Acquisitions

6 Months Ended

Jun. 30, 2011

Acquisitions

Acquisitions

3. Acquisitions

Acquisition of Taligen Therapeutics, Inc.

On January 28, 2011, we acquired all of the outstanding capital stock of Taligen Therapeutics, Inc. (Taligen) in a transaction accounted for under the acquisition method of accounting for business combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed of Taligen were recorded as of the acquisition date at their respective fair values. The reported consolidated financial condition after completion of the acquisition reflect these fair values. Taligen's results of operations are included in the consolidated financial statements from the date of acquisition.

We made initial payments of $111,773 in cash and may make additional future payments of up to $367,000 in contingent milestone payments. Prior to the acquisition, Taligen was a privately held development-stage biotechnology company involved in the development of preclinical compounds including product candidates for the potential treatment of patients with ophthalmic diseases such as age-related macular degeneration (AMD), as well as other novel antibody and protein regulators of the complement inflammatory pathways. We acquired Taligen to broaden our portfolio of preclinical compounds and to expand our capabilities in translational medicine.

During the three and six months ended June 30, 2011, we incurred approximately $707 and $10,076, respectively, in costs related to the Taligen acquisition. Acquisition-related costs include the following:

	Three months ended	Six months ended
	June 30,	June 30,
	2011	2011
Separately-identifiable employee costs	$                                 -	$                   6,597
Professional fees	41	2,729
Changes in fair value of contingent consideration	666	750
	$                             707	$               10,076

The Taligen acquisition included contingent consideration which would obligate us to make up to $367,000 in cash milestone payments to the former Taligen shareholders upon achievement of various development and commercial milestones.

The initial fair value of contingent consideration was estimated at $11,634, which was recorded as a noncurrent liability. We determined the fair value of these obligations to pay additional milestone payments using various estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a 10-year BBB industrial index rate of 4.9%, which is representative of a market participant assumption. The range of estimated milestone payments is from zero if no clinical milestones are achieved for any product to $367,000 if six products gain both U.S and European marketing approval.

Subsequent to the acquisition date, we have adjusted the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the passage of time as development work progresses towards the achievement of the milestones. At June 30, 2011, the fair value of the contingent consideration for Taligen was $12,384.

A reconciliation of upfront payments in accordance with the purchase agreement to the total purchase price is presented below:

	Taligen
Upfront payment in accordance with agreement	$   111,773
Separately-identifiable employee costs	(6,259)
Total consideration transferred	$ 105,514
Estimated fair value of contingent consideration	11,634
Total purchase price	$ 117,148

The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective fair values summarized below:

	Taligen
Cash and cash equivalents	$       2,678
Purchased technology	5,000
In-process research and development	59,500
Other assets	555
Assets acquired	67,733
Deferred tax liability (net)	(9,567)
Other liabilities assumed	(1,084)
Liabilities assumed	(10,651)
Goodwill	60,066
Net assets acquired	$ 117,148

Asset categories acquired in the Taligen acquisition included working capital, fixed assets, purchased technology and in-process research and development (IPR&D). The fair value of working capital was determined to approximate book values.  During the three months ended June 30, 2011, we increased the fair value of the contingent consideration in the purchase allocation by $1,321 related to circumstances in effect at the acquisition date, with a corresponding adjustment to goodwill.  The purchase price allocation will be finalized as the information necessary to complete the analysis is obtained, but not later than one year from the acquisition date.

Purchased technology includes a platform technology that can be used for the development of other compounds.  The estimated fair value was determined using the relief from royalty method, an approach under which fair value is estimated to be the present value of royalties saved because we own the intangible asset and therefore do not have to pay a royalty for its use.  Our estimated useful life of the purchased technology is 12 years.

Intangible assets associated with IPR&D projects relate to two preclinical Taligen product candidates. Management estimated the acquisition-date fair value of intangible assets related to IPR&D to be $59,500. The estimated fair value was determined using the cost approach. The cost approach estimates the costs that would be incurred to replace the assets being purchased.  The fair value using the cost approach was dependent on an estimated rate of return on historical costs incurred of 25%, which represents a rate of return that a market participant would expect for these assets.  Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment on an annual basis, as well as between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to our acquisition of Taligen has been recorded as a noncurrent asset and is not amortized, but is subject to an annual review for impairment.  The factors that contributed to the recognition of goodwill included the synergies that are specific to our business and not available to market participants, including our unique ability to leverage our knowledge in the areas of complement inhibition and rare diseases for the development of the Taligen compounds and technology, the acquisition of a talented workforce that brings translational medicine expertise to all of our preclinical compounds and our ability to utilize our research capacity to the development of additional compounds using acquired technology.

We recorded a deferred tax liability of $9,959.  This amount was primarily comprised of $21,537 related to IPR&D, offset by acquired net operating losses and research credit carryovers totaling $13,338.

We have determined that separate presentation of Taligen's results of operations is impracticable for the three and six months ended June 30, 2011 as results are not separated tracked due to the integration of Taligen into our operations upon acquisition.

Pro forma financial information (unaudited)

The following unaudited pro forma information presents the combined results of operations for the three months ended June 30, 2010 and the six months ended June 30, 2011 and 2010 as if the acquisition of Taligen had been completed on January 1, 2010.  The pro forma results do not reflect any material adjustments, operating efficiencies or potential cost savings which may result from the consolidation of operations.

	Three months ended	Six months ended
	June 30,	June 30,
	2010	2011	2010
Revenues	$         125,834	$         351,825	$         243,412
Net income	18,477	60,469	36,714
Earnings per common share
Basic	$               0.10	$               0.33	$               0.21
Diluted	$               0.10	$               0.32	$               0.20

Acquisition of Orphatec Pharmaceuticals GmbH Assets

On February 8, 2011, we acquired certain patents and assets from Orphatec Pharmaceuticals GmbH (Orphatec) related to an investigational therapy for patients with molybdenum cofactor deficiency (MoCD) Type A, an ultra-rare genetic disorder characterized by severe brain damage and rapid death in newborns. The acquisition was accounted for under the acquisition method of accounting for business combinations. Orphatec is a privately held development-stage biotechnology company with headquarters in Cologne, Germany.

We made initial payments of $3,050 in cash and may make additional future payments of up to $42,000 in contingent milestone payments. We will also make future payments to Orphatec for manufacturing, development, and other services, which we estimate to be at a rate that approximates fair value.  We acquired these assets to advance our mission to provide life-transforming treatments for patients with severe and life-threatening disease states.

During the three and six months ended June 30, 2011, we incurred approximately $293 and $852, respectively, in costs related to the Orphatec acquisition.  Acquisition-related costs include the following:

	Three months ended	Six months ended
	June 30,	June 30,
	2011	2011
Professional fees	$                              214	$                      721
Changes in fair value of contingent consideration	79	131
	$                             293	$                    852

                 The Orphatec acquisition included contingent consideration which would obligate us to make up to $42,000 in cash milestone payments to the former Orphatec shareholders upon various development, regulatory and commercial milestones.

The initial fair value of contingent considerations was $5,086, which was recorded as a noncurrent liability. We determined the fair value of these obligations to pay additional milestone payments using various estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted at the rate of 4.9% for development milestones and 21% for commercial milestones, which is representative of a market participant assumption. The range of estimated milestone payments is from zero if no products gain market approval to $42,000 if all indications for up to two products gain both U.S and European marketing approval and reach applicable sales levels. 

Subsequent to the acquisition date, we have measured the contingent consideration arrangement at fair value with changes in fair value recognized in operating earnings. Changes pertaining to facts and circumstances that existed as of the acquisition date will be recognized as adjustments to goodwill. Changes in fair values reflect new information about the IPR&D assets and the passage of time. In the absence of new information, changes in fair value will only reflect the passage of time as development work progresses towards the achievement of the milestones. At June 30, 2011, the fair value of the contingent consideration for Orphatec was $5,217.

A reconciliation of upfront payments in accordance with the purchase agreement to the total purchase price is presented below:

	Orphatec
Upfront payments in accordance with agreement	$       3,050
Estimated fair value of contingent consideration	5,086
Total purchase price	$      8,136

The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective fair values summarized below:

	Orphatec
In-process research & development	$       8,050
Other noncurrent assets	73
Assets acquired	8,123
Goodwill	13
Net assets acquired	$      8,136

Asset categories acquired in the Orphatec acquisition included fixed assets and IPR&D. The purchase price allocation will be finalized as the information necessary to complete the analysis is obtained, but not later than one year from the acquisition date.

Intangible assets associated with IPR&D projects relate to the preclinical product candidate. Management estimated the acquisition-date fair value of intangible assets related to IPR&D to be $8,050. The estimated fair value was determined using the income approach, which discounts expected future cash flows to present value. We estimated the fair value using a present value discount rate of 23%, which is based on the estimated weighted-average cost of capital for companies substantially similar to that of Orphatec. This is comparable to the estimated internal rate of return for their operations and represents the rate that market participants would use to value the intangible assets. The projected cash flows from the IPR&D project was based on key assumptions such as: estimates of revenues and operating profits related to the project considering its stage of development; the time and resources needed to complete the development and approval of the product candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a drug compound such as obtaining marketing approval from the FDA and other regulatory agencies; and risks related to the viability of and potential alternative treatments in any future target markets.

We do not consider the acquisition of Orphatec to be a material business combination and therefore have not disclosed the pro forma results of operations.