Annual report pursuant to Section 13 and 15(d)

Business Combinations

v3.8.0.1
Business Combinations
12 Months Ended
Dec. 31, 2017
Business Combinations [Abstract]  
Business Combinations
Business Combinations

Acquisition of Crystal

On October 6, 2017, the Company 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, Ligand was to pay Crystal shareholders $27.2 million in cash including $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 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 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, 2017, $0.3 million of the initial $27.2 million of cash consideration remained outstanding.

The transaction was accounted for as a business combination. At the closing of the acquisition, the Company recorded a $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 the Company’s estimated corporate credit rating, and averaged to approximately 4.6%. Refer to Note 4 Fair Value Measurement for further discussion. The liability will be periodically assessed based on events and circumstances related to the underlying milestones, and any change in fair value will be recorded in the Company’s 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, 2017.

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

(12,558
)
     Intangible asset with finite life - core technology

36,000

     Goodwill
13,752

Total consideration
$
35,743



The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, purchased intangibles and deferred revenue, as well as the estimated fair value of contingent consideration described above 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.
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 $13.8 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.
    
Acquisition of OMT

On January 8, 2016, the Company 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 transaction was accounted for as a business combination and 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
5

     Income tax receivable
136

     Prepaid expenses and other current assets
1

     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.

The following table presents supplemental pro forma information for the three and twelve months ended December 31, 2016 and December 31, 2015, as if the acquisition of OMT had occurred on January 1, 2015 (in thousands except for income per share):
 
Three months ended
Twelve months ended
December 31,
December 31,
2016
 
2015
2016
 
2015
Revenue
$
38,185

 
$
24,571

$
111,449

 
$
80,365

Net (loss) income
$
(3,126
)
 
$
5,888

$
632

 
$
222,788

 
 
 
 
 
 
 
Basic (loss) income per share:
$
(0.15
)
 
$
0.30

$
0.03

 
$
11.26

Diluted (loss) income per share:
$
(0.15
)
 
$
0.27

$
0.03

 
$
10.50



The unaudited pro forma consolidated results include pro forma adjustments that assume the acquisition occurred on January 1, 2015. The primary adjustments include: (i) the $0.3 million and $0.9 million for the three and twelve months ended December 31, 2015, respectively, for share based compensation expenses related to the stock awards issued to the retained OMT employees after the acquisition, (ii) additional intangible amortization expense of  $2.1 million and $6.3 million was included in the three and twelve months ended December 31, 2015, respectively and (iii) a platform license fee of $3.0 million paid by OMT during the twelve months ended December 31, 2015. The license agreement was terminated upon acquisition by Ligand. The adjustments also include $2.5 million license revenue recognized by OMT from January 1, 2016 to the acquisition date. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition on January 1, 2015. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisition.