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):



	September 29, 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	$	7.0	$	—	$	—	$	17.0	$	—	$	—
Foreign currency forward contracts	—		3.3		—		—		6.3		—
Funds associated with Israeli severance liability	—		14.2		—		—		16.3		—
Royalty Pharma contingent milestone payments	—		—		200.4		—		—		134.5
Total assets	$	7.0	$	17.5	$	200.4	$	17.0	$	22.6	$	134.5

Liabilities:
Foreign currency forward contracts	$	—	$	6.6	$	—	$	—	$	3.8	$	—
Contingent consideration	—		—		16.4		—		—		22.0
Total liabilities	$	—	$	6.6	$	16.4	$	—	$	3.8	$	22.0

Measured at fair value on a non-recurring basis:
Assets:
Goodwill⁽¹⁾	$	—	$	—	$	42.2	$	—	$	—	$	—
Indefinite-lived intangible assets⁽²⁾	—		—		10.5		—		—		—
Definite-lived intangible assets⁽³⁾	—		—		22.4		—		—		11.5
Total assets	$	—	$	—	$	75.1	$	—	$	—	$	11.5


(1)	As of September 29, 2018, goodwill with a carrying amount of $178.9 million was written down to a fair value of $42.2 million.


(2)	As of September 29, 2018, indefinite-lived intangible assets with a carrying amount of $46.7 million were written down to a fair value of $10.5 million.


(3)	As of September 29, 2018, definite-lived intangible assets with a carrying amount of $71.3 million were written down to a fair value of $22.4 million. 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 and nine months ended September 29, 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% as of both September 29, 2018 and September 30, 2017 and a rate of return of 8.07% and 8.06% as of September 29, 2018 and September 30, 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 $74.9 million during the three months ended September 29, 2018. This increase included $67.7 million and $7.2 million increases in the fair value of the 2018 and 2020 contingent milestone payments, respectively. During the nine months ended September 29, 2018, the fair value of the contingent milestone payments increased by $65.9 million. This increase included $53.2 million and $12.7 million increases in the fair value of the 2018 and 2020 contingent milestone payments, respectively. The net changes in the fair value of the contingent milestone payments were driven by higher projected global net sales of Tysabri^® and the estimated probability of achieving the respective earn-outs as of September 29, 2018.

The fair value of the Royalty Pharma contingent milestone payments decreased $2.9 million and $42.1 million during the three and nine months ended September 30, 2017, respectively, 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 $200.4 million of estimated fair value contingent milestone payments as of September 29, 2018, $133.0 million and $67.4 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 $133.0 million asset as an expense. If the prescribed threshold is exceeded, we will increase the asset to $250.0 million and recognize income of $117.0 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 $67.4 million asset as an expense. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $332.6 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					Nine Months Ended
	September 29, 2018		September 30, 2017			September 29, 2018		September 30, 2017
Royalty Pharma Contingent Milestone Payments
Beginning balance	$	125.5	$	145.8		$	134.5	$	—
Additions	—		—			—		184.5
Foreign currency effect	—		0.3			—		0.8
Change in fair value	74.9		(2.9		)	65.9		(42.1		)
Ending balance	$	200.4	$	143.2		$	200.4	$	143.2

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 $17.0 million during the nine months ended September 30, 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						Nine Months Ended
	September 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017
Contingent Consideration
Beginning balance	$	16.2		$	49.7		$	22.0		$	69.9
Net realized (gains) losses	1.1			(2.9		)	(0.3		)	(18.5		)
Currency translation adjustments	(0.3		)	0.2			(0.3		)	1.5
Settlements	(0.6		)	(2.1		)	(5.0		)	(8.0		)
Ending balance	$	16.4		$	44.9		$	16.4		$	44.9

Goodwill and Indefinite-Lived Intangible Assets

Animal Health

When determining the fair value of our animal health reporting unit, we utilized a combination of comparable company market and discounted cash flow techniques. In our comparable company market approach, we considered observable market information and transactions for companies that we deemed to be of a comparable nature, scope, and size of animal health (Level 2 inputs). Our cash flow projections included revenue assumptions related to new products, product line extensions, and existing products, plus gross margin, advertising and promotion, and other operating expenses based on the growth plans (Level 3 inputs). In our discounted cash flow analysis, we utilized projected sales growth rate and discount rate assumptions of 2.5% and 9.75%, respectively. The discount rate correlates with the required investment return and risk that we believe market participants would apply to the projected growth. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows and applied the jurisdictional tax rate of 22.8%. We weighted indications of fair value resulting from the market approach and present value techniques, considering the reasonableness of the range of measurements and the point within the range that we determined was most representative of fair market conditions (refer to Note 4).

When assessing our animal health indefinite-lived intangible asset, we utilized a multi-period excess earnings method ("MPEEM") to determine the fair value of the intangible asset. Our cash flow projections included revenue assumptions related to new products, product line extensions, and existing products. We utilized long-term growth rate and discount rate assumptions of (0.3)% and 9.75%, respectively, and we applied a jurisdictional tax rate of 22.8% (refer to Note 4).

Definite-Lived Intangible Assets

When assessing our animal health definite-lived assets for impairment, we utilized a combination of MPEEM and relief from royalty methods to determine the fair values of definite-lived assets within the asset group. The projected financial information, inputs, and assumptions utilized were consistent with those utilized in the goodwill discounted cash flow analysis described above (refer to Note 4).

Fixed Rate Long-term Debt

Our fixed rate long-term debt consisted of the following (in millions):



	September 29, 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	$	2,513.9			$	2,650.8

Retail bond and private placement note
Carrying value (excluding premium)			$	296.1			$	306.0
Fair value			$	321.1			$	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.