excluding the assets and liabilities of the Women’s Health Division and certain other assets and liabilities, which were divested by Lumara Health prior to closing, for $600.0 million in cash, subject to certain net working capital and other adjustments, and issued approximately 3.2 million shares of our common stock, having a value of approximately $112.0 million at the time of closing, to the holders of common stock of Lumara Health. The acquisition of Lumara Health provided a strategic commercial entry into the maternal health business. The addition of Makena, the only FDA-approved therapy to reduce the risk of preterm birth in certain at-risk women, added a complementary commercial platform to our portfolio and transformed us into a multi-product specialty pharmaceutical company.

We agreed to pay additional merger consideration, up to a maximum of $350.0 million, based upon the achievement of certain net sales milestones of Makena for the period from December 1, 2014 through December 31, 2019. This contingent consideration is recorded as a liability and measured at fair value based upon significant unobservable inputs. During the three months ended September 30, 2016, based on our achievement of the $300.0 million annual net Makena sales milestone, the first $100.0 million milestone to the former Lumara Health security holders was triggered, which we expect to pay in the fourth quarter of 2016. See Note E, “Fair Value Measurements,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and Note C, “Business Combinations,” to the Financial Statements in our Annual Report for additional information.

The following table summarizes the components of the total purchase price paid for Lumara Health, as adjusted for the final net working capital and other adjustments (in thousands):



	Total Acquisition Date Fair Value
Cash consideration	$	600,000
Fair value of AMAG common stock issued	111,964
Fair value of contingent milestone payments	205,000
Estimated working capital and other adjustments	821
Purchase price paid at closing	917,785
Less:
Cash received on finalization of the net working capital and other adjustments	(562		)
Cash acquired from Lumara Health	(5,219		)
Total purchase price	$	912,004

At the closing, $35.0 million of the cash consideration was contributed to a separate escrow fund to secure the former Lumara Health security holders’ obligations to indemnify us for certain matters, including breaches of representations and warranties, covenants included in the Lumara Health acquisition agreement, payments made by us to dissenting stockholders, specified tax claims, excess parachute claims, and certain claims related to the Women’s Health Division of Lumara Health, which was divested by Lumara Health prior to the closing. As of September 30, 2016, the funds held in escrow have been fully distributed to the former Lumara Health security holders.

The following table summarizes the fair values assigned to assets acquired and liabilities assumed by us along with the resulting goodwill at the Lumara Health Acquisition Date, as adjusted for certain measurement period adjustments for Lumara Health recorded during 2015 (in thousands):



	Total Acquisition Date Fair Value
Accounts receivable	$	36,852
Inventories	30,300
Prepaid and other current assets	3,322
Deferred income tax assets	102,355
Property and equipment	60
Makena base technology	797,100
IPR&D	79,100
Restricted cash - long term	1,997
Other long-term assets	3,412
Accounts payable	(3,807		)
Accrued expenses	(36,561		)
Deferred income tax liabilities	(295,676		)
Other long-term liabilities	(4,563		)
Total estimated identifiable net assets	$	713,891
Goodwill	198,113
Total	$	912,004

During 2015, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the Lumara Health Acquisition Date. See Note C, “Business Combinations,” to the Financial Statements in our Annual Report for additional information.

Unaudited Pro Forma Supplemental Information

The following supplemental unaudited pro forma information presents our revenues and net income (loss) on a pro forma basis, assuming that the CBR acquisition occurred on January 1, 2014. For purposes of preparing the following pro forma information, certain items recorded during the three and nine months ended September 30, 2015, such as $8.5 million and $11.2 million of acquisition-related costs, respectively, $10.4 million loss on debt extinguishment and $9.2 million of other one-time fees and expenses incurred in connection with the CBR acquisition financing, are reflected in 2014 and 2015 as if the CBR acquisition occurred on January 1, 2014. The pro forma amounts do not include any expected cost savings or restructuring actions which may be achievable or which have occurred subsequent to the acquisition of CBR or the impact of any non-recurring activity. The following table presents unaudited pro forma results (in thousands, except per share data):



	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
Pro forma revenues	$	110,244		$	381,650
Pro forma net income (loss)	$	(5,116	)	$	24,220
Pro forma net income (loss) per diluted share	$	(0.15	)	$	0.69

The pro forma adjustments reflected in the pro forma net income (loss) in the above table primarily represent adjustments to historical amortization of intangible assets, adjustments to historical depreciation of property, plant and equipment and reductions to historical CBR revenues due to fair value adjustments in purchase accounting to intangible assets, property, plant and equipment and deferred revenue, respectively. In addition, the pro forma combined net income (loss) includes increased interest expense due to the increase in total term loan borrowings and the issuance of the 2023 Senior Notes (as defined below) in connection with the CBR acquisition. Income taxes for all periods were adjusted accordingly. This pro forma financial information is not necessarily indicative of our consolidated operating results that would have been reported had the transactions been completed as described herein, nor is such information necessarily indicative of our consolidated results for any future period.

Goodwill

In connection with the CBR acquisition, we recognized $441.4 million of goodwill, primarily due to the synergies expected from combining our operations with CBR and to deferred tax liabilities related to fair value adjustments of intangible assets and deferred revenue. In connection with the Lumara Health acquisition, we recognized $198.1 million of goodwill, primarily due to the net deferred tax liabilities recorded on the fair value adjustments to Lumara Health’s inventories and identifiable intangible asset. The $639.5 million of goodwill resulting from the CBR and Lumara Health acquisitions is not deductible for income tax purposes.