Fair Value Measurements

9 Months Ended

Sep. 30, 2016

FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of September 30, 2016 and December 31, 2015, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):



	Fair Value Measurements at September 30, 2016 Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	5,689	$	5,689	$	—	$	—
Corporate debt securities	252,694		—		252,694		—
U.S. treasury and government agency securities	9,947		—		9,947		—
Commercial paper	31,852		—		31,852		—
Certificates of deposit	11,800		—		11,800		—
Municipal securities	2,499		—		2,499		—
Total Assets	$	314,481	$	5,689	$	308,792	$	—
Liabilities:
Contingent consideration - Lumara Health	$	225,137	$	—	$	—	$	225,137
Contingent consideration - MuGard	2,316		—		—		2,316
Total Liabilities	$	227,453	$	—	$	—	$	227,453



	Fair Value Measurements at December 31, 2015 Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	73,676	$	73,676	$	—	$	—
Corporate debt securities	200,677		—		200,677		—
Commercial paper	34,449		—		34,449		—
Municipal securities	2,500		—		2,500		—
Total Assets	$	311,302	$	73,676	$	237,626	$	—
Liabilities:
Contingent consideration - Lumara Health	$	214,895	$	—	$	—	$	214,895
Contingent consideration - MuGard	7,664		—		—		7,664
Total Liabilities	$	222,559	$	—	$	—	$	222,559

Investments

Our cash equivalents are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our investments are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analyses of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analyses, we did not adjust or override any fair value measurements provided by our pricing services as of September 30, 2016. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the nine months ended September 30, 2016.

Contingent consideration

There were no contingent consideration obligations related to the CBR acquisition. The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are classified as Level 3 assets under the fair value hierarchy as these assets have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents a reconciliation of contingent consideration obligations related to the acquisition of Lumara Health and the MuGard Rights (in thousands):



Balance as of December 31, 2015	$	222,559
Payments made	(212		)
Adjustments to fair value of contingent consideration	5,106
Balance as of September 30, 2016	$	227,453

The $5.1 million of adjustments to the fair value of the contingent consideration liability during the nine months ended September 30, 2016 were due to a $10.2 million increase to the Makena contingent consideration and a $5.1 million decrease to the MuGard contingent consideration. During the second quarter of 2016, we revised our forecast of total projected net sales for MuGard and reassessed the fair value of the contingent consideration liability related to the MuGard Rights. As a result, we reduced our MuGard-related contingent consideration liability by $5.6 million. These adjustments were included in selling, general and administrative expenses in our condensed consolidated statements of operations. We have classified $100.0 million of the Makena contingent consideration and $0.4 million of the MuGard contingent consideration as short-term liabilities in our condensed consolidated balance sheet as of September 30, 2016. The $100.0 million Makena contingent consideration reflects a $100.0 million milestone payment to be paid in the fourth quarter of 2016 to the former Lumara Health security holders based on the achievement of a net sales milestone of Makena in the third quarter of 2016.

The fair value of the contingent milestone payments payable by us to the former stockholders of Lumara Health was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of Makena from December 1, 2014 through December 31, 2019. The cash flows were discounted at a rate of 5.0%, which we believe is reasonable given the estimated likelihood of the pay-out. As of September 30, 2016, the total undiscounted milestone payment amounts we could pay in connection with the Lumara Health acquisition was $350.0 million through December 31, 2019, including the $100.0 million milestone payment to be paid in the fourth quarter of 2016.

The fair value of the contingent royalty payments payable by us to Abeona was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately 9%. As of September 30, 2016, we estimated that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from $2.0 million to $6.0 million over the remainder of the ten year period which commenced on June 6, 2013, the acquisition date, which is our best estimate of the period over which we expect the majority of the asset’s cash flows to be derived.

We believe the estimated fair values of Lumara Health and the MuGard Rights are based on reasonable assumptions, however, our actual results may vary significantly from the estimated results.

Debt

We estimate the fair value of our debt obligations by using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input. As of September 30, 2016, the estimated fair value of our 2023 Senior Notes, Convertible Notes and 2015 Term Loan Facility (each as defined below) was $473.0 million, $223.0 million and $336.9 million, respectively, which differed from their carrying values. See Note Q, "Debt" for additional information on our debt obligations.

- 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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