FAIR VALUE MEASUREMENTS

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.


Level 1:	Quoted prices for identical instruments in active markets.


Level 2:	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.


Level 3:	Valuations derived from valuation techniques in which one or more significant inputs are not observable.

The following table summarizes the valuation of our financial instruments carried at fair value and measured at fair value on a recurring and non-recurring basis by the above pricing categories (in millions):



		Fair Value
	Fair Value Hierarchy	December 31, 2016		December 31, 2015		June 27, 2015
Measured at fair value on a recurring basis:
Assets:
Investment securities	Level 1	$	38.2	$	14.9	$	12.7

Foreign currency forward contracts	Level 2	3.8		4.8		12.4
Funds associated with Israeli severance liability	Level 2	15.9		17.2		17.3
		19.7		22.0		29.7

Tysabri^® royalty stream - at fair value (restated)	Level 3	2,350.0		5,310.0		5,420.0

Liabilities:
Interest rate swap agreements	Level 2	—		0.3		—
Foreign currency forward contracts	Level 2	5.0		3.9		4.6
Total level 2 liabilities		5.0		4.2		4.6

Contingent consideration	Level 3	$	69.9	$	17.9	$	—

Measured at fair value on a non-recurring basis:
Assets:
Goodwill⁽¹⁾	Level 3	$	1,148.4	$	—	$	—
Indefinite-lived intangible assets⁽²⁾	Level 3	0.3		1,031.8		—
Definite-lived intangible assets⁽³⁾	Level 3	758.0		—		—
Assets held for sale, net	Level 3	18.2		37.5		—
Total level 3 assets		$	1,924.9	$	1,069.3	$	—


⁽¹⁾	Goodwill with a carrying amount of $2.2 billion was written down to its implied fair value of $1.1 billion resulting in a total impairment charge of $1.1 billion.


⁽²⁾	Indefinite-lived intangible assets with a carrying amount of $0.7 million were written down to a fair value of $0.3 million resulting in a total impairment charge of $0.4 million.

⁽³⁾

Definite-lived intangible assets with a carrying amount of $2.3 billion were written down to a fair value of $758.0 million resulting in a total impairment charge of $1.5 billion. Included in this balance are indefinite-lived intangible assets with fair value of $364.5 million and $674.2 million that were reclassified to definite-lived assets at April 3, 2016 and October 2, 2016, respectively. Total impairment charges recorded on the indefinite-lived intangible assets were $849.1 million.

There were no transfers among Level 1, 2, and 3 during the year ended December 31, 2016, the six months ended December 31, 2015, or the year ended June 27, 2015. Our policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period. See Note 7 for information on our investment securities. See Note 8 for a discussion of derivatives.

Foreign Currency Forward Contracts

The fair value of foreign currency forward contracts is determined using a market approach, which utilizes values for comparable derivative instruments.

Funds Associated with Israel Severance Liability

Israeli post-employment benefits represent amounts we have deposited in funds managed by financial institutions designated by management to cover post-employment benefits for our Israeli employees as required by Israeli law. The funds are recorded in Other non-current assets and values are determined using prices for recently traded financial instruments with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves, that are observable at commonly quoted intervals.

Tysabri^® Royalty Stream - at Fair Value

On December 18, 2013, we acquired Elan, which had a royalty agreement with Biogen Idec Inc. ("Biogen"), whereby Biogen conveyed the right to receive royalties that are typically payable on sales revenue generated by the sale, distribution or other use of the drug Tysabri^®. Pursuant to the royalty agreement, we were entitled to royalty payments from Biogen based on its Tysabri^® sales in all indications and geographies. We received royalties of 12% on worldwide Biogen sales of Tysabri^®from December 18, 2013 through April 30, 2014. From May 1, 2014 we received royalties of 18% on annual worldwide Biogen sales of Tysabri^®up to $2.0 billion and 25% on annual sales above $2.0 billion.

We are accounting for the Tysabri^® royalty stream as a financial asset and have elected to use the fair value option model. We made the election to account for the Tysabri^® financial asset using the fair value option as we believe this method is most appropriate for an asset that does not have a par value, a stated interest stream, or a termination date. The financial asset acquired represents a single unit of accounting. The fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected probability weighted future cash flows to be generated by the royalty stream. The financial asset is classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs, including industry analyst estimates for global Tysabri^® sales, probability weighted as to the timing and amount of future cash flows along with certain discount rate assumptions. Cash flow forecasts included the estimated effect and timing of future competition, considering patents in effect for Tysabri^® through 2024 and contractual rights to receive cash flows into perpetuity. The discounted cash flows are based upon the expected royalty stream forecasted into perpetuity using a 20-year discrete period with a declining rate terminal value. The pre-tax discount rate utilized was 7.72% and 7.83% at December 31, 2015, and June 27, 2015, respectively. Significant judgment is required in selecting appropriate discount rates.

In the first quarter of 2016, a competitor's pipeline product, Ocrevus^®, received breakthrough therapy designation from the FDA. Breakthrough therapy designation is when a drug intended alone or in combination with one or more other drugs to treat a serious or life threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. In June 2016 the FDA granted priority review with target action date in December 2016. A priority review is a designation when the FDA will direct overall attention and resources to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications. The product was approved in the first quarter of 2017. The product is expected to compete with Tysabri^® and we expect it will have a significant negative impact on the Tysabri^®royalty stream. Although the product has not launched, industry analysts believe that based on released clinical study information, Ocrevus^® will favorably compete against Tysabri^® in the relapsing, remitting multiple sclerosis market segment due to its high efficacy and convenient dosage form. Given the new market information for Ocrevus^®, using industry analyst estimates we reduced our first ten year growth forecasts from an average of growth of approximately 3.4% in the fourth calendar quarter of 2015 to an average decline of approximately minus 2.0% in the third and fourth calendar quarters of 2016. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri^® asset which was completed March 27, 2017. As of December 31, 2016, the financial asset was adjusted based on the strategic review and sale process. These effects, combined with the change in discount rate each quarter, led to a reduction in fair value of $204.4 million, $910.8 million, $377.4 million and $1.1 billion in the first, second, third and fourth quarters of 2016, respectively.

At December 31, 2015, and June 27, 2015, an evaluation was performed to assess the discount rate and general market conditions potentially affecting the fair value. As of December 31, 2015, had this discount rate had increased or decreased by 0.5%, the fair value of the asset would have decreased by $260.0 million or increased by $270.0 million, respectively. As of June 27, 2015, had this discount rate increased or decreased by 0.5%, the fair value of the asset would have decreased by $260.0 million or increased by $290.0 million, respectively. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from those estimates. Quarterly, we assess the expected future cash flows and to the extent such payments are greater or less than initial estimates, or the timing of such payments is materially different than the original estimates, we will adjust the estimated fair value of the asset. As of December 31, 2015 if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $270.0 million or decreased by $280.0 million, respectively. As of June 27, 2015 if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $280.0 million or decreased by $280.0 million, respectively. Refer to Note 22 for additional information on the divestiture.

The following table summarizes the change in our Consolidated Balance Sheet for the Tysabri^® Royalty Stream, which includes our fair value adjustment that is a Level 3 measurement under ASC 820 and is included in our Consolidated Statement of Operations for the year ended December 31, 2016, six months ended December 31, 2015, and year ended June 27, 2015 (in millions):



	Year Ended			Six Months Ended			Year Ended
	December 31, 2016			December 31, 2015			June 27, 2015
	December 31, 2016			Restated			Restated
Tysabri^®Royalty Stream - at fair value
Beginning balance	$	5,310.0		$	5,420.0		$	5,680.0
Royalties earned	(351.8		)	(167.3		)	(338.5		)
Change in fair value	(2,608.2		)	57.3			78.5
Ending balance	$	2,350.0		$	5,310.0		$	5,420.0

Interest Rate Swaps

The fair values of interest rate swaps are determined using a market approach, which utilizes values for comparable swap instruments.

Contingent Consideration

Contingent consideration represents milestone payment obligations obtained through product acquisitions, which are valued using estimates based on probability-weighted outcomes, sensitivity analysis, and discount rates reflective of the risk involved. The estimates are updated quarterly and the liabilities are adjusted to fair value depending on a number of assumptions, including the competitive landscape and regulatory approvals that may impact the future sales of a product. Purchases or additions for the year ended December 31, 2016 included contingent consideration associated with five transactions.

The table below presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Net realized losses in the table were recorded in Administrative expense.



	Year Ended			Six Months Ended		Year Ended
	December 31, 2016			December 31, 2015		June 27, 2015
Contingent Consideration
Beginning balance	$	17.9		$	—	$	17.4
Net realized (gains) losses	(2.1		)	—		0.9
Purchases or additions	56.7			17.9		—
Foreign currency effect	0.1			—		—
Settlements	(2.7		)	—		(18.3		)
Ending balance	$	69.9		$	17.9	$	—

Non-recurring fair value measurements

The non-recurring fair values represent only those assets whose carrying values were adjusted to fair value during the reporting period. We conduct our goodwill and indefinite-lived intangible asset impairment test on the first day of the fourth quarter, unless indications of impairment exists during an interim period.

Goodwill and Indefinite-Lived Intangible Assets

We have nine reporting units for which we assess the goodwill in each reporting unit for impairment. We utilize a comparable company market approach, weighted equally with a discounted cash flow analysis, to determine the fair value of the reporting units. We utilize either a relief from royalty method or a multi-period excess earnings method to value our indefinite-lived intangible assets. We use a consistent set of projected financial information for the goodwill and indefinite-lived asset impairment tests. The discounted cash flow analysis that we prepared for goodwill impairment testing purposes for the year ended December 31, 2016 included long-term growth rates ranging from of 2.0% to 3.0%. We also utilized discount rates ranging from 7.0% to 14.5%, which were deemed to be commensurate with the required investment return and risk involved in realizing the projected free cash flows of each reporting unit. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows of each reporting unit, and applied the tax rates that were applicable to the jurisdictions represented within each reporting unit. We recorded Impairment charges on the Consolidated Statements of Operations related to Goodwill and indefinite-lived intangible assets of $1.1 billion and $0.4 million, respectively, for the year ended December 31, 2016. We recorded Impairment charges on the Consolidated Statements of Operations related to indefinite-lived intangible assets of $185.1 million for the six months ended December 31, 2015. As of December 31, 2016, the remaining goodwill and indefinite-lived asset balances were $4.0 billion and $114.5 million, respectively. See Note 3 for an additional detail on impaired goodwill and indefinite-lived intangible assets.

Definite-Lived Intangible Assets

When assessing our definite-lived assets for impairment, we utilize either a multi-period excess earnings method or a relief from royalty method to determine the fair value of the asset and use the forecasts that are consistent with those used in the reporting unit analysis. Below is a summary of the various metrics used in our valuations:



	Year Ended
	December 31, 2016
	Omega - Lifestyle	Omega - XLS	Entocort^®- Branded Products	Entocort^®- AG Products	Herron Trade names and Trademarks
5-year average growth rate	2.5%	3.2%	(31.7)%	(30.4)%	4.6%
Long-term growth rates	2.0%	NA	(10.0)%	(4.7)%	2.5%
Discount rate	9.3%	9.5%	13.0%	10.5%	10.8%
Royalty rate	NA	4.0%	NA	NA	11.0%
Valuation method	MPEEM	Relief from Royalty	MPEEM	MPEEM	Relief from Royalty

We recorded Impairment charges on the Consolidated Statements of Operations related to definite-lived intangible assets of $665.6 million during the year ended December 31, 2016. These impairments were primarily recorded in our BCH-ROW and RX goodwill reporting units. See Note 3 for an additional detail on impaired definite-lived intangible assets. See Note 6 for additional information on the fair value metrics.

Assets Held for sale

When a group of assets is classified as held-for-sale, the book value is evaluated and adjusted to the lower of its carrying amount or fair value less the cost to sell. See Note 9 for additional information on the impaired assets held for sale, net.

Fixed Rate Long-term Debt

As of December 31, 2016, December 31, 2015, and June 27, 2015, our fixed rate long-term debt consisted of public bonds, a private placement note, and retail bonds that were assumed with the Omega acquisition. As of December 31, 2016, the public bonds and private placement note had a carrying value and fair value of $4.6 billion, based on quoted market prices (Level 1). As of December 31, 2015, the public bonds and private placement note had a carrying value of $3.9 billion and fair value of $3.8 billion, based on quoted market prices (Level 1). As of June 27, 2015, the public bonds and private placement note had a carrying value and fair value of $3.9 billion, based on quoted market prices (Level 1). As of December 31, 2016, our retail bonds had a carrying value of $773.1 million (excluding a premium of $49.8 million) and a fair value of $825.0 million. As of December 31, 2015, our retail bonds had a carrying value of $798.3 million (excluding a premium of $82.5 million) and a fair value of $859.8 million. As of June 27, 2015, our retail bonds had a carrying value of $820.9 million (excluding a premium of $97.1 million) and a fair value of $902.4 million. The fair values for all periods were based on interest rates offered for borrowings of a similar nature and remaining maturities (Level 2).

The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt and variable rate long-term debt, approximate their fair value.