SALIX PHARMACEUTICALS LTD - FORM 8-K/A - EX-99.2

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8-K/A - 8-K/A - SALIX PHARMACEUTICALS LTD	d684776d8ka.htm
EX-99.1 - EX-99.1 - SALIX PHARMACEUTICALS LTD	d684776dex991.htm
EX-23.1 - EX-23.1 - SALIX PHARMACEUTICALS LTD	d684776dex231.htm

Exhibit 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information has been prepared to reflect adjustments to the financial condition and results of operations of Salix Pharmaceuticals, Ltd. (the “Company” or “Salix”) to give effect to the following items: (i) the estimated effects of our acquisition of Santarus, Inc. (“Santarus”) (this acquisition, the “Merger”), (ii) the incurrence of an aggregate of $1.2 billion of indebtedness under a six-year senior term loan B facility (the “Term Loan B Facility”) and (iii) the issuance of $750.0 million of senior notes (the “Notes”).

The following unaudited pro forma condensed combined balance sheet as of September 30, 2013 and unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2013 and 2012 are based on and derived from, and should be read in conjunction with the historical unaudited financial statements of Salix (which are available in Salix’s Quarterly Report in Form 10-Q for the quarter ended September 30, 2013) and historical unaudited financial statements of Santarus (included elsewhere in this Current Report on Form 8-K/A). The following unaudited pro forma condensed combined statement of operations for the year ended December 31, 2012 is based on and derived from and should be read in conjunction with the historical audited financial statements of Salix (which are available in Salix’s Annual Report on Form 10-K for the year ended December 31, 2012) and historical audited financial statements of Santarus (included elsewhere in this Current Report on Form 8-K/A).

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2012 and the nine months ended September 30, 2013 and 2012 assume that the Merger occurred on January 1, 2012. The unaudited pro forma condensed combined balance sheet as of September 30, 2013 assumes that the Merger occurred on September 30, 2013. The unaudited pro forma condensed combined financial information has been prepared by management for illustrative purposes only and is not necessarily indicative of the consolidated financial position or results of operations that would have been realized had the Merger occurred as of the dates indicated, nor is it meant to be indicative of any anticipated consolidated financial position or future results of operations that the combined company will experience. In addition, the accompanying unaudited pro forma condensed combined statements of operations do not include any expected cost savings or restructuring actions which may be achievable or which may occur subsequent to the Merger or the impact of any non-recurring activity and one-time transaction related costs. The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the Merger and financings related thereto, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statements of operations, are expected to have a continuing impact on the combined results.

The Merger has been accounted for as a business combination using the acquisition method of accounting under the provisions of Accounting Standard Codification No. 805, “Business Combinations,” (“ASC 805”) and applying the pro forma assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. Under ASC 805, the Company values most assets acquired and liabilities assumed in a business combination at their fair values as of the acquisition date. Fair value measurements can be highly subjective and the reasonable application of measurement principles may result in a range of alternative estimates using the same facts and circumstances. The process for estimating the fair values of in-process research and development (“IPR&D”) and other identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, timing and probability of success to complete in-process projects and projecting regulatory approvals. Under ASC 805, transaction costs are not included as a component of consideration transferred, and are expensed as incurred. The excess of the purchase price (consideration transferred) over the estimated amounts of identifiable assets and liabilities as of the effective date of the acquisition are allocated to goodwill in accordance with ASC 805. The final valuation is expected to be completed as soon as practicable but no later than one year after the consummation of the Merger. The purchase price allocation is subject to completion of the Company’s final analysis of the fair value of the assets and liabilities of Santarus as of the effective date of the Merger. Accordingly, the purchase price allocation in the unaudited pro forma condensed combined financial statements is preliminary and will be adjusted upon completion of the final valuation. These adjustments could be material. The establishment of the fair value of the consideration for the acquisition and the allocation to identifiable tangible and intangible assets and liabilities requires the extensive use of accounting estimates and management judgment. The Company believes the fair values assigned to the assets to be acquired and liabilities to be assumed are based on reasonable estimates and assumptions using currently available data.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2013


	Historical Salix		Historical Santarus 4(a)			Pro Forma Adjustments			Pro Forma Combined
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	817,725	$	121,138		$	(822,665	)5(a)	$	116,198
Short-term investments		—		47,581			—			47,581
Accounts receivable, net		389,750		51,462			—			441,212
Inventory		106,284		11,882			55,350	5(c)		173,516
Deferred tax assets		57,049		35,899			160,130	5(e)		253,078
Prepaid and other current assets		55,869		7,821			—			63,690

Total current assets		1,426,677		275,783			(607,185	)		1,095,275
Property and equipment, net		26,432		1,197			—			27,629
Goodwill		180,907		2,913			1,324,945	5(b)		1,508,765
Product rights and intangibles, net		408,389		18,502			1,406,898	5(d)		1,833,789
Long-term deferred tax assets		—		19,556			(19,556	)5(i)		—
Other assets		33,690		1,611			49,725	5(f)		85,026

Total assets	$	2,076,095	$	319,562		$	2,154,827		$	4,550,484

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,386	$	7,019		$	—		$	34,405
Accrued liabilities		100,349		30,560			—			130,909
Reserve for product returns, rebates and chargebacks		204,040		47,134			—			251,174
Current portion of capital lease obligations		49		—			—			49

Total current liabilities		331,824		84,713			—			416,537
Long-term liabilities:
Convertible senior notes		872,642		—			—			872,642
Term Loan B Facility		—		—			1,188,000	5(g)		1,188,000
Notes		—		—			750,000	5(h)		750,000
Lease incentive obligation		8,036		—			—			8,036
Acquisition-related contingent consideration		110,500		2,761			—			113,261
Deferred tax liabilities		65,047		—			529,134	5(i)		594,181
Other long-term liabilities		9,564		3,106			—			12,670

Total long-term liabilities		1,065,789		5,867			2,467,134			3,538,790

Stockholders’ equity:
Common stock		63		7			(7	)5(j)		63
Additional paid-in capital		657,916		392,054			(392,054	)5(j)		657,916
Other comprehensive income (loss)		1,111		4			(4	)5(j)		1,111
Retained earnings (deficit)		19,392		(163,083	)		163,083	5(j)		(63,933	)
							(83,325	)5(k)

Total stockholders’ equity		678,482		228,982			(312,307	)		595,157

Total liabilities and stockholders’ equity	$	2,076,095	$	319,562		$	2,154,827		$	4,550,484

See notes to unaudited pro forma condensed combined financial statements

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2012


	Historical Salix			Historical Santarus 4(b)			Pro Forma Adjustments			Pro Forma Combined
	(in thousands)
Revenues:
Net product revenues	$	735,444		$	217,955		$	—		$	953,399
Costs and expenses:
Cost of products sold (excluding amortization of product rights and intangibles)		124,597			65,904			—			190,501
Amortization of product rights and intangible assets		45,351			5,675			226,601	6(a)		277,627
Intangible asset impairment charge		41,600			—						41,600
Research and development		123,234			39,506			—			162,740
Selling, general and administrative		258,187			86,552			—			344,739
Change in acquisition-related contingent consideration		(29,598	)		146			—			(29,452	)

Total costs and expenses		563,371			197,783			226,601			987,755

Income (loss) from operations		172,073			20,172			(226,601	)		(34,356	)
Loss on extinguishment of debt		(15,580	)		—			—			(15,580	)
Interest expense, net		(44,665	)		(308	)		(113,322	)6(b)		(158,295	)

Income (loss) before provision for income tax		111,828			19,864			(339,923	)		(208,231	)
Income tax (expense) benefit		(47,582	)		(1,309	)		132,570	6(c)		83,679

Net income (loss)	$	64,246		$	18,555		$	(207,353	)	$	(124,552	)


Earnings per Share:

Basic	$	1.09								$	(2.12	)
Diluted	$	1.01								$	(2.12	)
Weighted average shares outstanding:
Basic		58,747									58,747
Diluted		63,699									63,699

See notes to unaudited pro forma condensed combined financial statements

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012


	Historical Salix			Historical Santarus 4(b)			Pro Forma Adjustments			Pro Forma Combined
	(in thousands)
Revenues:
Net product revenues	$	537,271		$	147,742		$	—		$	685,013
Costs and expenses:
Cost of products sold (excluding amortization of product rights and intangibles)		93,918			46,188			—			140,106
Amortization of product rights and intangible assets		34,034			4,146			169,954	6(a)		208,134
Intangible asset impairment charge		41,600			—			—			41,600
Research and development		86,677			21,787			—			108,464
Selling, general and administrative		187,266			61,567			—			248,833
Change in acquisition-related contingent consideration		(31,398	)		(25	)		—			(31,423	)

Total costs and expenses		412,097			133,663			169,954			715,714

Income (loss) from operations		125,174			14,079			(169,954	)		(30,701	)

Loss on extinguishment of debt		(14,369	)		—			—			(14,369	)
Interest expense, net		(29,182	)		(246	)		(84,917	)6(b)		(114,345	)

Income (loss) before provision for income tax		81,623			13,833			(254,871	)		(159,415	)
Income tax (expense) benefit		(35,000	)		(774	)		99,399	6(c)		63,625

Net income (loss)	$	46,623		$	13,059		$	(155,472	)	$	(95,790	)


Earnings per Share:

Basic	$	0.79								$	(1.63	)
Diluted	$	0.73								$	(1.63	)
Weighted average shares outstanding:
Basic		58,671									58,671
Diluted		63,689									63,689

See notes to unaudited pro forma condensed combined financial statements

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013


	Historical Salix			Historical Santarus 4(b)			Pro Forma Adjustments			Pro Forma Combined
	(in thousands)
Revenues:
Net product revenues	$	676,226		$	267,596		$	—		$	943,822
Costs and expenses:
Cost of products sold (excluding amortization of product rights and intangibles)		122,460			69,533			—			191,993
Amortization of product rights and intangible assets		33,518			4,752			169,348	6(a)		207,618
Intangible asset impairment charge		—			—			—			—
Research and development		113,733			24,978			—			138,711
Selling, general and administrative		223,785			99,692			—			323,477
Change in acquisition-related contingent consideration		7,000			561			—			7,561

Total costs and expenses		500,496			199,516			169,348			869,360

Income (loss) from operations		175,730			68,080			(169,348	)		74,462

Loss on extinguishment of debt		—			—			—			—
Interest expense, net		(44,937	)		(180	)		(83,089	)6(b)		(128,206	)

Income (loss) before provision for income tax		130,793			67,900			(252,437	)		(53,744	)
Income tax (expense) benefit		(40,021	)		54,668			98,451	6(c)		113,098

Net income (loss)	$	90,772		$	122,568		$	(153,986	)	$	59,354


Earnings per Share:
Basic	$	1.48								$	0.97
Diluted	$	1.40								$	0.91
Weighted average shares outstanding:
Basic		61,416									61,416
Diluted		65,031									65,031

See notes to unaudited pro forma condensed combined financial statements

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Description of Transactions

On November 7, 2013, the Company and Santarus, among others, entered into the Merger Agreement, pursuant to which the Company agreed to conduct a cash tender offer to purchase all of the issued and outstanding shares of Santarus common stock for $32.00 per share in cash (without interest but less any applicable withholding taxes). The Company’s obligation to purchase shares tendered in the tender offer was subject to the condition that, immediately prior to the expiration of the tender offer, there be validly tendered and not validly withdrawn the number of shares of Santarus common stock that, when added to the shares of Santarus common stock then owned by us, would represent one share more than one half of the sum of (i) all shares of Santarus common stock then outstanding and (ii) all shares of common stock that Santarus may be required to issue upon the vesting (including vesting solely as a result of the tender offer), conversion, settlement or exercise of all securities convertible or exchangeable into shares of Santarus common stock.

On January 2, 2014, an indirect wholly owned subsidiary of the Company (“Merger Sub”) accepted for payment all shares that were validly tendered and not validly withdrawn pursuant to the tender offer. Also on January 2, 2014, following acceptance of the tendered shares, Merger Sub merged with and into Santarus, with Santarus surviving as an indirect wholly owned subsidiary of the Company. In connection with the Merger, each share of Santarus common stock issued and outstanding immediately prior to the effective time and not tendered pursuant to the tender offer (other than (i) shares held in the treasury of Santarus, (ii) shares owned by the Company, Merger Sub or any wholly owned subsidiary of the Company or Santarus and (iii) shares that are held by any stockholders who were entitled to and who properly demanded appraisal in connection with the Merger) was canceled and converted automatically into the right to receive $32.00 per share in cash (without interest thereon and subject to any required withholding taxes). At the time of the Merger, unexercised options were canceled, terminated and converted into the right to receive an amount in cash (without interest) determined by multiplying (i) the excess, if any, of the $32.00 per share offer price over the applicable exercise price of such options by (ii) the number of shares underlying such options (assuming full vesting of such options) had the holders thereof exercised such options in full immediately prior to the Effective Time.

2. Basis of Presentation

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under the provisions of ASC 805 and was based on the historical financial information of the Company and Santarus. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net tangible and intangible assets to be acquired based on their estimated fair values as of the date the Merger is consummated. Such fair values are based on available information and certain assumptions that we believe are reasonable. Management has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets to be acquired and liabilities to be assumed based on various preliminary estimates. The final determination of these estimated fair values, the assets’ useful lives and the amortization methods is subject to completion of an ongoing assessment and will be available as soon as practicable but no later than one year after the consummation of the Merger. Fair value measurements can be highly subjective and the reasonable application of measurement principles may result in a range of alternative estimates using the same facts and circumstances. The results of the final allocation could be materially different from the preliminary allocation set forth in these unaudited pro forma condensed combined financial statements, including but not limited to, the allocations related to identifiable intangible assets, goodwill, property and equipment, inventory, deferred taxes, cost of products sold, general and administrative expenses, amortization, interest expense and income taxes.

3. Accounting Policies

Following the acquisition, Salix is conducting a review of Santarus’ accounting policies in an effort to determine if differences in accounting policies require adjustment or reclassification of Santarus’ results of operations or assets or liabilities to conform to Salix’s accounting policies and classifications. As a result of this review, Salix may identify differences between the accounting policies of the two companies that, when conformed, could be materially different from the amounts set forth in these unaudited pro forma condensed combined financial statements. During the preparation of these unaudited pro forma condensed combined financial statements, Salix was not aware of any material differences between accounting policies of the two companies, except for certain reclassifications necessary to conform to Salix’s financial presentation; as discussed below. Accordingly, these unaudited pro forma condensed combined financial statements do not assume any material differences in accounting policies between the two companies.

4. Historical Santarus – Reclassification

Financial information presented in the “Historical Santarus” column in the unaudited pro forma condensed combined balance sheet and statements of operations has been reclassified to conform to the historical presentation in Salix’s consolidated financial statements as follows:

(a) Reclassifications included in the unaudited pro forma condensed combined balance sheet

As of September 30, 2013


	Santarus
	Before Reclassification		Reclassification			After Reclassification
	(in thousands)
Accounts receivable, net	$	43,576	$	7,886	(i)	$	51,462
Long-term restricted cash	$	750	$	(750	)(ii)	$	—
Other assets	$	861	$	750	(ii)	$	1,611
Accounts payable and accrued liabilities	$	52,662	$	(45,643	)(iii)	$	7,019
Accrued liabilities	$	—	$	30,560	(iii)	$	30,560
Allowance for product returns	$	24,165	$	22,969	(i)(iii)	$	47,134
Acquisition-related contingent consideration	$	—	$	2,761	(iv)	$	2,761
Deferred revenue	$	1,103	$	(1,103	)(v)	$	—
Other long term liabilities	$	4,764	$	(1,658	)(iv)(v)	$	3,106

(i)	Represents a $7.8 million reclassification of chargebacks and other discounts (contra account) from “Accounts receivable” to “Allowance for product returns” as accounted for on Salix’s balance sheet.

(ii)	Represents a $750,000 reclassification of “Long term restricted cash” to “Other assets.”

(iii)

Represents a reclassification of $45.6 million from “Accounts payable and accrued liabilities” to “Accrued liabilities” to reflect accrued liabilities which are presented separately on Salix’s balance sheet. Offsetting the $45.6 million balance reclassified to “Accrued liabilities” is a $15.1 million reclassification from “Accrued liabilities” to “Allowance for product returns” for accrued rebates.

(iv)	Represents a $2.7 million adjustment for the Covella contingent consideration that was reclassified to “Acquisition-related contingent consideration” from “Other long term liabilities.”

(v)	Represents a $1.1 million adjustment for the reclassification of “Deferred revenue” to “Other long term liabilities.”

(b) Reclassifications included in the unaudited pro forma condensed combined statement of operations

Year Ended December 31, 2012


	Santarus
	Before Reclassification		Reclassification			After Reclassification
	(in thousands)
Royalty revenues	$	3,417	$	(3,417	)(i)	$	—
Net product revenues	$	214,538	$	3,417	(i)	$	217,955
Cost of products sold	$	15,640	$	50,264	(ii)	$	65,904
Amortization of product rights and intangibles	$	—	$	5,675	(iii)	$	5,675
Licensing and royalty fees	$	69,783	$	(69,783	)(ii)(iii)	$	—
Research and development	$	25,808	$	13,698	(iii)	$	39,506
Change in acquisition-related contingent considerations	$	—	$	146	(iii)	$	146

Nine Months Ended September 30, 2012


	Santarus
	Before Reclassification		Reclassification			After Reclassification
	(in thousands)
Royalty revenues	$	2,618	$	(2,618	)(i)	$	—
Net product revenues	$	145,124	$	2,618	(i)	$	147,742
Cost of products sold	$	10,463	$	35,725	(ii)	$	46,188
Amortization of product rights and intangibles	$	—	$	4,146	(iii)	$	4,146
Licensing and royalty fees	$	43,544	$	(43,544	)(ii)(iii)	$	—
Research and development	$	18,089	$	3,698	(iii)	$	21,787
Change in acquisition-related contingent considerations	$	—	$	(25	)(iii)	$	(25	)

Nine Months Ended September 30, 2013


	Santarus
	Before Reclassification		Reclassification			After Reclassification
	(in thousands)
Royalty revenues	$	2,510	$	(2,510	)(i)	$	—
Net product revenues	$	265,086	$	2,510	(i)	$	267,596
Cost of products sold	$	16,145	$	53,388	(ii)	$	69,533
Amortization of product rights and intangibles	$	—	$	4,752	(iii)	$	4,752
Licensing and royalty fees	$	63,701	$	(63,701	)(ii)(iii)	$	—
Research and development	$	19,978	$	5,000	(iii)	$	24,978
Change in acquisition-related contingent considerations	$	—	$	561	(iii)	$	561

(i)	Represents $3.4 million, $2.6 million, and $2.5 million of “Royalty revenues” for the year ended December 31, 2012, and the nine-month periods ended September 30, 2012 and 2013 respectively, reclassified to “Net product revenues.”

(ii)	Represents an increase of $50.3 million, $35.7 million and $53.4 million to “Cost of products sold,” reflecting a reclassification of royalty fees from “Licensing and royalty fees,” for the year ended December 31, 2012, and the nine-month periods ended September 30, 2012 and 2013 respectively.

(iii)

Represents a reclassification of license fees from “Licensing and royalty fees” to the following accounts: $5.7 million, $4.1 million, and $4.7 million related to the reclassification to “Amortization for product rights and intangibles”; $146,000, $25,000, and $561,000 related to the reclassification to “Change in acquisition-related contingent consideration” and $13.7 million, $3.7 million and $5.0 million related to the reclassification to “Research and development” for the year ended December 31, 2012, and the nine-month periods ended September 30, 2012 and 2013 respectively.

5. Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments

(a)

The following table summarizes the estimated sources and uses of proceeds in connection with the Merger.


	(in thousands)
Sources:
Balance Sheet Cash	$	822,665
Term Loan B Facility		1,200,000
Notes		750,000

	$	2,772,665

Uses:
Equity purchase price (i)	$	2,627,615
Estimated financing fees (ii)		71,100
Estimated acquisition costs (iii)		73,950

	$	2,772,665

(i)	Represents the total consideration paid to holders of all of the issued and outstanding shares of Santarus common stock, including $359.4 million paid to holders of vested stock options and $121.4 million paid to holders of unvested stock options that vested upon the closing of the Merger.

(ii)

Includes $49.7 million of issuance costs related to the Notes, the Term Loan B Facility and commitment fees related to the revolving credit facility, $12.0 million of original issue discount (“OID”) related to the Term Loan B Facility and $9.4 million of commitment fees related to bridge financing. Commitment fees related to the establishment of the bridge facility were written off upon issuance of the Notes. See also footnote 5(k).

(iii)

Consists of estimated non-recurring deal fees and expenses of $43.9 million, comprised of financial advisory and legal fees, and acquisition-related severance costs of $30.0 million.

(b)

The following table sets forth the preliminary allocation of the purchase price:


	(in thousands)
Equity purchase price	$	2,627,615
Historical book value of net assets acquired		228,982

Excess of purchase price over net assets acquired		2,398,633
Excess allocated to:
Inventory		55,350
Current deferred tax assets		160,130
Intangible assets – product rights on currently marketed products		1,273,498
Intangible assets – IPR&D		90,400
Intangible assets – licensing agreements		43,000
Non-current deferred tax liabilities		(548,690	)

Pro forma adjustment to goodwill	$	1,324,945

(c)

Represents the estimated fair value adjustment to step up inventory to fair value. This estimated step-up in inventory is preliminary and is subject to change based upon management’s final determination of the fair value of finished goods inventory. Salix will reflect the fair value of Santarus’ inventory as the acquired inventory is sold, which for purposes of these unaudited pro forma condensed combined financial statements is assumed to occur within the first year after acquisition. As there is no continuing impact of the inventory step-up on Salix’s results, the increased value is not included in the unaudited pro forma condensed combined statements of operations.

(d)

Represents the adjustments to record identified intangible assets at fair value. The IPR&D amounts will be capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project and launch of the product, Salix will make a separate determination of useful life of the IPR&D intangible, and amortization will be recorded as an expense. As the IPR&D intangibles are not currently marketed, no amortization of these items is reflected in the unaudited pro forma condensed combined statements of operations. Other intangible assets are amortized as described in note (a) under “Unaudited Pro Forma Condensed Combined Statement of Operations Adjustments.”

The fair value estimate for identifiable intangible assets in the accompanying unaudited pro forma condensed combined financial statements is preliminary and is determined based on the assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). This preliminary fair value estimate could include assets that are not intended to be used, may be sold or are intended to be used in a manner other than their best use. The final fair value determination for identified intangibles may differ from this preliminary determination. The fair value of identifiable intangible assets is determined primarily using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions used in the income approach from the perspective of a market participant include the estimated net cash flows for each year for each project or product (including net revenues, cost of sales, research and development costs, selling and marketing costs and working capital/asset contributory asset charges), the discount rate that measures the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk and regulatory risk. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change or that the timely completion of each project to commercial success will occur. For these and other reasons, actual results may vary significantly from estimated results.

(e)

Reflects a deferred income tax asset of $187.5 million resulting from the settlement of outstanding Santarus stock options, offset by a deferred income tax liability of $21.6 million resulting from the fair value adjustment to inventory acquired, based on a combined federal and state statutory income tax rate of 39.0% and the reversal of a $5.8 million historical deferred tax asset related to Santarus stock options. These estimates of deferred taxes are preliminary and are subject to change based on management’s final determination of the number of stock options settled and the fair values of assets acquired and liabilities assumed by jurisdiction.

(f)

Reflects the capitalization of debt issuance costs of $49.7 million related to the Notes, the Term Loan B Facility and commitment fees related to the revolving credit facility.

(g)

Reflects the borrowing of $1.2 billion under the Term Loan B Facility, net of OID.

(h)

Reflects the issuance of $750.0 million of Notes.

(i)

Reflects a deferred income tax liability resulting from fair value adjustments for identifiable intangible assets acquired using a combined federal and state statutory income tax rate of 39.0%. The resulting pro forma long-term deferred income tax liability of $548.7 million has been netted against the Santarus historical long term deferred tax asset of $19.6 million. The estimate of the deferred income tax liability is preliminary and is subject to change based on management’s final determination of the fair values of tangible and identifiable intangible assets acquired and liabilities assumed by jurisdiction.

(j)

Reflects the elimination of Santarus’ historical stockholders’ equity.

(k)

Reflects the recognition of transaction costs of $73.95 million related to the Merger and $9.4 million of commitment fees related to bridge financing which expired unused upon issuance of the Notes. Resulting tax benefits related to these charges (deferred tax assets) have not been reflected as the Company is still evaluating the deductibility of various transaction expenses.

6. Unaudited Pro Forma Condensed Combined Statement of Operations Adjustments

(a)	Reflects the incremental amortization expense resulting from the fair value adjustments for purchase accounting for the Merger as follows:


	Weighted Average Useful Life (years)		Estimated Fair Value		Year Ended December 31, 2012		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2013
IPR&D		N/A	$	90,400	$	—	$	—	$	—
Product rights on currently marketed products		8.2		1,273,498		227,833		170,875		170,875
Licensing agreements		10.0		43,000		4,300		3,225		3,225

Total pro forma amortization expense						232,133		174,100		174,100
Less: historical amortization expense						5,532		4,146		4,752

Net adjustment					$	226,601	$	169,954	$	169,348

(b)	Reflects the incremental interest expense related to the Company’s debt structure after the Merger, comprised of the Notes and borrowings under the Term Loan B Facility, as follows:


	Year Ended December 31, 2012		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2013
	(in thousands)
Interest on Term Loan B Facility of $1,200 million and the $750 million Notes at an assumed weighted average cash interest rate of approximately 5.02%		97,875		73,406		71,494
Commitment fees on senior revolving credit facility		750		563		563
Amortization of debt issue costs and OID		14,697		10,948		11,032

Total adjustment	$	113,322	$	84,917	$	83,089

A ¹⁄₈th percent change in the weighted average interest rate would increase or decrease the pro forma annual cash interest expense on the $1,950 million aggregate indebtedness under the Term Loan B Facility and the Notes at the closing of the Merger by approximately $2.4 million.

(c)

Represents the income tax effect of the pro forma adjustments using a combined federal and state statutory income tax rate of 39.0%. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition integration activities, cash needs and the geographical mix of income.

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