Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption granted from requirement to provide audited financial statements of the acquired business in a BAR – it is impracticable to prepare financial statements – filer granted relief to include alternative financial information, comprised of statement of assets acquired and liabilities assumed and statement of operations, as financial statement disclosure for a significant acquisition.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.1.
National Instrument 44-101 Short Form Prospectus Distributions, s. 8.1.
Form 44-101F1 Short Form Prospectus, s. 10.2.
November 15, 2016
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
ARALEZ PHARMACEUTICALS INC.
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for:
(a) a decision pursuant to section 13.1 of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”) that the requirement under section 8.4 of NI 51-102 and Item 3 of Form 51-102F4 Business Acquisition Report (“Form 51-102F4”) to provide certain historical financial statements of a business that constitutes a significant acquisition, together with an auditor’s report on such financial statements (collectively, the “Historical Financial Statements”) in a business acquisition report (or any document or series of documents that are furnished to the SEC in connection with a business acquisition containing all of the information, including financial statements, required to be included in a business acquisition report) (a “BAR”) not apply to the Filer in connection with the Acquisition (as defined below); and
(b) a decision pursuant to section 8.1 of National Instrument 44-101 Short Form Prospectus Distributions (“NI 44-101”) that the Historical Financial Statements be included or incorporated by reference in any short form prospectus which the Filer files pursuant to NI 44-101 (a “Prospectus”), as required by Item 10.2(4) of Form 44-101F1 – Short Form Prospectus (“Form 44-101F1”), not apply to the Filer in connection with the Acquisition
(collectively, the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in Alberta, British Columbia, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland (together with the Jurisdiction, the “Jurisdictions”).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the Business Corporations Act (British Columbia) and is a reporting issuer or the equivalent thereof in each of the Jurisdictions, and to the best of its knowledge, information and belief, is not in default of any requirement of securities legislation applicable in the Jurisdictions.
2. The Filer is an “SEC issuer” as defined in NI 51-102. The Filer is a U.S. domestic issuer and not a “foreign private issuer” within the meaning of Rule 405 under the Securities Exchange Act of 1934 of the United States of America.
3. The common shares of the Filer are listed and posted for trading on the TSX under the symbol “ARZ” and on the NASDAQ Global Market under the symbol “ARLZ”.
4. The Filer’s financial year-end is December 31. The Filer reports in U.S. GAAP and U.S. Dollars.
5. On October 31, 2016 (the “Closing Date”), the Filer acquired the U.S. rights to Toprol-XL® (the “Acquired Assets”), pursuant to an asset purchase agreement (the “Acquisition”) with AstraZeneca AB, a wholly-owned, indirect subsidiary of AstraZeneca AB, a wholly-owned, indirect subsidiary of AstraZenecaPLC (“AZ”).
6. The asset purchase agreement for the Acquisition was executed on October 3, 2016.
7. No employees were transferred to the Filer as part of the Acquisition.
8. The purchase price of the Acquired Assets consists of:
a. An initial upfront payment of U.S.$175 million on the Closing Date;
b. Certain milestone payments payable subsequent to the Closing Date upon the occurrence of certain milestone events based on the annual aggregate net sales of Toprol-XL® and the currently marketed authorized generic (the “Authorized Generic”) and other contingent events, which in no event will exceed U.S.$48 million in the aggregate;
c. Royalty payments of (A) 15% of total quarterly net sales of Toprol-XL® and any other authorized or owned generic version of Toprol-XL® that is marketed, distributed or sold by or on behalf of, or under a license or sublicense from, the Filer or any of its affiliates (other than the Authorized Generic), and (B) 15% of quarterly net sales of the Authorized Generic, but for purposes of royalty payments and clause (B) only, net sales do not include the supply price paid for the Authorized Generic by the Filer to AZ under the supply agreement to be entered into in connection with the closing of the Acquisition in respect of the applicable period; and
d. A payment for the value of the finished inventory of Toprol-XL® and Authorized Generic at the Closing Date, not to exceed a cap specified in the asset purchase agreement.
9. Details of the Acquisition and the asset purchase agreement related to the Acquisition can be found in the Current Report on Form 8-K (News Release) filed on SEDAR by the Filer on October 7, 2016 and a News Release filed on SEDAR by the Filer on October 31, 2016.
10. Pursuant to section 8.3 of NI 51-102 and section 81.(4) of Companion Policy 51-102CP – Continuous Disclosure Obligations (“51-102CP”), the Filer has concluded that the Acquisition constitutes as “significant acquisition” of a “business”. Accordingly the Filer will be required to file a BAR within 75 days of the Closing Date.
11. In addition, in connection with the filing of any Prospectus following completion of the Acquisition, the Filer would be required to include in any such Prospectus, in accordance with Form 44-101F1 Item 10(4)(a) or (b), financial statements and other information that is required to be included in, or incorporated by reference into, a BAR filed under Part 8 of NI 51-102 or satisfactory alternative financial statements or other information.
12. Section 8.4 of NI 51-102 requires that the Filer include in the BAR the following financial statements for the Acquired Assets:
a. comparative annual financial statements, including:
i. a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for (i) the audited annual period ended December 31, 2015; and (ii) the annual period ended December 31, 2014;
ii. an audited statement of financial position as at December 31, 2015;
iii. a statement of financial position as at December 31, 2014; and
iv. notes to the annual financial statements; and
b. an interim financial report for September 30, 2016 and 2015.
13. Section 8.4(5) requires that the Filer include:
a. a pro forma statement of financial position of the Filer as at the date of the Filer’s most recent statement of financial position filed that gives effect, as if the Acquisition has taken place as at the date of the pro forma statement of financial position, to the Acquisition; and
b. a pro forma income statement that gives effect to significant acquisitions completed since January 1, 2015 (including the Acquisition) for (i) the annual period ended December 31, 2015; and (ii) the most recent interim period of the Filer that ended immediately before the Closing Date.
14. Section 10.2(4) of Form 44-101F1 requires that, in any Prospectus filed after completion of a significant acquisition for which the Filer has not yet filed a BAR under NI 51-102, the Filer include the financial statements that would be required under NI 51-102, as outlined above, or satisfactory alternative financial statements or other information.
15. AZ has advised the Filer that it did not treat the Acquired Assets as a separate and distinct business or division for accounting purposes, and, as a result, AZ did not prepare or maintain stand-alone financial statements specific to the Acquired Assets.
16. The Filer has been further advised by AZ that it is impracticable to prepare full or “carve-out” financial statements for the Acquired Assets in accordance with the requirements under section 8.4 of NI 51-102 for the following reasons:
a. AZ has never maintained distinct and separate accounts for the Acquired Assets necessary to prepare the full financial statements for the Acquired Assets and the Acquired Assets are not accounted for as a separate entity, subsidiary or division of AZ and do not represent a separate legal entity. Accordingly, AZ has informed the Filer that it is unable to prepare carve-out financial statements;
b. the Acquired Assets represented an inconsequential part of the operations of AZ. The estimated net sales of the Acquired Assets for the year ended December 31, 2015 was $89 million, which represented less than 1% of AZ’s 2015 total revenue of $25 billion. The carrying value of the Acquired Assets at December 31, 2015 was nil;
c. the Acquired Assets were integrated into other businesses of AZ and did not represent a separate reporting or operating segment of AZ. Due to the nature of the Acquired Assets, which rely on shared infrastructure, AZ is unable to systematically isolate discrete financial information for indirect activities and related balance sheet accounts as they were integrated with other parts of AZ’s business;
d. AZ did not maintain separate sales and marketing or general and administrative support functions (such as finance and accounting, treasury, human resources, public relations, tax, information systems, legal, accounts receivable and accounts payable) for the Acquired Assets;
e. as a result of the integration of AZ’s business with the Acquired Assets, AZ is unable to objectively allocate certain corporate expenses to the Acquired Assets and, as a result, any allocation would be subjective;
f. consistent with the foregoing, AZ’s systems and procedures do not provide sufficient information for the preparation of stand-alone income tax and interest/capital cost provisions for the Acquired Assets, nor was this required for internal, regulatory or tax purposes as the Acquired Assets are not operated as a separate business or legal entity;
g. as a result of the integration of the Acquired Assets in AZ’s business, there is no reasonable basis to allocate interest expense; and
h. separate cash balances were not maintained for the Acquired Assets; instead, cash receipts and disbursements were aggregated with AZ’s other cash activities.
17. The records are insufficiently detailed to extract information specific to the Acquired Assets as would be required to produce the financial statements as set out in Part 8 of NI 51-102 (and, accordingly, Item 10(4)(a) of Form 44-101F1) and, in the Filer’s view, it is impracticable to do so. As a result of the factors set out above, the assumptions and estimates required for the Filer to “carve-out” a complete set of financial statements for the Acquired Assets would by necessity be arbitrary and speculative and undermine the reliability of those statements. Any such statements would not reflect the true nature of the Acquired Assets or be useful to shareholders or investors.
18. The Filer proposes to include the following financial statements in the BAR and in any Prospectus (collectively, the “Abbreviated Financial Statements”):
a. an audited statement of the assets to be acquired and liabilities to be assumed by the Filer as at September 30, 2016 and December 31, 2015 (each a “Statement of Assets Acquired and Liabilities Assumed”), prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) that:
i. includes all assets acquired and liabilities assumed;
ii. includes a statement that the Statement of Assets Acquired and Liabilities Assumed is prepared using accounting policies that are permitted by U.S. GAAP;
iii. includes a description of the accounting policies used to prepare the Statement of Assets Acquired and Liabilities Assumed; and
iv. includes an auditor’s report that reflects the fact that the Statement of Assets Acquired and Liabilities Assumed was prepared in accordance with the basis of presentation disclosed in the notes to the Statement of Assets Acquired and Liabilities Assumed;
b. an audited statement of the Acquired Assets’ direct revenues and expenses for the year ended December 31, 2015 and the nine months ended September 30, 2016 (the “Statement of Direct Revenues and Expenses”). These statements will be prepared in accordance with U.S. GAAP and include direct revenues generated by the Acquired Assets, less expenses directly attributable to the Acquired Assets and will include notes to the statements outlining the basis of preparation and assumptions used. The notes will include the assumptions used for any allocated costs (e.g., distribution and certain selling, general and administrative costs) and the nature of any costs excluded (e.g., treasury, tax, legal, information technology, human resources, interest expense and taxes). The Statement of Direct Revenues and Expenses will:
i. include a statement that the operating statements are prepared using accounting policies that are permitted by U.S. GAAP;
ii. include a description of the accounting policies used to prepare the operating statements; and
iii. include an auditor’s report that reflects the fact that the operating statements were prepared in accordance with the basis of presentation disclosed in the notes to the operating statements;
c. a pro forma balance sheet as at September 30, 2016 (the “Pro Forma Balance Sheet”); and
d. a pro forma income statement for each of the year ended December 31, 2015 and the nine months ended September 30, 2016 that includes the Filer’s consolidated statements of income and comprehensive income for the year ended December 31, 2015 and the nine months ended September 30, 2016, as applicable, and a constructed statement of the Acquired Assets’ direct revenues and expenses for the twelve-month period ended December 31, 2015 and the nine-month period ended September 30, 2016, as applicable (the “Pro Forma Operating Statements”).
19. Based on the financial information relating to the Acquired Assets, the Filer believes that it would be impracticable to prepare a statement of cash flows. Likewise, there is not sufficient data to prepare information about the operating, investing and financing cash flows of the Acquired Assets.
20. The Filer believes that the Abbreviated Financial Statements will provide investors with sufficient information material to their understanding of the Acquired Assets.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that the Filer includes the Abbreviated Financial Statements in the BAR and in any Prospectus filed by the Filer that would be required to include or incorporate by reference the Historical Financial Statements.
Deputy Director, Corporate Finance Branch
Ontario Securities Commission