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.

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 CBR acquisition 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 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”). Measurement period adjustments recorded in the fourth quarter of 2015 consisted primarily of reductions to accounts receivable, inventories, prepaid and other current assets and property, plant and equipment totaling $1.9 million and increases to accrued expenses and long-term liabilities totaling $0.5 million, which resulted in an increase to goodwill of $1.8 million, net of $0.6 million of deferred taxes.

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 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 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 trade names and trademark intangible asset is deemed to be an indefinite-lived asset, which is not amortized but is subject to periodic assessments for impairment. See Note H, “Goodwill and Intangible Assets” for additional information.

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.

We incurred approximately $11.2 million of acquisition-related costs in 2015 related to the CBR acquisition. These costs primarily represented financial advisory fees, legal fees, due diligence and other costs and expenses.

In connection with the CBR acquisition, we incurred a $6.8 million bridge loan commitment fee, which was included in other income (expense) in our 2015 consolidated statement of operations and paid in the third quarter of 2015.

During the post-acquisition period in 2015, CBR generated approximately $24.1 million of revenue. Separate disclosure of CBR’s earnings for the post-acquisition period in 2015 is not practicable due to the integration of CBR’s operations into our business upon acquisition.

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 and its existing commercial product, Makena, 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 as follows:


•	A one-time payment of $100.0 million payable upon achievement of $300.0 million in aggregate net sales in any consecutive 12-month period, commencing in the month following the Lumara Health Acquisition Date (“the First Milestone”); plus

•

A one-time payment of $100.0 million payable upon achievement of $400.0 million in aggregate net sales in any consecutive 12-month period commencing in the month following the last month in the First Milestone period (the “Second Milestone”); if the Third Milestone payment (described below) has been or is required to be made prior to achieving the Second Milestone, the Second Milestone payment shall be reduced from $100.0 million to $50.0 million; plus


•	A one-time payment of $50.0 million payable if aggregate net sales equal or exceed $700.0 million in any consecutive 24 calendar month period (which may include the First Milestone period) (the “Third Milestone”); however, no Third Milestone payment will be made if the Second Milestone payment has been or is required to be made in the full amount of $100.0 million; plus


•	A one-time payment of $100.0 million payable upon achievement of $500.0 million in aggregate net sales in any consecutive 12-month period commencing in the month following the last month in the Second Milestone period (the “Fourth Milestone”); plus


•	A one-time payment of $50.0 million payable upon achievement of $200.0 million in aggregate net sales in each of the five (5) consecutive calendar years from and including the 2015 calendar year to the 2019 calendar year (the “Fifth Milestone”).

In the event that the conditions to more than one contingent payment are met in any calendar year, any portion of the total amount of contingent payment due in such calendar year in excess of $100.0 million shall be deferred until the next calendar year in which less than $100.0 million in contingent payments is due. This contingent consideration is recorded as a liability and measured at fair value based upon significant unobservable inputs. We paid the former Lumara Health security holders $100.0 million in the fourth quarter of 2016 based on our achievement of the First Milestone during the third quarter of 2016.

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 December 31, 2016, the funds held in escrow have been fully distributed to the former Lumara Health security holders.

The fair value of the 3.2 million shares of AMAG common stock was determined based on the closing price of our common stock on the NASDAQ Global Select Market (“NASDAQ”) of $34.88 per share on November 11, 2014, the closing price immediately prior to the closing of the transaction.

The fair value of the contingent milestone payments was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of Makena from December 1, 2014 through December 31, 2019. The cash flows were discounted at a rate of 5%, which we believe is reasonable given the level of certainty of the pay-out.

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

The measurement period adjustments recorded in 2015 consisted primarily of a $7.2 million reduction to our Makena revenue reserves and a $5.4 million reduction related to net deferred tax liabilities, partially offset by a $4.5 million increase in the purchase price associated with the final settlement of net working capital with the former stockholders. These measurement period adjustments were reflected as current period adjustments during 2015 in accordance with the guidance in ASU 2015-16.

The gross contractual amount of accounts receivable at the Lumara Health Acquisition Date was $40.5 million. The $30.3 million fair value of inventories included a fair value step-up adjustment of $26.1 million, which will be amortized and recognized as cost of product sales in our consolidated statements of operations as the related inventories are sold. We recognized $4.9 million, $11.6 million and $1.3 million of the fair value adjustment as cost of product sales during the years ended December 31, 2016, 2015 and 2014, respectively. An additional $0.9 million and $1.2 million of the fair value adjustment was recognized as research and development expense during the year ended December 31, 2016 and 2015, respectively. The remaining $6.2 million is estimated to be recognized as follows: $2.1 million in 2017 and $4.1 million in 2018.

The fair value amounts for the Makena base technology and IPR&D 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 Makena base technology and the IPR&D using the income approach. Some of the more significant assumptions used in the income approach for these assets include the estimated net cash flows for each year for each project or product, the discount rate that measures the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors, including the major risks and uncertainties associated with the timely and successful completion of the IPR&D projects, such as legal and regulatory risk.

The fair value of the acquired IPR&D asset represents the value assigned to acquired research and development projects that, as of the Lumara Health Acquisition Date, had not established technological feasibility and had no alternative future use, including certain programs associated with the Makena next generation development program to extend the brand franchise beyond the February 2018 exclusivity date, such as new routes of administration, the use of new delivery technologies, as well as reformulation technologies. We believe the fair values assigned to the Makena base technology and IPR&D assets are based upon reasonable estimates and assumptions given available facts and circumstances as of the Lumara Health Acquisition Date. If these assets are not successful or successfully developed, sales and profitability may be adversely affected in future periods, and as a result, the value of the assets may become impaired.

Both AMAG and Lumara Health had deferred tax assets for which full valuation allowances were provided in the pre-acquisition financial statements. However, we considered certain of the deferred tax liabilities recorded in acquisition accounting as sources of income to support realization of Lumara Health’s deferred tax assets. We recorded a net deferred tax liability of $193.3 million in our consolidated balance sheet in acquisition accounting using a combined federal and state statutory income tax rate of 38.8%. The net deferred tax liability represents the $295.7 million of deferred tax liabilities recorded in acquisition accounting (primarily related to the fair value adjustments to Lumara Health’s inventories and identifiable intangible assets) offset by $102.4 million of deferred tax assets acquired from Lumara Health which we have determined, are ‘more likely than not’ to be realized. See Note J, “Income Taxes,” for additional information.

We incurred approximately $9.5 million of acquisition-related costs in 2014 related to the acquisition of Lumara Health. These costs primarily represented financial advisory fees, legal fees, due diligence and other costs and expenses.

During the post-acquisition period in fiscal 2014, Lumara Health generated $22.5 million of revenue from sales of Makena. Separate disclosure of Lumara Health’s earnings for the post-acquisition period in fiscal 2014 is not practicable due to the integration of Lumara Health’s operations into our business upon acquisition.

During 2015, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the Lumara Health Acquisition Date.

Unaudited Pro Forma Supplemental Information

The following supplemental unaudited pro forma information presents our revenue and net income (loss) on a pro forma combined basis, including CBR and Lumara Health, assuming that the CBR acquisition occurred on January 1, 2014 and that the Lumara Health acquisition occurred on January 1, 2013. For purposes of preparing the following pro forma information, certain items recorded during 2015, such as the $11.2 million of acquisition-related costs, the $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 excluded from 2015 and reflected in 2014. In addition, certain items recorded in 2014, such as the $153.2 million tax benefit and the $9.5 million of acquisition-related costs incurred in connection with the acquisition of Lumara Health, are excluded from 2014 and reflected as having occurred in 2013. The pro forma amounts do not include any expected cost savings or restructuring actions which may be achievable or may occur subsequent to the acquisition of Lumara Health or CBR, or the impact of any non-recurring activity. The following table presents the unaudited pro forma consolidated results (in thousands):



	Years Ended December 31,
	2015	2014
Pro forma combined revenues	490,451	364,447
Pro forma combined net income (loss)	28,217	(57,739	)

The pro forma adjustments reflected in the pro forma combined net income (loss) in the above table primarily represent adjustments to historical amortization of intangible assets, to historical depreciation of property, plant and equipment, and reductions to historical CBR revenues due to fair value purchase accounting adjustments to intangible assets, property, plant and equipment and deferred revenue. In addition, the pro forma combined net income (loss) includes increased interest expense due to the increase in term loan borrowings and the issuance of $500.0 million aggregate principal amount of 7.875% Senior Notes due 2023 (the “2023 Senior Notes”) 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.