Annual report pursuant to Section 13 and 15(d)

Business Combinations

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Business Combinations
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Business Combinations Business Combinations
As set forth below, we completed three acquisitions from January 1, 2016 through December 31, 2018, and all were accounted for as business combinations. We applied the acquisition method of accounting. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition. For each acquisition, we did not incur any material acquisition related costs.

Vernalis Acquisition

In October 2018, we acquired Vernalis, a structure-based drug discovery biotechnology company for $43.0 million, funded through cash on hand. The acquisition of Vernalis increases our overall portfolio of fully-funded programs. As Vernalis' operations are not considered material, pro forma information is not provided.

The preliminary allocation of the consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):

Cash and cash equivalents  $ 34,286 
Restricted cash  2,836 
Other assets  6,383 
Accounts payable and accrued liabilities  (3,403)
Restructuring and product reserves  (7,118)
Deferred revenue  (746)
Intangibles assets with finite life - core technology 7,000 
Goodwill 3,740 
$ 42,978 

None of the goodwill is deductible for tax purposes. The fair value of the core technologies were based on the discounted cash flow method that estimated the present value of the hypothetical royalty/milestone streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 34.0%. The fair value of the core technology is being amortized on a straight-line basis over the weighted average estimated useful life of approximately nine years.

The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, purchased intangibles and deferred revenue are provisional. The accounting for these amounts falls within the measurement period and therefore we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

Crystal Acquisition

On October 6, 2017, we acquired all of the assets and liabilities of Crystal. Crystal is a biotechnology company focused in avian genetics and the generation of fully-human therapeutic engineering of animals for the generation of fully-human therapeutic antibodies through its OmniChicken® technology. Under the terms of the agreement, we were to pay Crystal selling shareholders $27.2 million in cash including a $2.2 million working capital adjustment, and up to an additional $10.5 million of cash consideration based on Crystal’s achievement of certain research and business milestones prior to December 31, 2019. In addition, Crystal’s selling shareholders will receive 10% of revenues realized by Ligand above $15 million between the closing date and December 31, 2022 from existing collaboration agreements between Crystal and three of its collaborators, and Crystal’s selling shareholders will receive 20% of revenues above $1.5 million generated between the closing date and
December 31, 2022 pursuant to a fourth existing collaboration agreement with a large pharmaceutical company. As of December 31, 2018, $0.2 million of the initial $27.2 million of cash consideration remained outstanding.

At the closing of the acquisition, we recorded an $8.4 million contingent liability for amounts potentially due to Crystal shareholders. The initial fair value of the liability was determined using a probability weighted income approach incorporating the estimated future cash flows from potential milestones and revenue sharing. These cash flows were then discounted to present value using discount rates based on our estimated corporate credit rating, and averaged to approximately 4.6%. Refer to Note 4 Fair Value Measurement for further discussion. The liability has been periodically assessed based on events and circumstances related to the underlying milestones, and any changes in fair value are recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different than the carrying amount of the liability. There was no change in the fair value of the contingent liabilities from the initial valuation date to December 31, 2018.

The aggregate acquisition consideration was determined to be $35.7 million, consisting of (in thousands):
Cash paid to Crystal shareholders $ 26,877 
Cash payable to Crystal Shareholders 336 
Assumed liabilities 129 
Fair value of contingent consideration 8,401 
Total consideration $ 35,743 

The acquisition consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):

Cash and cash equivalents $ 224 
Accounts receivable 2,513 
Prepaid expenses and other assets 201 
Property and equipment, net 589 
Current liabilities assumed (354)
Deferred revenue (4,624)
Deferred tax liabilities, net

(9,503)
Intangible asset with finite life - core technology

36,000 
Goodwill 10,697 
Total consideration $ 35,743 

The fair value of the core technology, or OmniChicken technology, was based on the discounted cash flow method that estimated the present value of a hypothetical royalty stream derived from the licensing of the OmniChicken technology. These projected cash flows were discounted to present value using a discount rate of 10.8%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 20 years.

The excess of the acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed was $10.7 million and was recorded as goodwill, which is not deductible for tax purposes and is primarily attributable to Crystal’s potential revenue growth from combining the Crystal and Ligand businesses and workforce, as well as the benefits of access to different markets and customers.

OMT Acquisition

On January 8, 2016, we acquired substantially all of the assets and liabilities of OMT. OMT is a biotechnology company engaged in the genetic engineering of animals for the generation of human therapeutic antibodies through its OmniAb® technology. The aggregate acquisition consideration was $173.4 million, consisting of (in thousands, except per share amounts):
Cash consideration $ 96,006 
Total share consideration:
Actual number of shares issued 790 
Multiplied by: Ligand closing share price on January 8, 2016 98 
Total share consideration $ 77,373 
Total consideration $ 173,379 

The acquisition consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):

Cash and cash equivalents $ 3,504 
Accounts receivable
Income tax receivable 136 
Prepaid expenses and other current assets
Deferred tax liabilities, net (55,708)
Intangible asset with finite life - core technology 167,000 
Liabilities assumed (1,528)
Goodwill 59,969 
Total consideration $ 173,379 

The fair value of the core technology, or OMT's OmniAb technology, was based on the discounted cash flow method that estimated the present value of a hypothetical royalty stream derived from the licensing of the OmniAb technology. These projected cash flows were discounted to present value using a discount rate of 15.5%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 20 years.

The excess of the acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed was $60.0 million and was recorded as goodwill, which is not deductible for tax purposes and is primarily attributable to OMT’s potential revenue growth from combining the OMT and Ligand businesses and workforce, as well as the benefits of access to different markets and customers.