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	March 31, 2018		December 31, 2017
Measured at fair value on a recurring basis:
Assets:
Investment securities	Level 1	$	13.8	$	17.0

Foreign currency forward contracts	Level 2	$	5.0	$	6.3
Funds associated with Israeli severance liability	Level 2	15.0		16.3
Total level 2 assets		$	20.0	$	22.6

Royalty Pharma contingent milestone payments	Level 3	$	124.9	$	134.5

Liabilities:
Foreign currency forward contracts	Level 2	$	3.8	$	3.8

Contingent consideration	Level 3	$	18.1	$	22.0

Measured at fair value on a non-recurring basis:
Assets:
Definite-lived intangible assets⁽¹⁾	Level 3	$	—	$	11.5


⁽¹⁾	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.

There were no transfers among Level 1, 2, and 3 during the three months ended March 31, 2018 or the year ended December 31, 2017. 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 8 for information on our investment securities and Note 9 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 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 $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 $184.5 million as of April 1, 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.

Royalty Pharma Contingent Milestone Payments

We valued our contingent milestone payments from Royalty Pharma 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 until the contingent milestones are resolved. 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 8.08% as of March 31, 2018. 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 three months ended March 31, 2018, the fair value of the Royalty Pharma contingent milestone payments decreased $9.6 million. The decrease was primarily attributed to projected global net sales of Tysabri^® continuing to fall below the threshold required for payment of the $250.0 million milestone payment for 2018. Global net sales of Tysabri^® are being impacted by competition, namely the launch of Ocrevus^® in the U.S. and European markets in 2017 and 2018, respectively.

Payment of the contingent milestone payments is dependent on actual global net sales of Tysabri^® in 2018 and 2020. Of the $124.9 million of estimated fair value contingent milestone payments as of March 31, 2018, $68.2 million and $56.7 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 $68.2 million asset as an expense to Change in financial assets on the Condensed Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $250.0 million and recognize income of $181.8 million in Change in financial assets on the Condensed Consolidated Statement of Operations. If Tysabri^® global net sales do not meet the prescribed threshold in 2020, we will write off the $56.7 million asset as an expense to Change in financial assets on the Condensed Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $400.0 million and recognize income of $343.8 million in Change in financial assets on the Condensed Consolidated Statement of Operations.

Global Tysabri^® net sales need to exceed $1.85 billion and $1.95 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.

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 Condensed Consolidated Statements of Operations.



	Three Months Ended
	March 31, 2018
Royalty Pharma Contingent Milestone Payments
Beginning balance	$	134.5
Change in fair value	(9.6		)
Ending balance	$	124.9

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 4) and recorded a corresponding gain of $16.5 million during the three months ended April 1, 2017, this gain was partially offset by net realized losses of $2.1 million. The liability decrease relates to a reduction of the probability of achievement assumptions and anticipated cash flows.

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 Condensed Consolidated Statements of Operations.



	Three Months Ended
	March 31, 2018			April 1, 2017
Contingent Consideration
Beginning balance	$	22.0		$	69.9
Net realized (gains) losses	0.4			(14.4		)
Currency translation adjustments	0.1			(0.1		)
Settlements	(4.4		)	(3.4		)
Ending balance	$	18.1		$	52.0

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.

Definite-Lived Intangible Assets

When assessing our definite-lived assets for impairment, we utilize either a multi-period excess earnings method ("MPEEM") 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, 2017
	Lumara Branded Intangible
5-year average growth rate	(4.1)%
Discount rate	13.5%
Valuation method	MPEEM

Fixed Rate Long-term Debt

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



	Fair Value Hierarchy	March 31, 2018		December 31, 2017
(in billions)
Public Bonds	Level 1
Carrying Value (excluding discount)		$	2.6	$	2.6
Fair value		$	2.6	$	2.7

(in millions)
Retail bond and private placement note	Level 2
Carrying value (excluding premium)		$	314.3	$	306.0
Fair value		$	348.0	$	342.1

The fair values of our public bonds for all periods were based on quoted market prices. The fair values of our retail bond 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.