FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of September 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 September 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	$	4,826	$	4,826	$	—	$	—
Corporate debt securities	111,414		—		111,414		—
U.S. treasury and government agency securities	9,333		—		9,333		—
Commercial paper	3,990		—		3,990		—
Certificates of deposit	11,449		—		11,449		—
Total Assets	$	141,012	$	4,826	$	136,186	$	—
Liabilities:
Contingent consideration - Lumara Health	$	98,778	$	—	$	—	$	98,778
Contingent consideration - MuGard	1,910		—		—		1,910
Total Liabilities	$	100,688	$	—	$	—	$	100,688



	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 September 30, 2017. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the nine months ended September 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 September 30, 2017, $10.0 million of contingent consideration was recorded in accrued expenses and is expected to be paid to Endoceutics in April 2018 on the first anniversary of the closing. 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	(165		)
Adjustments to fair value of contingent consideration	(47,142		)
Balance as of September 30, 2017	$	100,688

During the nine months ended September 30, 2017, we adjusted the fair value of our contingent consideration liability by approximately $47.1 million, primarily due to a decrease of approximately $49.2 million to the Makena contingent consideration. During the third quarter of 2017, we revised our long-term forecast of total projected net sales for Makena, which impacted both the amount and timing of future milestone payments. As a result, during the third quarter of 2017, we reduced our Makena-related contingent consideration liability by $50.4 million. We have classified $98.8 million of the Makena contingent consideration and $0.3 million of the MuGard contingent consideration as short-term liabilities in our condensed consolidated balance sheet as of September 30, 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 September 30, 2017, the total potential 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 11%. As of September 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 September 30, 2017, the estimated fair value of our 2023 Senior Notes, 2022 Convertible Notes and 2019 Convertible Notes (each as defined below) was $502.5 million, $308.6 million and $22.2 million, respectively, which differed from their carrying values. See Note P, “Debt” for additional information on our debt obligations.