Fair Value Measurements

9 Months Ended

Sep. 28, 2019

FAIR VALUE MEASUREMENTS

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



	September 28, 2019						December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Measured at fair value on a recurring basis:
Assets:
Investment securities	$	2.6	$	—	$	—	$	9.4	$	—	$	—
Foreign currency forward contracts	—		8.4		—		—		3.8		—
Cross-currency swap	—		30.1		—		—		—		—
Funds associated with Israeli severance liability	—		14.3		—		—		13.0		—
Royalty Pharma contingent milestone	—		—		91.7		—		—		323.2
Total assets	$	2.6	$	52.8	$	91.7	$	9.4	$	16.8	$	323.2

Liabilities:
Foreign currency forward contracts	$	—	$	4.9	$	—	$	—	$	9.2	$	—
Contingent consideration payments	—		—		13.2		—		—		15.3
Total liabilities	$	—	$	4.9	$	13.2	$	—	$	9.2	$	15.3

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⁾	—		—		11.6		—		—		22.4
Total assets	$	—	$	—	$	11.6	$	—	$	—	$	75.1


(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 carrying amounts of $46.9 million were written down to a fair value of $10.5 million.


(3)	As of September 28, 2019, a definite-lived intangible asset with a carrying amount of $22.4 million was written down to a fair value of $11.6 million. As of December 31, 2018, definite-lived intangible assets with carrying amounts of $72.0 million were written down to a fair value of $22.4 million.

There were no transfers among Level 1, 2, and 3 during the three and nine months ended September 28, 2019 or the year ended December 31, 2018.

Royalty Pharma Contingent Milestone

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



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019			September 29, 2018
Beginning balance	$	89.1	$	125.5	$	323.2		$	134.5
Payments received	—		—		(250.0		)	—
Change in fair value	2.6		74.9		18.5			65.9
Ending balance	$	91.7	$	200.4	$	91.7		$	200.4

We value our contingent milestone payment 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:



	Three Months Ended
	September 28, 2019		September 29, 2018
Volatility	30.0	%	30.0	%
Rate of return	7.99	%	8.07	%

The fair value of the Royalty Pharma contingent milestone payment increased by $2.6 million and $18.5 million during the three and nine months ended September 28, 2019, respectively. These adjustments were driven by higher projected global net sales of Tysabri^® and the estimated probability of achieving the earn-out. 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.

In order for us to receive the 2020 milestone payment of $400.0 million, Royalty Pharma contingent payments for Tysabri^® sales in 2020 must exceed $351.0 million. In 2018, the Royalty Pharma contingent payments for Tysabri^®were $337.5 million. If Royalty Pharma contingent payments for Tysabri^® sales do not meet the prescribed threshold in 2020, we will write off the $91.7 million asset as an expense. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $308.3 million in Change in financial assets on the Condensed Consolidated Statements of Operations.

Contingent Consideration Payments

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



	Three Months Ended					Nine Months Ended
	September 28, 2019		September 29, 2018			September 28, 2019			September 29, 2018
Beginning balance	$	12.1	$	16.2		$	15.3		$	22.0
Changes in value	1.1		1.1			(0.9		)	(0.3		)
Currency translation adjustments	—		(0.3		)	—			(0.3		)
Settlements and other adjustments	—		(0.6		)	(1.2		)	(5.0		)
Ending balance	$	13.2	$	16.4		$	13.2		$	16.4

Goodwill and Intangible Assets

Evamist branded product

When measuring the impairment of our Evamist branded product, a definite-lived intangible asset, during the three months ended September 28, 2019, we utilized a discounted cash flow technique to estimate the fair value of the asset. Significant valuation inputs and assumptions relate to our projected future cash flows, including volume and average selling price (refer to Note 4).

Generic product

When measuring the impairment of a certain definite-lived asset during the three months ended June 29, 2019, we utilized a discounted cash flow technique to estimate the fair value of the asset. Significant valuation inputs and assumptions relate to our projected future cash flows, including the total market size, our estimated market share, and our average selling price (refer to Note 3 and Note 4).

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 rate. 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).

Fixed Rate Long-term Debt

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



	September 28, 2019				December 31, 2018
	Level 1		Level 2		Level 1		Level 2
Public Bonds
Carrying Value (excluding discount)	$	2,600.0			$	2,600.0
Fair value	$	2,604.1			$	2,316.6

Retail bond and private placement note
Carrying value (excluding premium)			$	147.7			$	292.5
Fair value			$	163.4			$	307.9

The fair values of our public bonds for all periods were based on quoted market prices. The fair value of our private placement note for all periods was based on interest rates offered for borrowings of a similar nature and remaining maturities. The fair value of our retail bond for the year ended December 31, 2018 was based on interest rates offered for borrowings of a similar nature and remaining maturities. On May 23, 2019, we repaid the retail bond in full (refer to Note 10).

The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt, revolving credit agreements, and variable rate long-term debt, approximate their fair value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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