FAIR VALUE MEASUREMENTS

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):



	June 30, 2018						December 31, 2017
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Measured at fair value on a recurring basis:
Assets:
Investment securities	$	8.1	$	—	$	—	$	17.0	$	—	$	—
Foreign currency forward contracts	—		2.7		—		—		6.3		—
Funds associated with Israeli severance liability	—		14.2		—		—		16.3		—
Royalty Pharma contingent milestone payments	—		—		125.5		—		—		134.5
Total assets	$	8.1	$	16.9	$	125.5	$	17.0	$	22.6	$	134.5

Liabilities:
Foreign currency forward contracts	$	—	$	9.1	$	—	$	—	$	3.8	$	—
Contingent consideration	—		—		16.2		—		—		22.0
Total liabilities	$	—	$	9.1	$	16.2	$	—	$	3.8	$	22.0

Measured at fair value on a non-recurring basis:
Assets:
Definite-lived intangible assets	$	—	$	—	$	—	$	—	$	—	$	11.5

There were no transfers among Level 1, 2, and 3 during the three and six months ended June 30, 2018 or the year ended December 31, 2017.

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% for each of June 30, 2018 and July 1, 2017, and a rate of return of 8.09% and 8.05% as of June 30, 2018 and July 1, 2017, respectively. 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.

The fair value of the Royalty Pharma contingent milestone payments increased by $0.6 million during the three months ended June 30, 2018. This increase included a $2.9 million decrease in the fair value of the 2018 contingent milestone payment, more than offset by a $3.5 million increase in the fair value of the 2020 contingent milestone payment. During the six months ended June 30, 2018, the fair value of the contingent milestone payments decreased by $9.0 million. The net changes in the fair value of the contingent milestone payments were due to the fluctuation of the projected global net sales of Tysabri^®. 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.

The fair value of the Royalty Pharma contingent milestone payments decreased $39.2 million in each of the three and six months ended July 1, 2017 as a result of a decrease in the estimated Tysabri^® revenues due to the launch of Ocrevus^® in the U.S. market late in the first quarter of 2017.

Payment of the contingent milestone payments is dependent on actual global net sales of Tysabri^® in 2018 and 2020. Of the $125.5 million of estimated fair value contingent milestone payments as of June 30, 2018, $65.3 million and $60.2 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 $65.3 million asset as an expense. If the prescribed threshold is exceeded, we will increase the asset to $250.0 million and recognize income of $184.7 million in Change in financial assets on the Condensed Consolidated Statements of Operations. If Tysabri^® global net sales do not meet the prescribed threshold in 2020, we will write off the $60.2 million asset as an expense. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $339.8 million in Change in financial assets on the Condensed Consolidated Statements 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					Six Months Ended
	June 30, 2018		July 1, 2017			June 30, 2018			July 1, 2017
Royalty Pharma Contingent Milestone Payments
Beginning balance	$	124.9	$	184.5		$	134.5		$	—
Additions	—		—			—			184.5
Foreign currency effect	—		0.5			—			0.5
Change in fair value	0.6		(39.2		)	(9.0		)	(39.2		)
Ending balance	$	125.5	$	145.8		$	125.5		$	145.8

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 $15.6 million during the six months ended July 1, 2017. The liability decrease related 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 operating expense (income) on the Condensed Consolidated Statements of Operations.



	Three Months Ended						Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Contingent Consideration
Beginning balance	$	18.1		$	52.0		$	22.0		$	69.9
Net realized (gains) losses	(1.8		)	(1.3		)	(1.4		)	(15.6		)
Currency translation adjustments	(0.1		)	1.4			—			1.3
Settlements	—			(2.4		)	(4.4		)	(5.9		)
Ending balance	$	16.2		$	49.7		$	16.2		$	49.7

Fixed Rate Long-term Debt

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



	June 30, 2018				December 31, 2017
	Level 1		Level 2		Level 1		Level 2
Public Bonds
Carrying Value (excluding discount)	$	2,600.0			$	2,600.0
Fair value	$	2,525.9			$	2,650.8

Retail bond and private placement note
Carrying value (excluding premium)			$	298.0			$	306.0
Fair value			$	326.7			$	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.