Fair Value Measurements

6 Months Ended

Jun. 30, 2017

FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of June 30, 2017 and December 31, 2016, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):



	Fair Value Measurements at June 30, 2017 Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents	$	1,522	$	1,522	$	—	$	—
Corporate debt securities	93,103		—		93,103		—
U.S. treasury and government agency securities	10,832		—		10,832		—
Commercial paper	16,708		—		16,708		—
Certificates of deposit	18,452		—		18,452		—
Total Assets	$	140,617	$	1,522	$	139,095	$	—
Liabilities:
Contingent consideration - Lumara Health	$	148,797	$	—	$	—	$	148,797
Contingent consideration - MuGard	1,866		—		—		1,866
Total Liabilities	$	150,663	$	—	$	—	$	150,663



	Fair Value Measurements at December 31, 2016 Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents	$	9,951	$	9,951	$	—	$	—
Corporate debt securities	245,857		—		245,857		—
U.S. treasury and government agency securities	12,364		—		12,364		—
Commercial paper	40,560		—		40,560		—
Certificates of deposit	6,000		—		6,000		—
Total Assets	$	314,732	$	9,951	$	304,781	$	—
Liabilities:
Contingent consideration - Lumara Health	$	145,974	$	—	$	—	$	145,974
Contingent consideration - MuGard	2,021		—		—		2,021
Total Liabilities	$	147,995	$	—	$	—	$	147,995

Investments

Our cash equivalents are classified as Level 1 assets under the fair value hierarchy as these assets, which consist of money market funds, 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 analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value measurements provided by our pricing services as of June 30, 2017. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the six months ended June 30, 2017.

Contingent consideration

In accordance with GAAP, for asset acquisitions, such as Intrarosa, we record contingent consideration for obligations we consider to be probable and estimable and these liabilities are not adjusted to fair value. As of June 30, 2017, we recorded $20.0 million of contingent consideration for the Intrarosa license, which was reflected in accrued expenses. We recorded contingent consideration related to the November 2014 acquisition of Lumara Health Inc. (“Lumara Health”) and related to our June 2013 license agreement for MuGard (the “MuGard License Agreement”) with Abeona Therapeutics, Inc. (“Abeona”), under which we acquired the U.S. commercial rights for the management of oral mucositis and stomatitis (the “MuGard Rights”).

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, 2016	$	147,995
Payments made	(118		)
Adjustments to fair value of contingent consideration	2,786
Balance as of June 30, 2017	$	150,663

The $2.8 million of adjustments to the fair value of the contingent consideration liability during the six months ended June 30, 2017 were due to an approximately $2.8 million increase to the Makena contingent consideration. We have classified $98.4 million of the Makena contingent consideration and $0.2 million of the MuGard contingent consideration as short-term liabilities in our condensed consolidated balance sheet as of June 30, 2017. The $98.4 million Makena contingent consideration reflects a $100.0 million sales milestone payment expected to be paid in the fourth quarter of 2017 to the former Lumara Health security holders based on the forecasted achievement of a net sales milestone of Makena in the fourth quarter of 2017.

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. As of June 30, 2017, the total undiscounted milestone payment amount we could pay in connection with the Lumara Health acquisition was $250.0 million through December 31, 2019.

The fair value of the contingent royalty payments payable by us to Abeona under the MuGard License Agreement was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately 12%. As of June 30, 2017, we estimated that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from approximately $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 June 30, 2017, the estimated fair value of our 2023 Senior Notes, 2022 Convertible Notes and 2019 Convertible Notes (each as defined below) was $482.0 million, $307.4 million and $43.3 million, respectively, which differed from their carrying values. See Note P, “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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