Note 5 – Business Combinations and Sale of Businesses

5.1 Acquisitions – 2018

Acquisition of Octane Biotech Inc.

Effective 31 October 2018, Lonza acquired 52% of the shares of Octane Biotech Inc. («Octane»). As a result, Lonza increased its equity interest in Octane to 80%, obtaining control of the company. The total consideration related to the 2018 acquisition amounts to USD 58 million (CHF 58 million), of which USD 28 million (CHF 28 million) was paid in cash in 2018 and USD 30 million (CHF 30 million) is related to a contingent consideration arrangement. The contingent payments are based on the achievement of performance-related and regulatory-related milestones and the range of undiscounted outcomes is between zero and USD 74 million (CHF 73 million).

Lonza and Octane have been collaborating since 2015 on the development of the CocoonTM system, a patient-scale, closed and automated cell-therapy manufacturing system. The increase in ownership will allow Lonza to further develop the technology to support the growing need for scalable autologous manufacturing. Octane’s 24 employees at the current site in Kingston, ON (CA) will continue to support activities as the CocoonTM system is further developed.

The Octane business is reported within the Pharma & Biotech segment and did not have a significant impact on the consolidated financial statements for the year ended 31 December 2018, with the exception of the acquired goodwill and intangible assets and the related deferred tax liabilities.

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

Acquisition of Octane Biotech Inc.

million CHF

 

 

 

 

 

Technology

 

132

Receivables

 

4

Deferred tax liabilities

 

(35)

Debt

 

(3)

Other operating payables

 

(4)

Net identifiable assets

 

94

 

 

 

Cash consideration

 

28

Contingent consideration

 

30

Total consideration transferred

 

58

Fair value of Lonza’s previously held interest in Octane

 

36

Non-controlling interest

 

24

Fair value of net identifiable assets

 

(94)

Goodwill

 

24

The fair value of the technology was determined using an excess earning method. The method is based on management’s forecasts and observable market data for discount rates, tax rates and foreign exchange rates. The present value of the forecasted cash flows was calculated using a risk-adjusted discount rate of 8.6%. The valuation of the acquired technology and contingent consideration of Octane was performed by an independent valuation expert.

Goodwill includes the acquired workforce and the expected synergies from integrating Octane 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.

Lonza recognized a financial gain of CHF 32 million from fair valuing its interest in Octane held by the Group prior to the transaction. This gain is classified as financial income for 2018.

5.2 Discontinued Operations and Assets Held for Sale – 2018

On 1 November 2018 Lonza announced that it had entered into a definitive agreement with Platinum Equity to sell Lonza’s Water Care business and operations for USD 630 million in cash.

With headquarters in Alpharetta, GA (USA), Water Care has six manufacturing facilities in key regions, including North America, South America, EMEA and South Africa, with sales locations in all regions globally and with approximately 1,200 employees. The business is a provider of innovative water treatment solutions and a global consumer brand in residential pool care and key positions in high-growth industrial and municipal water care markets. The divestment transaction is expected to close in the first quarter of 2019, subject to customary closing conditions.

As IFRS 5 held for sale criteria were met in 2018, the Water Care related assets and liabilities were classified as a disposal group in assets held for sale and liabilities held for sale in the 2018 consolidated balance sheet. The results of the Water Care business discontinued operations are disclosed separately in the consolidated income statement.

An impairment loss of CHF 85 million has been included in «Other operating expenses» of the discontinued operations for the write-down of the Water Care disposal group to its estimated fair value less cost to sell. The impairment loss was recorded to partially impair the Water Care related goodwill of CHF 184 million. In addition, costs of CHF 22 million were incured in 2018 related to the planned divestiture of the Water Care business, which are included in «Other operating expenses» of the discontinued operations.

The results from the Water Care business, which is presented as discontinued operations, are as follows:

Water Care

million CHF

 

2018

 

2017

 

 

 

 

 

Sales

 

516

 

523

Cost of goods sold

 

(370)

 

(372)

Gross profit

 

146

 

151

 

 

 

 

 

Marketing and distribution

 

(70)

 

(68)

Research & development

 

(8)

 

(8)

Administration and general overheads

 

(47)

 

(50)

Other operating income

 

2

 

6

Other operating expenses

 

(111)

 

(3)

Result from operating activities (EBIT)

 

(88)

 

28

 

 

 

 

 

Net financing costs

 

(9)

 

(3)

Share of loss of associates / joint ventures

 

(1)

 

(1)

Profit before income taxes from discontinued operations

 

(98)

 

24

 

 

 

 

 

Income taxes

 

2

 

19

Profit from discontinued operations, net of tax

 

(96)

 

43

 

 

 

 

 

 

 

CHF

 

CHF

Basic earnings per share

 

(1.29)

 

0.64

Diluted earnings per share

 

(1.29)

 

0.63

The loss from the discontinued operation of CHF 96 million (2017: profit of CHF 43 million) is attributable entirely to the equity holders of the parent.

The main elements of the cash flows of the Water Care discontinued operations are as follows:

million CHF

 

2018

 

2017

 

 

 

 

 

Net cash used for operating activities

 

(15)

 

(11)

Net cash used for investing activities

 

(11)

 

(28)

Net cash used for financing activities

 

0

 

(6)

 

 

 

 

 

Net cash flows for the year

 

(26)

 

(45)

At 31 December 2018, the assets and liabilities held for sale related to the Water Care disposal were the following:

million CHF

 

 

 

 

 

Goodwill

 

99

Intangible assets

 

296

Property, plant & equipment

 

100

Other non-current assets

 

16

Inventories

 

118

Trade receivables

 

131

Other receivables

 

9

Cash and cash equivalents

 

21

Assets held for sale

 

790

 

 

 

Deferred tax liabilities

 

98

Employee benefit liability

 

3

Trade payables

 

34

Other current liabilities

 

55

Other liabilities

 

3

Liabilities directly associated with assets held for sale

 

193

The cumulative expense recognized in other comprehensive income related to the Water Care operations as of 31 December 2018 was as follows:

million CHF

 

 

 

 

 

Remeasurements of net defined benefit liability, net of taxes

 

1

Exchange differences on translating foreign operations, net of taxes

 

15

Cumulative expense recognized in other comprehensive income

 

16

The accumulated exchange rate translation reserve losses at the time of the closing of the transaction will be reclassified to the income statement, which is expected to occur in the first quarter of 2019.

5.3 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 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 operated and was reported as a separate operating segment in 2017 but was 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.

1 The result from operating activities for 2017 includes the impact of the fair value adjustment of acquired inventories (CHF 77 million increased cost of goods sold) as well as the amortization of the acquired technologies and customer relations (CHF 60 million)

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

Acquisition of Capsugel S.A.

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

 

 

 

Cash consideration

 

3,325

Total consideration transferred

 

3,325

 

 

 

Cash and cash equivalents acquired

 

(120)

Cash outflow on acquisition

 

3,205

The total goodwill resulting from the Capsugel acquisition amounted to CHF 2,519 million and included 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 expert.

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

Directly attributable transaction costs of CHF 26 million were reported in the Corporate 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 did 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.

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 did not have a significant impact on the consolidated financial statements for the year ended 31 December 2017, with the exception of the acquired goodwill and intangible assets.

The identifiable assets acquired and liabilities assumed of these 2017 acquisitions are set out in the table below:

Other Acquisitions

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

 

 

 

 

 

 

 

 

 

Cash consideration

 

33

 

67

 

5

 

105

Total 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.

5.4 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.

The sales 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 31 million at year-end 2018 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 2018 and 2017.