Eli Lilly 2005 Annual Report Download - page 40

FI NA NCI A L S
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tions consistent with those we used in valuing employee options. Replacement options to purchase our common
stock granted as part of this acquisition have terms equivalent to the AME options being replaced.
In addition to acquiring the rights to two compounds currently under development, we expected the acquisi-
tion of AME’s protein optimization technology to create synergies that will accelerate our ability to discover and
optimize biotherapeutic drugs for cancer, critical care, diabetes, and obesity, areas in which proteins are of great
therapeutic benefit.
In accordance with SFAS 141, Business Combinations, the acquisition was accounted for as a purchase busi-
ness combination. Under the purchase method of accounting, the assets acquired and liabilities assumed from
AME at the date of acquisition were recorded at their respective fair values as of the acquisition date in our con-
solidated financial statements. The excess of the purchase price over the fair value of the acquired net assets was
recorded as goodwill in the amount of $9.6 million. Goodwill resulting from this acquisition was fully allocated to
the pharmaceutical products segment. No portion of this goodwill is expected to be deductible for tax purposes.
AME’s results of operations are included in our consolidated financial statements from the date of acquisition.
As of the date of acquisition, we determined the following estimated fair values for the assets purchased and
liabilities assumed. The determination of estimated fair value requires management to make significant estimates
and assumptions. We hired independent third parties to assist in the valuation of assets that were difficult to value.
Estimated Fair Value at February 12, 2004
Cash and short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38.7
Acquired in-process research and development. . . . . . . . . . . . . . . . . 362.3
Platform technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.9
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6
Other assets and liabilities—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3
Total estimated purchase price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 442.8
The acquired in-process research and development (IPR&D) represents compounds currently under develop-
ment that have not yet achieved regulatory approval for marketing. The estimated fair value of these intangible
assets was derived using a valuation from an independent third party. AME’s two lead compounds for the treat-
ment of non-Hodgkin’s lymphoma and rheumatoid arthritis represent approximately 80 percent of the estimated
fair value of the IPR&D. In accordance with FIN 4, Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method, these IPR&D intangible assets were written off by a charge to income
immediately subsequent to the acquisition because the compounds did not have any alternative future use. This
charge was not deductible for tax purposes. The ongoing activity with respect to each of these compounds under
development is not material to our research and development expenses.
There are several methods that can be used to determine the estimated fair value of the acquired IPR&D. We
utilized the “income method,” which applies a probability weighting to the estimated future net cash flows that
are derived from projected sales revenues and estimated costs. These projections were based on factors such as
relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The
estimated future net cash flows were then discounted to the present value using an appropriate discount rate. This
analysis was performed for each project independently. The discount rate we used in valuing the acquired IPR&D
projects was 18.75 percent.
Product Acquisition
In October 2004, we entered into an agreement with Merck KGaA (Merck) to acquire Merck’s compound for a
potential treatment for insomnia. At the inception of this agreement, this compound was in the development stage
(Phase I clinical trials) and no alternative future uses were identified. As with many development phase com-
pounds, launch of the product, if approved, was not expected in the near term. Our charge for acquired in-process
research and development expense related to this arrangement was $29.9 million in the fourth quarter of 2004.
Note 4: Asset Impairments, Restructuring, and Other Special Charges
The components of the charges included in asset impairments, restructuring, and other special charges in our
consolidated statements of income are described below.
In December 2005, management approved, as part of our ongoing efforts to increase productivity and reduce
our cost structure, decisions that resulted in non-cash charges of $154.6 million for the write-down of certain im-