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Corlieve transaction

9 Months Ended

Sep. 30, 2021

3 Corlieve transaction

On July 30, 2021 (“Acquisition Date”), the Company acquired Corlieve. Following Corlieve’s formation in November 2019, Corlieve obtained exclusive licenses to certain patents from two French research institutions that continue to collaborate with the Company. At the same time Corlieve also obtained an exclusive license from Regenxbio Inc. to use AAV9 to deliver any sequence that affects the expression of the Glutamate inotropic receptor kainate type subunit 2 (“GRIK 2”) gene sequence in humans. Corlieve and Regenxbio Inc. simultaneously entered into a collaboration plan related to agreed joint preclinical research and development activities. At the Acquisition Date, Corlieve and its Swiss subsidiary, Corlieve Therapeutics AG, employed seven employees.

The Company evaluated the Corlieve transaction as to whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. Based on the provisional fair values of the gross assets acquired, the Company determined the screen test was not met. The Company further analyzed whether or not the acquired inputs and processes that have the ability to create outputs would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.

Identifiable assets and liabilities of Corlieve, including identifiable intangible assets, were recorded at their fair values as of the Acquisition Date, when the Company obtained control. The excess of the fair value of the consideration transferred over the fair value of the net assets acquired was recorded as goodwill.

The following table summarizes the provisional fair values assigned to assets acquired and the liabilities assumed by the Company, along with the resulting goodwill, as of the Acquisition Date:




	Allocation
		€
	(in thousands)
Consideration
Cash	€	44,876
Contingent consideration		20,165
Liability related to mandatorily redeemable shares		720
Fair value of total consideration	€	65,760

Recognized amounts of identifiable assets acquired and liabilities assumed
Current assets including €2.8 million of cash	€	2,902
Property, plant and equipment		34
Identifiable intangible asset		53,267
Current liabilities		(1,129)
Deferred tax liability, net		(11,472)
Debt		(1,352)
Other non-current liabilities		(260)
Fair value of net assets acquired		41,990
Goodwill		23,770
	€	65,760

Consideration

On the Acquisition Date, the Company acquired 97.7% of the outstanding ordinary shares of Corlieve for EUR 44.9 million ($53.3 million). The Company is contractually required to acquire the remaining outstanding ordinary shares in February 2022 following the expiration of a minimum holding period. The Company recorded a liability related to these mandatorily redeemable shares for an amount of EUR 0.7 million ($0.9 million) as of the Acquisition Date. The Company financed the transaction from its cash on hand.

In addition, Corlieve’s former shareholders are eligible to receive up to EUR 35.8 million ($42.5 million) upon achievement of certain development milestones through Phase I/II and EUR 143.1 million ($169.9 million) upon achievement of certain milestones associated with Phase III development and obtaining approval to commercialize Corlieve’s target candidate for the treatment of temporal lobe epilepsy (“AMT-260” or “TLE”) in the United States of America and the European Union. The Company may elect to pay up to 25% of such milestone payments through the issuance of the Company’s ordinary shares.

As of the Acquisition Date, the Company recorded EUR 20.2 million ($24.0 million) as a contingent liability (presented as “Non-current liability”) for the fair value of these milestone payments. The fair value of the liability for the contingent consideration was determined using unobservable inputs with respect to (i) the probability of achieving the relevant milestones, or probability of success (“POS”), (ii) the estimated timing of achieving such milestones, and (iii) the interest rate used to discount the payments. The Company determined the fair market value of the contingent consideration by calculating the probability-adjusted payments based on each milestone’s probability of achievement. The probability-adjusted payments were then discounted to present value using a discount rate representing the Company’s credit risk based on the estimated timing of achieving the milestones. The unobservable inputs were estimated within a range of inputs. Varying the inputs within the range of inputs considered by the Company would not result in a material change of the fair value of contingent consideration as of the Acquisition Date. Increasing the POS of AMT-260 advancing into clinical development by 5% would increase the fair value of contingent consideration by $1.9 million to $25.9 million as of the Acquisition Date. Similarly reducing the estimated timing of achieving such milestones by six months would reduce the fair value of contingent consideration by $1.3 million to $25.3 million as of the Acquisition Date. The Company subsequently measures the contingent liability at its fair value. The fair value of the contingent liability as of September 30, 2021 amounted to EUR 20.5 million ($23.8 million). Changes in fair value of the contingent liability are recognized within research and development expenses in the consolidated statements of operations.

Identified intangible assets

The Company identified various licenses that combined with the results of the research and development activities conducted in relation to AMT-260 since incorporation of Corlieve in 2019 constitute an In-process research and development intangible asset (“IPR&D intangible asset”).

The Company determined the fair value of the IPR&D intangible asset using a present value model based on expected cash flows. Estimating the amounts and timing of cash flows required to complete the development of AMT-260 as well as net sales, cost of goods sold, and sales and marketing costs involved considerable judgment and uncertainty. The expected cash flows are materially impacted by the probability of successfully completing the various stages of development (i.e., dosing of first patient in clinical trial, advancing into late-stage clinical development and obtaining approval to commercialize a product candidate) as well as the weighted average cost of capital of 10.4% used to discount the expected cash flows. Based on all such information and its judgment the Company estimated the fair value of the IPR&D intangible asset at EUR 53.3 million ($63.3 million) as of the Acquisition Date.

The IPR&D intangible asset is considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts and is not amortized. If and when development is completed, which generally occurs when regulatory approval to market a product is obtained, the associated asset would be deemed finite-lived and would then be amortized based on its respective useful life at that point in time.

In case of abandonment, the IPR&D intangible asset will be written-off. In accordance with ASC 350, Intangibles – Goodwill and Other, the Company tests indefinite-lived intangible assets for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate the fair value of the IPR&D intangible asset is below its carrying amount.

Deferred tax liability, net

Corlieve’s deferred tax assets at the time of acquisition amounted to EUR 1.8 million ($2.2 million). Recognition of the IPR&D intangible asset gave rise to a deferred tax liability of EUR 13.3 million ($15.8 million) at the enacted French corporate income tax rate of 25.0%. The Company consequently recorded a net deferred tax liability of EUR 11.5 million ($13.6 million) as of the Acquisition Date. Changes in the net deferred tax liability after the Acquisition Date will be recorded in income tax expense in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of total consideration over the estimated fair value of net assets acquired. The Company recorded EUR 23.8 million ($28.2 million) of goodwill in the consolidated balance sheet as of the Acquisition Date. The Company allocated the goodwill to its only reporting unit. The Company does not expect any portion of this goodwill to be deductible for tax purposes. Goodwill is not amortized but is evaluated for impairment on an annual basis and between annual tests, in accordance with ASC 350, Intangibles – Goodwill and Other, if the Company becomes aware of any events occurring or changes in circumstances that would more likely than not reduce the fair value of the corporate reporting unit below its carrying amount.

Provisional fair values

The provisional determination of the fair value for the IPR&D intangible asset required considerable judgment. As of September 30, 2021, the valuation of this item has not yet been finalized. The Company will adjust the provisional valuation of identifiable assets and assumed liabilities for any material additional information regarding the fair values that becomes available until it finalized its valuation. Any such adjustments might also impact the deferred tax liability as well as goodwill. The finalization of the valuation might change the outcome of the screen test requiring the Company to treat the transaction as an asset acquisition. In accordance with ASC 805, the Company in this case, among others, would not record any goodwill and expense all identifiable intangible assets without alternative future use.

Debt

As of the Acquisition Date, Corlieve held a loan with outstanding amount equal to EUR 1.0 million ($1.2 million), which loan was repaid in its entirety in September 2021.