NOTE 7. FAIR VALUE MEASUREMENTS

Financial Instruments

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents (including money market funds and time deposits), restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at $1.00 per unit, which assists in providing adequate liquidity upon demand by the holder. Money market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds and time deposits), accounts receivable, accounts payable and accrued expenses approximate their fair values.

Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:


•	Level 1—Quoted prices in active markets for identical assets or liabilities.


•	Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•	Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Marketable Securities

Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the above-defined fair value hierarchy. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in Marketable securities in our Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015.

At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. The Company reviews unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

Equity and Cost Method Investments

As of September 30, 2016, the Company has investments that it accounts for using the equity or cost method of accounting totaling $9.1 million. The Company divested a joint venture investment owned through its Litha subsidiary during the three months ended March 31, 2016. The Company classified this joint venture investment as Assets held for sale as of December 31, 2015 in its Condensed Consolidated Balance Sheets.

With respect to its other equity or cost method investments, which are included in Other Assets in the Company’s Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015, the Company did not recognize any other-than-temporary impairments. The Company considered various factors, including the operating results of its equity method investments and the lack of an unrealized loss position on its cost method investments.

Acquisition-Related Contingent Consideration

The fair value of contingent consideration liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.

Recurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015 were as follows (in thousands):



	Fair Value Measurements at Reporting Date using:
September 30, 2016	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	65,500	$	—	$	—	$	65,500
Time deposits	—		100,091		—		100,091
Equity securities	2,361		—		—		2,361
Total	$	67,861	$	100,091	$	—	$	167,952
Liabilities:
Acquisition-related contingent consideration—short-term	$	—	$	—	$	108,778	$	108,778
Acquisition-related contingent consideration—long-term	—		—		177,019		177,019
Total	$	—	$	—	$	285,797	$	285,797

At September 30, 2016, money market funds include $40.5 million in Qualified Settlement Funds to be disbursed to mesh-related product liability claimants. See Note 12. Commitments and Contingencies for further discussion of our product liability cases.



	Fair Value Measurements at Reporting Date using:
December 31, 2015	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	51,145	$	—	$	—	$	51,145
Equity securities	3,889		—		—		3,889
Total	$	55,034	$	—	$	—	$	55,034
Liabilities:
Acquisition-related contingent consideration—short-term	$	—	$	—	$	65,265	$	65,265
Acquisition-related contingent consideration—long-term	—		—		78,237		78,237
Total	$	—	$	—	$	143,502	$	143,502

At December 31, 2015, money market funds include $51.1 million in Qualified Settlement Funds to be disbursed to mesh-related product liability claimants. See Note 12. Commitments and Contingencies for further discussion of our product liability cases.

Fair Value Measurements Using Significant Unobservable Inputs

The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Beginning of period	$	135,796		$	189,082		$	143,502		$	46,005
Amounts acquired	146,866			47,900			146,866			214,435
Amounts settled	(8,121		)	(13,094		)	(30,242		)	(21,668		)
Transfers (in) and/or out of Level 3	—			—			—			—
Measurement period adjustments	—			(78		)	—			(11,634		)
Changes in fair value recorded in earnings	11,585			(80,277		)	24,790			(83,605		)
Effect of currency translation	(329		)	(1,210		)	881			(1,210		)
End of period	$	285,797		$	142,323		$	285,797		$	142,323

The fair value measurement of the contingent consideration obligations was determined using risk-adjusted discount rates ranging from 3.0% to 22.0%. Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items, and amounts recorded for the short-term and long-term portions of acquisition related contingent consideration are included in Accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.

The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the nine months ended September 30, 2016 by acquisition (in thousands):



	Balance as of December 31, 2015		Acquisitions		Fair Value Adjustments and Accretion			Payments and Other			Balance as of September 30, 2016
Qualitest acquisition	$	1,137	$	—	$	(1,137	)	$	—		$	—
Sumavel acquisition	631		—		(631		)	—			—
Auxilium acquisition	26,435		—		2,203			(9,787		)	18,851
Lehigh Valley Technologies, Inc. acquisitions	97,003		—		24,686			(19,389		)	102,300
Voltaren Gel^® acquisition	—		142,355		(2,905		)	—			139,450
Other	18,296		4,511		2,574			(185		)	25,196
Total	$	143,502	$	146,866	$	24,790		$	(29,361	)	$	285,797

The following is a summary of available-for-sale securities held by the Company at September 30, 2016 and December 31, 2015 (in thousands):



	Available-for-sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
September 30, 2016
Money market funds	$	65,500	$	—	$	—	$	65,500
Total included in cash and cash equivalents	$	25,012	$	—	$	—	$	25,012
Total included in restricted cash and cash equivalents	$	40,488	$	—	$	—	$	40,488
Equity securities	$	—	$	—	$	—	$	—
Total other short-term available-for-sale securities	$	—	$	—	$	—	$	—
Equity securities	$	1,766	$	595	$	—	$	2,361
Long-term available-for-sale securities	$	1,766	$	595	$	—	$	2,361



	Available-for-sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
December 31, 2015
Money market funds	$	51,145	$	—	$	—	$	51,145
Total included in cash and cash equivalents	$	3	$	—	$	—	$	3
Total included in restricted cash and cash equivalents	$	51,142	$	—	$	—	$	51,142
Equity securities	$	24	$	10	$	—	$	34
Total other short-term available-for-sale securities	$	24	$	10	$	—	$	34
Equity securities	$	1,766	$	2,089	$	—	$	3,855
Long-term available-for-sale securities	$	1,766	$	2,089	$	—	$	3,855

Nonrecurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2016 were as follows (in thousands):



	Fair Value Measurements at Reporting Date using:						Total Expense for the Nine Months Ended September 30, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Expense for the Nine Months Ended September 30, 2016
Assets:
Certain Astora property, plant and equipment (NOTE 3)	$	—	$	—	$	—	$	(5,041	)
Certain U.S. Generics Pharmaceuticals property, plant and equipment	—		—		649		(4,448		)
Certain U.S. Branded Pharmaceuticals intangible assets (NOTE 9)	—		—		—		(72,814		)
Certain U.S. Generic Pharmaceuticals intangible assets (NOTE 9)	—		—		45,966		(169,576		)
Certain International Pharmaceuticals intangible assets (NOTE 9)	—		—		5,324		(16,243		)
Certain Astora intangible assets (NOTE 3)	—		—		—		(16,287		)
Total	$	—	$	—	$	51,939	$	(284,409	)