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 tables summarize the valuation of our financial instruments carried at fair value by the above pricing categories (in millions):



		Fair Value
	Fair Value Hierarchy	December 31, 2017		December 31, 2016		December 31, 2015
Measured at fair value on a recurring basis:
Assets:
Investment securities	Level 1	$	17.0	$	38.2	$	14.9

Foreign currency forward contracts	Level 2	$	6.3	$	3.8	$	4.8
Funds associated with Israeli severance liability	Level 2	16.3		15.9		17.2
Total level 2 assets		$	22.6	$	19.7	$	22.0

Royalty Pharma contingent milestone payments	Level 3	$	134.5	$	—	$	—
Financial assets	Level 3	—		2,350.0		5,310.0
Total level 3 assets		$	134.5	$	2,350.0	$	5,310.0

Liabilities:
Interest rate swap agreements	Level 2	$	—	$	—	$	0.3
Foreign currency forward contracts	Level 2	3.8		5.0		3.9
Total level 2 liabilities		$	3.8	$	5.0	$	4.2

Contingent consideration	Level 3	$	22.0	$	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	11.5		758.0		—
Assets held for sale, net	Level 3	—		18.2		37.5
Total level 3 assets		$	11.5	$	1,924.9	$	1,069.3


⁽¹⁾	As of December 31, 2016, goodwill with a carrying amount of $2.2 billion was written down to its implied fair value of $1.1 billion.


⁽²⁾	As of December 31, 2016, indefinite-lived intangible assets with a carrying amount of $0.7 million were written down to a fair value of $0.3 million. As of December 31, 2015, indefinite-lived intangible assets with a carrying amount of $1.2 billion were written down to a fair value of $1.0 billion.

⁽³⁾

As of December 31, 2017, definite-lived intangible assets with a carrying amount of $31.2 million were written down to a fair value of $11.5 million. As of December 31, 2016, definite-lived intangible assets with a carrying amount of $2.3 billion were written down to a fair value of $758.0 million. Included in this balance are indefinite-lived intangible assets with a 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.

There were no transfers among Level 1, 2, and 3 during the years ended December 31, 2017, and December 31, 2016, or the six months ended December 31, 2015. Our policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period (refer to Note 7 for information on our investment securities and 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 labor laws and agreements require us to pay benefits to employees dismissed or retiring under certain circumstances. Severance pay is calculated on the basis of the most recent employee salary levels and the length of employee service. Our Israeli subsidiaries also provide retirement bonuses to certain managerial employees. We make regular deposits to retirement funds and purchase insurance policies to partially fund these liabilities. The funds 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.

Financial Assets

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.

Prior to its divestiture on March 27, 2017, we accounted for the Tysabri^® royalty stream as a financial asset and 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 believed this method was most appropriate for an asset that did not have a par value, a stated interest stream, or a termination date. The financial asset acquired represented 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 was 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 were 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.

In the first quarter of 2016, a competitor's pipeline product, Ocrevus^®, received breakthrough therapy designation from the U.S. Food and Drug Administration ("FDA"). Breakthrough therapy designation is granted when a drug is 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 a 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 late in the first quarter of 2017. The product is expected to compete with Tysabri^®, and we expected it to have a significant negative impact on the Tysabri^®royalty stream. Industry analysts believe that, based on released clinical study information, Ocrevus^® will compete favorably 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^®, we used industry analyst estimates to reduce our first ten year growth forecasts from an average 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^® financial asset. 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, we performed an evaluation to assess the discount rate and general market conditions potentially affecting the fair value of our Tysabri^®financial asset. As of December 31, 2015, had this discount rate increased or decreased by 0.5%, the fair value of the asset would have increased by $270.0 million or decreased by $260.0 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. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri^® financial asset. As of December 31, 2016, the financial asset was adjusted based on this strategic review and sale process.

On March 27, 2017, we announced the completed divestment of our Tysabri^® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri^® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. We chose the fair value option as we believe it will help investors understand the potential future cash flows we may receive associated with the two contingent milestones.

The following table summarizes the change in our Consolidated Balance Sheet for the Tysabri^® Financial Asset, 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 years ended December 31, 2017 and 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, 2017			December 31, 2016			December 31, 2015			June 27, 2015
Tysabri^®financial asset
Beginning balance	$	2,350.0		$	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
Divestitures	(2,350.0		)	—			—			—
Ending balance	$	—		$	2,350.0		$	5,310.0		$	5,420.0

Royalty Pharma Contingent Milestone Payments

We valued the contingent milestone payments using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri^® that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% and a rate of return of 8.07% as of December 31, 2017. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. During the year ended December 31, 2017, the fair value of the Royalty Pharma contingent milestone payments decreased $42.0 million, as a result of the decrease in the estimated projected Tysabri^® revenues due to the launch of Ocrevus^® late in the first quarter of 2017.

In addition, payment of the contingent milestone payments is dependent on global net sales of Tysabri^®. Of the $134.5 million of estimated fair valued contingent milestone payments as of December 31, 2017, $79.7 million and $54.8 million relates to the 2018 and 2020 contingent milestone payments, respectively. If Tysabri^® global net sales do not meet the prescribed threshold in 2018, we will write off the $79.7 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $250 million and recognize income of $170.3 million in Change in financial assets on the Consolidated Statement of Operations. If Tysabri^® global net sales do not meet the prescribed threshold in 2020, we will write off the $54.8 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $400.0 million and recognize income of $345.2 million in Change in financial assets on the Consolidated Statement of Operations.

Global Tysabri^® net sales need to exceed $1.9 billion and $2.0 billion in 2018 and 2020, respectively in order for Royalty Pharma to receive the level of royalties needed to trigger the milestone payments owed to us.

See Note 1 for amounts recorded in our accounts receivable related to our Tysabri^® financial asset.

The table below presents a reconciliation for the Royalty Pharma contingent milestone payments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Change in fair value in the table was recorded in Change in financial assets on the Consolidated Statements of Operations.



	Year Ended
	December 31, 2017
Royalty Pharma Contingent Milestone Payments
Beginning balance	$	—
Additions	184.5
Payments	(8.0		)
Change in fair value	(42.0		)
Ending balance	$	134.5

Interest Rate Swaps

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

Guarantee Liability Related to The Israel API Sale

On November 21, 2017, we completed the sale of our Israel API business to SK Capital (refer to Item 8. Note 2). As a result of the sale, we recognized a guarantee liability, which was classified as a level 3 liability. Per the agreement, we will be reimbursed for tax receivables for tax years prior to closing and will need to reimburse SK Capital for the settlement of any uncertain tax liability positions for tax years prior to closing. In addition, after closing and going forward, the Israel API business, will be assessed by and liable to the Israel Tax Authority ("ITA") for any audit findings. As of November 21, 2017, we are no longer the primary obligor on the liabilities transferred to SK Capital, however, we have provided a guarantee on certain obligations that were recorded at a fair value of $13.8 million, with a maximum possible payout of $34.9 million.

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. We reduced a contingent consideration liability associated with certain IPR&D assets (refer to Note 3) and recorded a corresponding gain of $17.4 million during the year ended December 31, 2017. The liability decrease relates to a reduction of the probability of achievement assumptions and anticipated cash flows (refer to Note 2). In addition, we sold a certain IPR&D asset and the corresponding contingent consideration of $12.5 million was reduced. 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 Other expense (Income), net on the Consolidated Statements of Operations.



	Year Ended						Six Months Ended
	December 31, 2017			December 31, 2016			December 31, 2015
Contingent Consideration
Beginning balance	$	69.9		$	17.9		$	—
Net realized losses	(19.5		)	(2.1		)	—
Purchases or additions	—			56.7			17.9
Divestiture	(12.5		)	—			—
Currency translation adjustments	1.5			0.1			—
Settlements	(17.4		)	(2.7		)	—
Ending balance	$	22.0		$	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.

Goodwill and Indefinite-Lived Intangible Assets

We have six reporting units for which we assess the goodwill in each reporting unit for impairment. 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. 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, 2017 included long-term growth rates ranging from of 2.0% to 3.0%. We also utilized discount rates ranging from 7.5% to 13.5%, 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 $849.5 million, for the year ended December 31, 2016, respectively. 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, 2017, the remaining goodwill and indefinite-lived asset balances were $4.2 billion and $90.3 million, respectively (refer to Note 3).

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. We conduct our definite-lived intangible asset impairment test quarterly when indications of impairment exists. Below is a summary of the various metrics used in our valuations:



	Year Ended
	December 31, 2017
	Lumara
5-year average growth rate	(4.1)%
Discount rate	13.5%
Valuation method	MPEEM



	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 and RX goodwill reporting units (refer to Note 3 for a additional detail on impaired definite-lived intangible assets).

Fixed Rate Long-term Debt

Our fixed rate long-term debt consisted of public bonds, a private placement note and retail bonds as follows (in millions):



		Year Ended
	Fair Value Hierarchy	December 31, 2017		December 31, 2016		December 31, 2015

Public bonds	Level 1
Carrying value		$	2.6	$	4.6	$	3.9
Fair value		$	2.7	$	4.6	$	3.8

Retail bonds and private placement note	Level 2
Carrying value (excluding premium)		$	306.0	$	773.1	$	798.3
Fair value		$	342.1	$	825.0	$	859.8
Premium		$	21.4	$	49.8	$	82.5

The fair values of our public bonds for all periods were based on quoted market prices. The fair values of our retail bonds and private placement note for all periods were based on interest rates offered for borrowings of a similar nature and remaining maturities.

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.