Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair Value Disclosures [Abstract]

Fair value measurement

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 table below summarizes the valuation of our financial instruments carried at fair value by the above pricing categories (in millions):

	Year Ended
	December 31, 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	$	9.4	$	—	$	—	$	17.0	$	—	$	—
Foreign currency forward contracts	—		3.8		—		—		6.3		—
Funds associated with Israeli severance liability	—		13.0		—		—		16.3		—
Royalty Pharma contingent milestone payments	—		—		323.2		—		—		134.5
Total assets	$	9.4	$	16.8	$	323.2	$	17.0	$	22.6	$	134.5
Liabilities:
Foreign currency forward contracts	$	—	$	9.2	$	—	$	—	$	3.8	$	—
Contingent consideration	—		—		15.3		—		—		22.0
Total liabilities	$	—	$	9.2	$	15.3	$	—	$	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 December 31, 2018, goodwill with a carrying amount of $178.9 million was written down to a fair value of $42.2 million.

(2) As of December 31, 2018, indefinite-lived intangible assets with a carrying amount of $46.9 million were written down to a fair value of $10.5 million.

(3) As of December 31, 2018, definite-lived intangible assets with a carrying amount of $72.0 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 years ended December 31, 2018 or 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. 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

The table below summarizes the change in fair value of the Tysabri^® Financial Asset (in millions):

	Year Ended
	December 31, 2017			December 31, 2016
Tysabri® financial asset
Beginning balance	$	2,350.0		$	5,310.0
Royalties earned	—			(351.8		)
Change in fair value	—			(2,608.2		)
Divestitures	(2,350.0		)	—
Ending balance	$	—		$	2,350.0

During the year ended December 31, 2016, we accounted for the Tysabri^® royalty stream as a financial asset and elected to use the fair value option model. The fair value of the financial asset acquired was determined 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. As a result of a competitor's pipeline product Ocrevus^® entering the market, we began evaluating strategic alternatives for the Tysabri^® financial asset and reduced the fair value of the financial asset by $2.6 billion.

During the year ended December 31, 2017, Ocrevus^® was approved, and we divested the 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 on Change in financial assets in the Consolidated Statement of Operations.

Royalty Pharma Contingent Milestone Payments

The table below summarizes the change in fair value of the Royalty Pharma contingent milestone payments (in millions):

	Year Ended
	December 31, 2018		December 31, 2017
Royalty Pharma Contingent Milestone Payments
Beginning balance	$	134.5	$	—
Additions	—		184.5
Payments	—		(8.0		)
Change in fair value	188.7		(42.0		)
Ending balance	$	323.2	$	134.5

We value 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. 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 table below represents the volatility and rate of return:

	Year Ended
	December 31, 2018		December 31, 2017
Volatility	30.0	%	30.0	%
Rate of return	8.05	%	8.07	%

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 a decrease in the estimated Tysabri^® revenue due to the launch of Ocrevus^®.

During the year ended December 31, 2018, royalties on global net sales of Tysabri^® received by Royalty Pharma met the 2018 threshold resulting in an increase to the asset and a gain of $170.1 million recognized in Change in financial assets on the Consolidated Statement of Operations. Due to higher projected global net sales of Tysabri^® and the estimated probability of achieving the 2020 contingent milestone payment, during the year ended December 31, 2018 the fair value of the remaining 2020 Royalty Pharma contingent milestone payment increased $18.6 million.

Guarantee Liability Related to The Israel API Sale

During the year ended December 31, 2017, we completed the sale of our Israel API business to SK Capital (refer to Item 8. Note 3), resulting in a guaranteed liability of $13.8 million, classified as a Level 3 liability within the fair value hierarchy. 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. We are no longer the primary obligor on the liabilities transferred to SK Capital, but we have provided a guarantee on certain obligations. During the year ended December 31, 2018, we reduced the liability in the amount of $3.3 million. At December 31, 2018, the remaining guaranteed liability was $10.5 million.

Contingent Consideration

The table below summarizes the change in fair value of contingent consideration (in millions). Net realized losses were recorded in Other (income) expense, net on the Consolidated Statements of Operations.

	Year Ended
	December 31, 2018			December 31, 2017			December 31, 2016
Contingent Consideration
Beginning balance	$	22.0		$	69.9		$	17.9
Net realized (gains) losses	(1.5		)	(19.5		)	(2.1		)
Purchases or additions	—			—			56.7
Divestiture	—			(12.5		)	—
Currency translation adjustments	(0.2		)	1.5			0.1
Settlements	(5.0		)	(17.4		)	(2.7		)
Ending balance	$	15.3		$	22.0		$	69.9

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. During the year ended December 31, 2017, we reduced a contingent consideration liability associated with certain IPR&D assets and recorded a corresponding gain of $17.4 million. The liability decrease relates to a reduction of the probability of achievement assumptions and anticipated cash flows. 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.

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 Intangible Assets

Animal Health

When determining the fair value of our animal health reporting unit for the year ended December 31, 2018, 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 9.8%, 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 for the year ended December 31, 2018, 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 9.8%, respectively, and we applied a jurisdictional tax rate of 22.8% (refer to Note 4).

When assessing our animal health definite-lived assets for impairment for the year ended December 31, 2018, 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).

Lumara

When assessing the Lumara definite-lived assets for impairment for the year ended December 31, 2017, we utilized a MPEEM to determine the fair value of Lumara product assets. Our inputs and assumptions included a 5-year average growth rate of (4.1)% and discount rate of 13.5%.

Omega, Entocort^®, and Herron

When assessing the Omega, Entocort^®, and Herron definite-lived assets for impairment for the year ended December 31, 2016 we utilized the following valuation methods, inputs, and assumptions:

	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

Fixed Rate Long-term Debt

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

	Year Ended
	December 31, 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	$	2,316.6			$	2,650.8
Retail bond and private placement note
Carrying value (excluding premium)			$	292.5			$	306.0
Fair value			$	307.9			$	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.