CBI 0th Life Sciences Accounting and Reporting Congress March 8, 204
Introductions Brent Sabatini Director Technical Accounting & Controls Prateep Menon, CFA Principal Life Sciences Advisory Services One Amgen Center Drive Thousand Oaks, California 9320 Office + 805447083 sabatini@amgen.com 633 Broadway New York, NY, 006 Office + 22 436 650 pmenon@deloitte.com 2
Agenda I. Applying ASC 805 Business Combination of Asset Acquisition? I. Review significant accounting differences between a business combination and an asset acquisition II. Review guiding principles and the definition of a business III. Additional considerations for the pharma/life sciences industry IV. Licensing and Manufacturing examples V. SEC Comment Letters II. Contingent Payments Valuation and Economic considerations I. Deal Structuring Trends II. Contingent Consideration Payments, Valuation Method Comparison III. Case Study IV. Day 2 Implications 3
Applying ASC 805 Business Combination or Asset Acquisition? 4
Why does it matter? Differences in accounting Measurement of assets and liabilities Area Business Combination Asset Acquisition Fair value (some exceptions) Allocate purchase consideration based on relative fair values Transaction costs Expense as incurred Record as a component of the consideration transferred Contingent Consideration IPR&D Generally record at fair value; mark to market through P&L postclose if a liability Capitalize as an indefinite lived asset until project completed or abandoned Recognize when resolved and the consideration is paid or becomes payable Expense assuming no alternative future use Goodwill Recognize as standalone asset Cannot be recognized. The excess fair value of the consideration is allocated on relative fair value basis Leases classification Adjusted Earnings (some companies) Reassessment of lease classification is not required, unless significantly modified Amortization of intangibles / Fair Value adjmts. to contingent consideration are adjusted out of earnings Reassess lease classification No adjustments 5
What is a business? A business is an integrated set of assets and activities capable of being managed to provide a return to its owners. Businesses consist of () inputs (e.g., assets, resources), (2) processes (e.g., systems, standards, or protocols) applied to those inputs, that are capable of creating (3) outputs (e.g., economic benefits, such as revenues or lower costs). [ASC 8050554] A business need not include all of the inputs or processes that the seller used in operating that business if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes. [ASC 8050555] Generally the acquired set of activities and assets must have at least some inputs and processes in order to be considered a business Missing inputs or processes can be readily acquired without significant delay or effort by a market participant Does not need to be a legal entity 6
Distinguishing Business Combinations from Asset Acquisitions In making this determination, it is important to:. Identify the elements in the acquired group (i.e., the assets purchased and processes transferred); 2. Assess the capability of those elements to generate economic benefits; and 3. Assess the impact of any missing elements on a market participant's ability to generate economic benefits Business Combination Key business processes acquired (e.g., Has begun planned principal activities) Entity could manage the assets to provide a return to its owners (e.g., Is pursuing a plan to produce outputs) Key elements are missing but can be easily replicated or obtained Able to produce "Day " outputs Presence of liabilities and/or goodwill Asset Acquisition No processes acquired or only administrative processes acquired Entity could not manage the assets to provide a return to its owners without combining them with other assets Key elements are missing and cannot be easily replicated or obtained Not able to create economic benefits No goodwill present Developmentstage entities might not yet have outputs, but if a set has begun operations, has inputs and processes, and is following a plan to produce outputs, it is likely to qualify as a business. 7
Other factors / questions to consider Common processes acquired: Clinical manufacturing organization (CMO) or other supply agreements Clinical contract organization (CRO) or other R&D service agreements Generally, a CRO and CMO arrangement results in the provision of services that advance the technology and, therefore, would view it as a process. Acquirer must consider whether any process is actually being acquired, or whether there was a simultaneous separate transaction to provide certain services during the transitional period. If the supply contract results in the delivery of other inputs (i.e., raw materials), then it would be viewed as an input. However, if the supply contract results in the provision of services that advance the technology, then it would be viewed as a process. Consider the form of what is being delivered under a supply agreement (true raw materials or processed materials such as API)? Technology transfers (e.g., know how development transfers, consultation, and manufacturing transfers) Usually shortterm in nature In general, technology transfer is an input that enhances the value of the product rather than being a separate process in and of itself. 8
Other factors / questions to consider Does the development phase of the license have any effect on the analysis (i.e., likelihood of obtaining commercial sales or ability to sublicense)? Need to consider in the analysis of determining whether a market participant would be capable of using the acquired set to generate outputs. Generally, product candidates that are closer to regulatory approval (Phase 3 molecule vs. Phase molecule) are more likely a business. The earlier the stage of development the lower the likelihood there are inputs or functioning processes. Generally, the later the stage of development the higher the probability of generating some kind of return on investment (e.g., ability to sublicense with return on investment) Ability to sublicense may allow you to generate economic benefits without FDA approval. Further along in development, the better the understanding of the R&D program and the more options to generate economic benefits. These are only considerations and not determinative. 9
Example : Facts: Acquirer inlicenses a product candidate from Biotech at the completion of phase 2. No ongoing contracts are assumed by Acquirer (Biotech CRO contract completed at the end of phase 2), but the Acquirer obtains manufacturing knowhow. Acquirer may sublicense the product. Would this be a business? No. Because the Acquirer only obtains inputs (the license to the product candidate, manufacturing knowhow), the acquired set does not constitute a business. The ability to monetize the product by immediately sublicensing it does not relate to the primary revenue generating activity of a market participant which would be to continue the development activities (no implied processes). This is different than a situation in which Acquirer inlicenses an approved product that is generating revenues immediately before and after the transaction (implied processes). What if contemporaneously with the acquisition, Acquirer enters into a new arrangement at market terms with the same CRO. The CRO was not a party to the acquisition agreement between Acquirer and Biotech. Would this be a business? No. Because the Acquirer only obtains inputs (the license to the product candidate & knowhow), the acquired set does not constitute a business (similar to above). 0
Example 2: Facts: Acquirer inlicenses a product candidate from Biotech during phase 2 and assumes the related clinical research organization (CRO) contract. Acquirer may sublicense the product. Would this be a business? Possibly. Because the acquirer obtains inputs (the license to the product candidate) and processes (the CRO), which can generate outputs when applied to the product candidate, it may be considered a business. Ability to sublicense the product candidate may allow the Acquirer allow the acquirer to gain economic benefits prior to FDA approval. Assess the capability of generating economic benefits. What if the agreement prohibited you from sublicensing the compound? Less likely. If the inability to sublicense the product candidate would apply to all market participants and, therefore, all market participants could generate a return only upon FDA approval, notwithstanding that the buyer has assumed inputs and processes, then generally, no.
Example 3: Facts: Pharma Co (P) acquires a manufacturing plant (the facility ) in AnyCountry. Acquisition of the facility includes the plant s tangible assets, employees, and business licenses/registrations. P intends to immediately modify the facility to produce active pharmaceutical ingredients (e.g., raw materials) instead of finished dosage forms (e.g., finished goods). Because of the planned modifications, P does not acquire the facility s existing customer contracts and will not continue to sell any of the products previously manufactured in the facility. Would this be a business? Yes. The facility contains the elements necessary for producing outputs Inputs (i.e., tangible assets, intangible assets, employees) Processes (i.e., the production of finished dosage forms) P s intended use for the facility is not a factor the assessment is from the perspective of a market participant. Because the plant was operating and producing outputs upon acquisition, a market participant could have acquired the plant and continued to operate it in that manner. P concludes the facility is a business. 2
SEC Comment Letters The SEC may request supporting information regarding an entity s determination under ASC 805 We note that you accounted for the acquisition of assets of [Entity A] as the acquisition of a business under the guidance of FASB ASC 805. Please provide us with your analysis of why you believe that the acquisition was one of a business rather than of assets. Please explain to us in necessary detail why you believe this transaction constitutes the acquisition of assets, rather than of a business. be as detailed as necessary in your supplemental response, citing applicable literature you relied upon, so that we may understand your conclusions. 3
SEC Comment Letters Please provide us your analysis supporting your conclusion that the acquisition of XYZ is not a business to be accounted for under the acquisition method of accounting. Reference for us the authoritative literature you rely upon to support your anticipated accounting. At a minimum, please address the following items in your response: Please confirm that you will acquire the entire legal entity, XYZ, in this transaction. Please elaborate on your claim that XYZ does not have any processes. In your response tell us how XYZ has managed the development of PROGRAM and/or any other product candidates without strategic management, operational and/or resource management processes that at a minimum include the: Design and implementation of a development plan for the candidate(s); Execution of the development plan(s) including, but not limited to, product formulation, performing preclinical toxicology studies, filing an IND with the FDA, performing clinical trials and having a prenda meeting with the FDA; 4
Response to SEC We have not claimed that XYZ is without any processes. Rather, our accounting treatment is based on the fact that we will not acquire any processes from XYZ XYZ has no capabilities or infrastructure for commercialization, supply chain management, manufacturing, business development, etc. Nor do they have anything in place to support the production of outputs All processes used to bring the product to market will be from our existing processes and infrastructure used to produce, commercialize, support and maintain our current products If there is additional work, such as a requirement to conduct a phase 3 clinical trial, or an analysis of data for preparing the NDA is required from any contract research organizations (CROs), contract manufacturing organizations (CMOs) or other vendors, we will enter into those contracts directly with the vendors. If there is additional R&D work required subsequent to the closing date, we would use our existing infrastructure and/or the existing processes Based on the above, we have concluded that the acquisition of XYZ will be accounted for as an asset acquisition. We believe this conclusion is consistent with industry practice. That is, entities that acquire assets or inlicense compounds with manufacturing knowhow (but without any processes, such as CMO or CRO capabilities or employees) generally do not treat this type of agreement as a business combination. 5
Contingent Considerations
Number of Deals Average $(Millions) Deal Structuring Trends 00% 90% 80% 70% 60% 50% Percentage of deals with contingent payments has increased steadily Percent Distribution of Contingent Structure M&As among all Life Science M&As by Year (2002 203) 99% 99% 97% 95% 97% 92% 9% 89% 88% 87% 83% 78% 77% 85% 50 45 40 35 30 25 Average contingent payment s increasing as a proportion of total consideration Number of Contingent M&As, Average Deal Value, and Contingent Payments by Year (2002 203) 45 3 37 30 27 29 37 34 $800 $700 $600 $500 $400 40% 30% 20% 0% 0% Contingent Structure M&As 202 (n = 65) 2007202 Average (n = 54) 20 5 0 5 6 8 7 0 $0 2002 2003 2004 2005 2006 2007 2008 2009 200 20 202 203* Announced Avg. Total Value ($M) Announced Avg. Contingent Value ($M) M&As with All Payment Upfront #Contingent M&As *Excludes $38.7B acquisition of Alcon by Novartis in 2008 Source: Source: Percent Distribution of Lead Product Deloitte Stages For Therapeutic Product Company M&As (2007 202) Deloitte Recap Recap LLC 35% 45% LLC Phase II Marketed / Approved 22% Phase II 52% Marketed / Approved 3 $300 $200 $00 Source: The Deloitte Recap of 202 deals. *Data through March 8, 203. 0% 0% Early Stage Products 20% 30% 40% 50% 60% 70% 80% 90% 00% Late Stage Products Lead Molecule Preclinical Phase I Phase II Phase III Registration Stage Marketed / Approved Source: Deloitte Recap LLC 7
Contingent Consideration Payments Commercial Outcomes. Percentage of underlying metric 2. Fixed Payment Contingent Consideration Regulatory Approvals Fixed Payment Probability Based Discounted Cash Flow Method Contingent Consideration Valuation Options Pricing Method Monte Carlo Simulation 8
Contingent Valuation Inputs Regulatory Milestone Roadmap Commercial Milestone Roadmap Number of Scenarios Regulatory Milestones Discrete Model (Cash Flows) Probabilities Riskadjusted Discount Rate Commercial Milestones Discrete Model (Cash Flows) Continuous Model Probabilities Riskadjusted Discount Rate Option Pricing Monte Carlo Significant Assumptions Considerations Significant Assumptions Considerations Probability of Success Discount Rate Probabilities typically built from statistical studies related to product approval rates OR Management input based on internal data / expectations Judgment based, which raises risk and audit support challenges, but really the only way to properly value the contingency using a discrete approach If milestone is dependent on the outcome of another work stream/regulatory process, probabilities should be dependent Discount rate should be riskadjusted to reflect the probability of success estimates. By incorporating probabilities, technical risk factors are addressed For regulatory milestones, there are no commercial risk attributes, so proper discount should typically be a cost of debt or something similar Probability of Success Number of Scenarios Discount Rate Option Pricing vs. MonteCarlo Same as those assumed for the regulatory milestones Scenarios should reflect a number of potential cases base, upside, downside, regulatory delay, etc. As there are more risks than just technical success, typically an industry based discount rate or something slightly higher is appropriate to reflect commercial risks of the forecast. Use of multiple scenarios can mitigate commercial risk elements Depending on the structure of the deal terms, a continuous model might be appropriate. Typically this requires defining a base case financial projection path and then using inputs surrounding earnings/revenue volatility and mins/max deviations to provide boundaries for the calculation 9
Contingent Valuation Method Comparison Cash Flow Modeling (Probability Trees) Description Pros Cons Fair value of contingent consideration estimated using a discrete number of scenarios with projected cash flows and corresponding probabilities of occurrence Cash flows are discounted using risk adjust present value factor Easy to understand and to calculate and audit the value of the contingent payments. Corporate development teams often rely on probability trees when structuring a deal Discrete set of scenarios may not represent full set of outcomes Certain contingent structures with maximum and minimum payments are difficult to incorporate Model inputs are highly subjective to subject matter experts Monte Carlo Analysis (Real World Framework) BlackScholes (Risk Neutral) Discrete scenarios are replaced with continuous distributions for items such as projected revenue or EBITDA. Contingent payoffs are then estimated under each path of the simulation, and the value of the contingent consideration is equal to the average discounted payoff across all simulation paths using a riskadjusted discount rate. First, the risk neutral distribution for items such as revenue or EBITDA is estimated. Then, the payoff is estimated for each simulated path. The value of the contingent consideration is estimated by averaging the discounted payoffs across multiple simulation paths, with a discount rate equal to the risk free rate (in absence of credit risk). Continuous distributions may better represent the range of possible outcomes for variables such as revenue, EBITDA or unit sales (ie, captures outliers). Can more easily account for contingent structures such as catchup provisions. No need to estimate a riskadjusted discount rate. Continuous distributions may better represent the range of possible outcomes for variables such as revenue, EBITDA or unit sales (ie, captures outliers). Can more easily account for contingent structures such as catchup provisions. There may be a lack of data to support the shape of each continuous distribution. Model inputs may need to rely on subject matter specialist judgments which are subject to cognitive and motivational biases. Difficult to update on a quarterly basis The robustness of input assumptions are dependent on the availability of publicly observable metrics for comparable companies/assets. Model results can be sensitive to volatility and correlation estimates. Difficult to update on a quarterly basis 20
A Case Study Transaction Overview Assets Liabilities Buyer Seller Description Rationale Pharma Co Oncology Inc. Phama Co is acquiring Oncology Inc. for $50M (upfront cash) plus certain contingent payments tied to the regulatory and commercial success of Oncology Inc s technology, ONC234 Bolster oncology pipeline Working Capital Close Date July, 204 Purchase Consideration Payment Nominal Payment Timing PTS PV of PTS Adjusted Payment Upfront cash $50 M 7//4 00% $50 M Regulatory Milestones Phase II A Approval $50 M 2/3/4 40% $20 M Phase II B Approval $00 M //6 85% $32 M Phase III Approval $200 M 6/30/9 65% $35 M Commercial Milestone Sales > $700 Million $300 M 2/3/22 22% $29 M Total Payments $700 M $66 M PP&E Intangible (IPR&D) Goodwill Upfront Cash Payment Regulatory Milestones Equity Commercial Milestones 2
Transaction Economics 2 Valuation of Oncology Inc. using probability adjusted forecast (PV of expected Future Payments) USD $000,000 s 204 205 206 2022 Year N Probability Adjusted Revenues $0 $0 $0 $30 $8 Probability Adjusted Costs $2 $9 $8 $8 $26 Probability Adjusted Free Cash Flow ($8) ($6) ($2) $72 $00 Discount Rate % Business Enterprise Value $66 M Prob. Weighted Future Payments $66 M Versus Equivalent Valuation of Oncology Inc. using unadjusted forecast (Lumpsum cash value) USD $000,000 s 204 205 206 2022 Year N Unadjusted Revenues $0 $0 $0 $590 $89 Unadjusted Costs $2 $2 $53 $86 $20 Unadjusted Free Cash Flow ($8) ($4) ($35) $327 $454 Discount Rate % Standard Approach Cash Flows Probabilityadjusted cash flows Discount Rate Implied rate of return Evaluated based on required / target rate of return for acquisition Purchase Price Sum of all expected payments PTS and PV adjustments Deal Economics Expected value Will unlikely be realized Alternative Approach Cash Flows Unadjusted cash flows Assumes commercial approval Discount Rate Consistent with implied IRR Purchase Price Product of cash flows and estimated rate of return Business Enterprise Value Present Value of Future Payments $827 M $625 M Upside Potential Deal Economics Implied cash value of the business assuming one lumpsum payment 22
Transaction Economics Transaction Structure UpFront Payment $50M Total Potential Payments $700M Total Regulatory Milestone Payments $350MM Present Value of Payments $625M Commercial Milestone Payment $300M Transaction IRR % $202 M $459 M $827 M $6 M $625 M $66 M $50 M UpFront Payment Downside Protection Standard Approach PV of expected Future Payments Sacrificed Upside Due to Milestone Payments Present Value of Nominal Payments Maximum Upside Potential to Buyer Value Assuming Success 23
A Case Study Alternate Case Transaction Overview Assets Liabilities Buyer Seller Description Rationale Pharma Co Oncology Inc. Phama Co is acquiring Oncology Inc. for $50M (upfront cash) plus certain contingent payments tied to the regulatory and commercial success of Oncology Inc s technology, ONC234 Bolster oncology pipeline Working Capital Close Date July, 204 Purchase Consideration Payment Nominal Payment Timing PTS PV of PTS Adjusted Payment Upfront cash $50 M 7//4 00% $50 M Regulatory Milestones Phase II A Approval $50 M 2/3/4 40% $20 M Phase II B Approval $50 M //6 85% $47 M Phase III Approval $300 M 6/30/9 65% $52 M Commercial Milestone Sales > $700 Million $500 M 2/3/22 22% $48 M Total Payments $.05 B $27M PP&E Intangible (IPR&D) Goodwill Upfront Cash Payment Regulatory Milestones Equity Commercial Milestones 24
Transaction Economics Alternate Case 2 Valuation of Oncology Inc. using probability adjusted forecast (PV of expected Future Payments) USD $000,000 s 204 205 206 2022 Year N Probability Adjusted Revenues $0 $0 $0 $30 $8 Probability Adjusted Costs $2 $9 $8 $8 $26 Probability Adjusted Free Cash Flow ($8) ($6) ($2) $72 $00 Discount Rate % 8.% Business Enterprise Value $66 M $228 M Prob. Weighted Future Payments $27 M $228 M Versus Valuation of Oncology Inc. using unadjusted forecast (Lumpsum cash value) Very Low IRR Standard Approach Cash Flows Probabilityadjusted cash flows Discount Rate Implied rate of return Evaluated based on required / target rate of return for acquisition Purchase Price Sum of all expected payments PTS and PV adjustments Deal Economics Expected value Will unlikely be realized Alternative Approach USD $000,000 s 204 205 206 2022 Year N Unadjusted Revenues $0 $0 $0 $590 $89 Unadjusted Costs $2 $2 $53 $86 $20 Unadjusted Free Cash Flow ($8) ($4) ($35) $327 $454 Discount Rate % Business Enterprise Value Present Value of Future Payments $827 M $930 M Indications Upside Down at Normal IRR Cash Flows Unadjusted cash flows Assumes commercial approval Discount Rate Consistent with implied IRR Purchase Price Product of cash flows and estimated rate of return Deal Economics Implied cash value of the business assuming one lumpsum payment 25
Transaction Economics Alternate Case Transaction Structure UpFront Payment $50M Total Potential Payments $.05B Total Regulatory Milestone Payments $500MM Present Value of Payments $930M Commercial Milestone Payment $500M Transaction IRR 8% $03 M $60 M $930 M $67 M $827 M $27 M $50 M UpFront Payment Downside Protection Standard Approach PV of expected Future Payments Sacrificed Upside Due to Milestone Payments Value Assuming Success at Normal IRR (%) Maximum Downside Potential to Buyer Present Value of Nominal Payments 26
Day 0 Results Valuation Date 7//4 Date Value of IPR&D asset $57 M Using probability adjusted DCF Phase 2a Payment $20 M Phase 2b Payment $32 M Phase 3 Payment $35 M Commercial Payments $29 M Total Milestone Payments $6 M Using probability adjusted DCF Upfront Payment $50 M 27
Scenario Day 0 Assumptions 7//4 Date Probability of passing Phase II(A) Trials 40% Discount Rate % Probability of passing Phase II(B) Trials 85% Probability of passing Phase III Trials 65% No Sales Adjustments No R&D Expense Adjustment Valuation of IPR&D asset and Contingent Liabilities Value of IPRD asset ($ 000s) 57,000 Reset PV of Milestone Payments ($ 000s) 66,000 BEV ($ 000s) 66,000 IPR&D Asset Value Waterfall ($ 000s) Update Chart Business Enterprise Value Waterfall ($ 000s) 80,000 60,000 40,000 80,000 60,000 40,000 Update Chart 20,000 20,000 00,000 80,000 60,000 57,000 57,000 00,000 80,000 60,000 66,000 66,000 40,000 20,000 95.2 40,000 20,000 Original Value Sales R&D expenses Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value * PTRS Stands for Probability of Technical and Regulatory Success Present Value of Commercial Milestone Payments ($ 000s) 35,000 29,000 30,000 25,000 20,000 5,000 0,000 5,000 00 Original Value Sales Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value Present Value of Regulatory Milestone Payments ($ 000s) 40,000 35,000 35,000 32,000 30,000 25,000 20,000 20,000 5,000 0,000 5,000 Cum. Sales >$700 M by 2022 Approval of Phase 2a Dec 30, 204 Approval of Phase 2 b Jan 0, 206 Approval of Phase 3 Jun 0, 209 28
Scenario Day 2 Assumptions 7//206 Date Probability of passing Phase II(A) Trials 00% Discount Rate % Probability of passing Phase II(B) Trials 00% Probability of passing Phase III Trials 65% No Sales Adjustments No R&D Expense Adjustment Valuation of IPR&D asset and Contingent Liabilities Value of IPRD asset ($ 000s) 68,000 Reset PV of Milestone Payments ($ 000s) 28,000 BEV ($ 000s) 65,000 IPR&D Asset Value Waterfall ($ 000s) Update Chart Business Enterprise Value Waterfall ($ 000s) 700,000 600,000 500,000 93,000 700,000 600,000 500,000 98,000 Update Chart 400,000 300,000 35,000 68,000 400,000 300,000 332,000 65,000 200,000 200,000 00,000 20,000 95.2 00,000 22,000 Original Value Sales R&D expenses Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value * PTRS Stands for Probability of Technical and Regulatory Success Present Value of Commercial Milestone Payments ($ 000s) 20,000 05,000 00,000 80,000 60,000 00 Original Value Sales Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value Present Value of Regulatory Milestone Payments ($ 000s) 20,000 3,000 00,000 80,000 60,000 40,000 40,000 20,000 Cum. Sales >$700 M by 2022 20,000 Approval of Phase 2a Dec 30, 204 Approval of Phase 2 b Jan 0, 206 Approval of Phase 3 Jun 0, 209 29
Scenario 2 Future Value (Failure) Assumptions 7//206 Date Probability of passing Phase II(A) Trials 00% Discount Rate % Probability of passing Phase II(B) Trials 0% Probability of passing Phase III Trials N/A No Sales Adjustment No R&D Expense Adjustment Valuation of IPR&D asset and Contingent Liabilities Value of IPRD asset ($ 000s) Reset PV of Milestone Payments ($ 000s) BEV ($ 000s) IPR&D Asset Value Waterfall ($ 000s) Update Chart Business Enterprise Value Waterfall ($ 000s) 600,000 500,000 600,000 500,000 Update Chart 400,000 35,000 400,000 332,000 300,000 200,000 525,000 300,000 200,000 553,000 00,000 20,000 95.2 00,000 22,000 Original Value Sales R&D expenses Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value * PTRS Stands for Probability of Technical and Regulatory Success Present Value of Commercial Milestone Payments ($ 000s) 0 0 0 0 Cum. Sales >$700 M by 2022 00 Original Value Sales Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value Present Value of Regulatory Milestone Payments ($ 000s) 0 0 0 0 Approval of Phase 2a Dec 30, 204 Approval of Phase 2 b Jan 0, 206 Approval of Phase 3 Jun 0, 209 30
Scenario 3 Future Value (Successful Outcome) Assumptions 7//206 Date Probability of passing Phase II(A) Trials 00% Discount Rate % Probability of passing Phase II(B) Trials 00% Probability of passing Phase III Trials 70% 20% Increase in Sales Expectations No R&D Expense Adjustment Valuation of IPR&D asset and Contingent Liabilities Value of IPRD asset ($ 000s) 808,000 Reset PV of Milestone Payments ($ 000s) 234,000 BEV ($ 000s) 850,000 IPR&D Asset Value Waterfall ($ 000s) Update Chart Business Enterprise Value Waterfall ($ 000s) 900,000 800,000 700,000 600,000 66,000 2,000 900,000 800,000 700,000 600,000 7,000 69,000 Update Chart 500,000 400,000 300,000 200,000 00,000 20,000 378,000 808,000 42,000 Original Value Sales R&D expenses Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value * PTRS Stands for Probability of Technical and Regulatory Success Present Value of Commercial Milestone Payments ($ 000s) 20,000 3,000 00,000 80,000 60,000 40,000 95.2 00 500,000 400,000 300,000 200,000 00,000 399,000 850,000 44,000 22,000 Original Value Sales Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value Present Value of Regulatory Milestone Payments ($ 000s) 40,000 2,000 20,000 00,000 80,000 60,000 40,000 20,000 Cum. Sales >$700 M by 2022 20,000 Approval of Phase 2a Dec 30, 204 Approval of Phase 2 b Jan 0, 206 Approval of Phase 3 Jun 0, 209 3
Scenario 4 Future Value (Mixed Outcome) Assumptions 7//206 Date Probability of passing Phase II(A) Trials 00% Discount Rate % Probability of passing Phase II(B) Trials 00% Probability of passing Phase III Trials 60% 75% Decrease in Sales Expectations 25% Increase in R&D Expense Valuation of IPR&D asset and Contingent Liabilities Value of IPRD asset ($ 000s) 3,000 Reset PV of Milestone Payments ($ 000s) 04,000 BEV ($ 000s) 39,000 IPR&D Asset Value Waterfall ($ 000s) Update Chart Business Enterprise Value Waterfall ($ 000s) 250,000 250,000 Update Chart 200,000 200,000 50,000 00,000 50,000 20,000 57,000 4,000 74,000 22,000 4,000 3,000 95.2 50,000 00,000 50,000 208,000 56,000 78,000 23,000 4,000 39,000 Original Value Sales R&D expenses Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value * PTRS Stands for Probability of Technical and Regulatory Success Present Value of Commercial Milestone Payments ($ 000s) 0 0 0 0 Cum. Sales >$700 M by 2022 00 Original Value Sales Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value Present Value of Regulatory Milestone Payments ($ 000s) 20,000 04,000 00,000 80,000 60,000 40,000 20,000 Approval of Phase 2a Dec 30, 204 Approval of Phase 2 b Jan 0, 206 Approval of Phase 3 Jun 0, 209 32
Scenario 5 Future Value (Mixed Outcome) Assumptions 7//206 Date Probability of passing Phase II(A) Trials 00% Discount Rate % Probability of passing Phase II(B) Trials 00% Probability of passing Phase III Trials 70% 5% Decrease in Sales Expectations 20% Increase in R&D Expense Valuation of IPR&D asset and Contingent Liabilities Value of IPRD asset ($ 000s) 545,000 Reset PV of Milestone Payments ($ 000s) 22,000 BEV ($ 000s) 575,000 IPR&D Asset Value Waterfall ($ 000s) Update Chart Business Enterprise Value Waterfall ($ 000s) 600,000 500,000 400,000 300,000 200,000 00,000 20,000 3,000 9,000 46,000 75,000 254,000 545,000 700,000 600,000 500,000 400,000 300,000 200,000 95.2 00,000 2,000 32,000 79,000 268,000 49,000 Update Chart 575,000 Original Value Sales R&D expenses Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value * PTRS Stands for Probability of Technical and Regulatory Success Present Value of Commercial Milestone Payments ($ 000s) 00,000 9,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 0,000 Cum. Sales >$700 M by 2022 00 Original Value Sales Phase 2a Phase 2b Phase 3 Discount Rate Adjusted Value Present Value of Regulatory Milestone Payments ($ 000s) 40,000 2,000 20,000 00,000 80,000 60,000 40,000 20,000 Approval of Phase 2a Dec 30, 204 Approval of Phase 2 b Jan 0, 206 Approval of Phase 3 Jun 0, 209 33
Financial Statement Implications Scenario (Normal) Scenario 2 (Failure) Scenario 3 (Success) Scenario 4 (Mixed) Scenario 5 (Mixed) IPR&D Value / Impairment $57M Yes N/A Yes $26M N/A Fair Value of Contingent Consideration Net P&L Impact $6M $0M $234M $04M $22M N/A $4M Loss $8M Loss $4M Loss $96M Loss Scenario (Day 0) Debit Credit Rationale IPR&D $57M Book IPR&D Asset Goodwill $9M Remainder from Purchase Booked as Goodwill Contingent Liability $6M Book Contingent Liability Up Front Equity $50M Beginning Equity Scenario 2 Debit Credit Rationale IPR&D $57M IPR&D Value Decreases to $0 Fully Impaired Contingent Liability $6M Contingency Liability Goes to $0 Due to Failure Fully Written Off Equity Change $4M Additional Equity WriteDown for Impairment of IPR&D *Gain or loss is recorded in P&L flows through to equity. These scenarios do not include the impact of underlying asset impairments. 34
Financial Statement Implications Scenario Scenario 2 Scenario 3 Scenario 4 Scenario 5 IPR&D Impairment $57M Yes N/A Yes $26M N/A Fair Value of Contingent Consideration Net P&L Impact $6M $0M $234M $04M $22M N/A $4M Loss $8M Loss $4M Loss $96M Loss Scenario 3 Debit Credit Rationale IPR&D NA NA IPR&D Value Increase, No Change in Balance Sheet Contingent Liability $8M Contingency Increases Due to Successful Results Equity Change $8M P&L Loss for Liability Increase Scenario 4 Debit Credit Rationale IPR&D $26M IPR&D Value Decreases, Impairment of $26M Recorded Contingent Liability $2M Regulatory Milestone Values decreases Equity Change $4M Remaining P&L Loss for Impairment *Gain or loss is recorded in P&L flows through to equity. These scenarios do not include the impact of underlying asset impairments. 35
Financial Statement Implications Scenario Scenario 2 Scenario 3 Scenario 4 Scenario 5 IPR&D Impairment $57M Yes N/A Yes $26M N/A Fair Value of Contingent Consideration Net P&L Impact $6M $0M $234M $04M $22M N/A $4M Loss $8M Loss $4M Loss $96M Loss Scenario 5 Debit Credit Rationale IPR&D NA NA IPR&D Value Increase, No Change in Balance Sheet Contingent Liability $96M Contingency Increases Equity Change $96M P&L Loss for Liability Increase *Gain or loss is recorded in P&L flows through to equity. These scenarios do not include the impact of underlying asset impairments. 36
Questions & Comments 37