Note 4 – Business Combinations and Sale of Businesses Audited

4.1 Acquisitions – 2017

Acquisition of Capsugel S.A.

 

Effective 5 July 2017, Lonza received all required regulatory approvals to complete the acquisition of 100% of the shares of Capsugel S.A. (“Capsugel”) from KKR for a total consideration of USD 3.4 billion (CHF 3.3 billion at acquisition date rate) in cash. Upon acquisition, Lonza assumed existing Capsugel debt of USD 2.0 billion (CHF 1.96 billion at acquisition date rate). Lonza refinanced the assumed debt after the acquisition date. The acquisition was financed through a capital increase (see note 26) and additional debt (see note 15).

Capsugel designs, develops and manufactures a wide range of innovative dosage forms for the biopharmaceutical and consumer health and nutrition industries.

The Capsugel business is reported as a separate operating segment in 2017 but is being integrated into other Lonza businesses in 2018 (see note 2.1).

From 5 July to 31 December 2017, Capsugel contributed sales of CHF 543 million and a result from operating activities of CHF -5 million to the Group1.


The Capsugel identifiable assets acquired and liabilities assumed are set out in the table below and have been determined on a provisional basis:

million CHF  
   
Intangible assets  
– Customer relationships 1,234
– Technologies 1,210
– Capsugel corporate trade name 240
– Computer Software 7
Property, plant & equipment 583
Inventories 253
Trade receivables 156
Cash & cash equivalents 120
Deferred tax liabilities (662)
Debt (1,964)
Employee benefit liabilities (29)
Trade payables (65)
Other net liabilities (141)
Net identifiable assets 942
   
Goodwill 2,428
Non-controlling interest (45)
Total consideration 3,325
   
Total cash consideration transferred 3,325
Cash and cash equivalents acquired (120)
Cash outflow on acquisition 3,205



The total goodwill resulting from the Capsugel acquisition amounts to CHF 2,519 million and includes the effective portion of losses of CHF 91 million from cash flow hedges to manage the foreign exchange rate exposure that existed from 15 December 2016 until closing on 5 July 2017.

The fair value of the customer relationships was determined using an excess earning method while the fair value of the technologies as well as the Capsugel corporate trade name were determined using a relief from royalty method. Both methods are based on management forecasts and observable market data for discount rates, tax rates and foreign exchange rates. The present value was calculated using a risk-adjusted discount rate of 7.5%. The fair value of property, plant & equipment was determined based on market and cost methods. The fair value of inventories was determined based on the estimated selling price in the ordinary course of the business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. Portions of the valuation of the acquired assets and liabilities of Capsugel were performed by an independent valuation provider.

Goodwill includes the acquired workforce, expected synergies from integrating Capsugel into Lonza’s existing business. None of the goodwill recognized is expected to be deductible for income tax purposes. The acquisition has been accounted for using the acquisition method.

The fair value of the trade receivables amounts to CHF 156 million. The gross amount of trade receivables is CHF 164 million. The fair value includes a deduction of CHF 8 million for trade receivables for which it is expected that the full contractual amounts cannot be collected.

Directly attributable transaction costs of CHF 26 million are reported in the Capsugel segment within administration and general overhead expenses.

Other acquisitions

PharmaCell B.V.

 

Effective 3 May 2017, Lonza Group acquired 100% of the shares of PharmaCell B.V. for a cash consideration of EUR 31 million (CHF 33 million). PharmaCell is a contract develop­ment and manufacturing organization specialized in the field of cell and gene therapy and regenerative medicine with employees in Maastricht and Geleen (NL).

The acquisition is reported within the Pharma&Biotech segment and does not have significant impact on the consolidated financial statements for the twelve-month period ended 31 December 2017, with the exception of the acquired goodwill.

Micro-Macinazione S.A.

 
On 26 July 2017, Lonza completed the acquisition of Micro-Macinazione S.A., a company specializing in the micronization of active ingredients for the pharmaceutical and fine chemical industries, based in Molinazzo di Monteggio, (CH). The total cash consideration amounted to CHF 67 million.

The acquisition is reported within the Pharma&Biotech segment and does not have a significant impact on the consolidated financial statements for the twelve-month period ended 31 December 2017, with the exception of the acquired goodwill and intangible assets.

The identifiable assets acquired and liabilities assumed of these acquisitions are set out in the table below and have been determined on a provisional basis: 

million CHF PharmaCell Micro-Macinazione Other Total
         
Intangible assets  
– Customer relationships 3 28 0 31
– Technologies 0 6 0 6
Property, plant & equipment 6 7 5 18
Inventories 2 2 0 4
Trade receivables 6 5 0 11
Cash & cash equivalents 0 0 0 0
Deferred tax liabilities (1) (7) 0 (8)
Debt (7) (7) 0 (14)
Trade payables (6) (2) 0 (8)
Other net liabilities 0 (3) 0 (3)
Net identifiable assets 3 29 5 37
         
Goodwill 30 38 0 68
Total consideration 33 67 5 105
       
Total cash consideration transferred 33 67 5 105

 

Portions of the valuations of the acquired assets and liabilities of PharmaCell and Micro-Macinazione were performed by an independent valuation provider.

Impact from 2017 Acquisitions on Consolidated Income Statement

 

If the 2017 acquisitions had occurred on 1 January 2017, Group sales in 2017 would have been CHF 5,660 million (+ CHF 555 million) and the Group result from operating activities CHF 783 million (+ CHF 60 million). These amounts were calculated using the Group’s accounting policies and by adjusting the results of the subsidiaries to reflect the full year amortization that would have been charged if the fair value adjustments to intangible assets had applied from January 2017.

4.2 Divestment – 2017

 

On 7 December 2016 Lonza announced that it had entered into a definitive agreement with PolyPeptide Laboratories Holding (PPL) to sell the peptides business and operations of Lonza in Braine-l’Alleud, Belgium. Lonza’s Braine facility, with approximately 280 employees, is the center for peptide chemical development and manufacturing within Lonza. The agreement was subject to customary closing conditions and legally closed on 3 January 2017.

As IFRS 5 held for sale criteria were met in 2016, the Lonza Braine-related assets and liabilities were classified as a disposal group in assets held for sale and liabilities held for sale in the 2016 consolidated balance sheet.

An impairment loss of CHF 42 million had been included in "Other operating expenses" for the write-down of the Lonza Braine disposal group to its estimated fair value less cost to sell. The impairment loss had been recorded to fully impair the Lonza Braine-related goodwill of CHF 31 million as well as to reduce the carrying amount of property, plant & equipment (CHF 9 million) and intangible assets (CHF 2 million).

The purchase price includes a one-time payment of CHF 20 million paid in 2017 as well as a defined percentage of the net sales of the disposed business for the financial years 2017 – 2021 (estimated to be CHF 40 million at year-end 2017 exchange rates). Lonza’s estimate of the net present value of these future payments is reflected as a receivable in the consolidated balances sheet as of 31 December 2017.

At 31 December 2016 the assets held for sale and liabilities held for sale related to the Lonza Braine disposal were the following:

million CHF  
   
Property, plant & equipment 39
Customer relationships 10
Deferred tax assets 4
Inventories 34
Cash and cash equivalents 4
Assets held for sale 91
   
Employee benefit liability 16
Trade payables 3
Other non-current operating liabilities 21
Liabilities directly associated with assets held for sale 40

 

The cumulative income or expense recognized in other comprehensive income related to the Lonza Braine operations as of 31 December 2016 was as follows:

million CHF  
   
Remeasurements of net defined benefit liability, net of taxes 6
Exchange differences on translating foreign operations, net of taxes 29
Cumulative expense recognized in other comprehensive income 35

 

As a result of the closing of the transaction on 3 January 2017, the accumulated exchange rate translation reserve losses of CHF 29 million were reclassified to the income statement in 2017 (unfavorable effect of CHF 35 million within other expenses and a favorable effect of CHF 6 million within income taxes).

 4.3 Acquisitions – 2016

Acquisition of InterHealth Nutraceuticals Inc.

 

Effective 12 September 2016, Lonza acquired 100% of the shares of InterHealth Nutraceuticals Inc. (“InterHealth”) for a total consideration of USD 246 million (CHF 240 million), of which USD 229 million was paid in cash and USD 17 million arose from a contingent consideration arrangement. The contingent payments are based on the achievement of performance-related milestones and the range of undiscounted outcomes is between zero and USD 27.5 million. In addition, Lonza assumed InterHealth's net debt of USD 39 million (debt of USD 46 million net of cash & cash equivalents of USD 7 million) and repaid InterHealth's debt after the acquisition date.

InterHealth is a leader in research, development, manufacture and marketing of proprietary, value-added nutritional ingredients for use in dietary supplements, based in Benicia, CA (USA). The InterHealth business became part of Lonza’s Consumer Health and Nutrition Business, but retained its facilities and employees. The combination of the two businesses allows Lonza to offer InterHealth’s more than 15 branded ingredients, including its cornerstone ingredient UC-II.

The InterHealth business is reported within the Specialty Ingredients segment.

From 12 September 2016 to 31 December 2016, the acquired business contributed sales of CHF 21 million and a result from operating activities of CHF 3 million to the Group2. If the acquisition had occurred on 1 January 2016, Group sales in 2016 would have been CHF 4 170 million (+ CHF 38 million) and the Group result from operating activities CHF 498 million (+ CHF 12 million). These amounts were calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reflect the full year amortization that would have been charged if the fair value adjustments to intangible assets had applied from January 2016.


The InterHealth identifiable assets acquired and liabilities assumed are set out in the table below:

million CHF  
   
Intangible assets  
– Products 57
– Customer relationships 114
– Order backlog 5
Property, plant & equipment 1
Inventories 9
Trade receivables 8
Cash & cash equivalents 7
Deferred tax liabilities (63)
Debt (44)
Provisions (2)
Trade payables (5)
Other net liabilities (3)
Net identifiable assets 84
   
Goodwill 156
Total consideration 240
   
Cash  223
Contingent consideration 17
Total consideration transferred 240
 


The fair value of the customer relationships was determined using an excess earning method while the fair value of the products was determined using a relief from royalty method. Both methods are based on management forecasts and observable market data for discount rates, tax rates and foreign exchange rates. The present value was calculated using a risk-adjusted discount rate of 11%. Portions of the valuation of the acquired assets and liabilities of InterHealth were performed by an independent valuation provider.

Goodwill includes the acquired workforce, expected synergies from integrating InterHealth into Lonza’s existing business as well as the expected future product development. None of the goodwill recognized is expected to be deductible for income tax purposes. The acquisition has been accounted for using the acquisition method.

Directly attributable transaction costs of CHF 2 million were reported in the Specialty Ingredients segment within administration and general overhead expenses.
 

Acquisition of Triangle Research Labs
 

Effective 27 April 2016, Lonza Group acquired Triangle Research Labs for a total consideration of USD 16 million (CHF 15 million), resulting in a goodwill of CHF 12 million. The US-based company manufactures and supplies high-quality hepatocytes for medical and biomedical research in pre-clinical applications. This acquisition supports Lonza’s strategy to continue developing its life-science platform and expanding its global cell-biology portfolio.

The acquisition is reported within the Pharma&Biotech segment and did not have a significant impact on the consolidated financial statements for the twelve-month period ended 31 December 2016.