GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

Our goodwill balance consisted of the following (in thousands):





Balance at January 1, 2016	$	639,188
Measurement period adjustments related to Lumara Health acquisition	296
Balance as of December 31, 2017 and 2016	639,484

Our $639.5 million goodwill balance consisted of $198.1 million of goodwill acquired through the November 2014 Lumara Health acquisition and $441.4 million acquired through the August 2015 CBR acquisition. During 2016, the CBR goodwill increased by $0.3 million related to measurement period net tax adjustments. As of December 31, 2017, we had no accumulated impairment losses related to goodwill.

We test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that could indicate impairment and trigger an interim impairment assessment include, but are not limited to, an adverse change in current economic and market conditions, including a significant prolonged decline in market capitalization, a significant adverse change in legal factors, unexpected adverse business conditions, and an adverse action or assessment by a regulator. Our annual impairment test date is October 31. We have determined that we operate in a single operating segment and have a single reporting unit.

In performing our goodwill impairment tests during 2017, we utilized the approach prescribed under ASC 350, as amended by ASU 2017-04 which requires that an entity perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

When we perform any goodwill impairment test, the estimated fair value of our reporting unit is determined using an income approach that utilizes a discounted cash flow (“DCF”) model or, a market approach, when appropriate, which assesses our market capitalization as adjusted for a control premium, or a combination thereof. The DCF model is based upon expected future after-tax operating cash flows of the reporting unit discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows (ii) the probability of regulatory approvals, and (iii) future economic conditions, all of which may differ from actual future cash flows. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in the DCF model, is based on estimates of the weighted average cost of capital (“WACC”) of market participants relative to our reporting unit. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC. Any changes in these assumptions may affect our fair value estimate and the result of an impairment test. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. In addition, in order to assess the reasonableness of the fair value of our reporting unit as calculated under the DCF model, we also compare the reporting unit’s fair value to our market capitalization and calculate an implied control premium (the excess sum of the reporting unit’s fair value over its market capitalization). We evaluate the implied control premium by comparing it to control premiums of recent comparable market transactions, as applicable. Throughout 2017 and as of December 31, 2017, our market capitalization was lower than our stockholders’ equity, or book value. We believe that a market participant buyer would be required to pay a control premium for our business that would cover the difference between our market capitalization and our book value.

During the third quarter of 2017, we determined that the significant reduction in the long-term forecasted cash flows of our largest product, Makena, which led to a $319.2 million impairment of the Makena base technology intangible asset, was an indicator that an interim impairment test of goodwill was necessary at September 30, 2017. We performed a quantitative goodwill impairment test at September 30, 2017 in accordance with ASU 2017-04, to both assess whether a goodwill impairment existed and if so, the amount of the impairment loss. We considered our market capitalization, as adjusted for a control premium, to be one indicator of the fair value of our reporting unit. On September 30, 2017, our stock price closed at $18.45, resulting in a market capitalization of approximately $653.0 million, which was 18% below the carrying amount of the reporting unit as of September 30, 2017.

As described in the accounting guidance for evaluating long-lived assets for impairment, an entity’s fair value may include a control premium in addition to the quoted market price to determine the fair value of a single reporting unit entity, as an acquiring entity is often willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. This accounting guidance also indicates that the quoted market price of an individual security need not be the sole measurement basis of the fair value of a single reporting unit. During the third quarter of 2017, we obtained a control premium analysis which benchmarked average control premiums paid in prior merger and acquisition transactions among biotechnology and pharmaceutical companies. The analysis indicated that control premiums vary depending on facts and circumstances for each transaction. The range of control premiums observed was between 30% and 83%, with a mean of 64%. Management believes that using this market approach of assessing reasonable control premiums provided a sufficient basis to assess whether the fair value of our reporting unit, including a range of reasonable control premiums, was above its carrying amount as of September 30, 2017. Incorporating control premiums in this range to our September 30, 2017 market capitalization of $653.0 million resulted in a fair value which was at least 6% greater (at the low end of the range) than the carrying amount of our net assets as of September 30, 2017. As a result of this review, we determined that there was no impairment of our goodwill at September 30, 2017.

On October 31, 2017 (the “measurement date”), we conducted our 2017 annual goodwill impairment test using an income approach, specifically a DCF model, and a market approach to estimate the fair value of our reporting unit as of the measurement date. We used a range of discount rates between 10.0% and 19.5% across our commercial products and product candidates, which resulted in a weighted average discount rate of 13.6% to determine the fair value of our reporting unit. We believe the discount rate and other inputs and assumptions are consistent with those that a market participant would use. In addition, we believe we utilized reasonable estimates and assumptions about future revenues, cost projections, and cash flows as of the measurement date. As a corroborating step in our 2017 annual impairment assessment, we compared our implied control premium, as determined by the difference between the fair value of our reporting unit as estimated by our DCF analysis and our market capitalization, to control premiums of recent comparable market transactions. The results indicated that the implied control premium was within the range of control premiums observed in prior merger and acquisition transactions among biotechnology and pharmaceutical companies. We believe that using this market approach further corroborated our DCF fair value assessment at October 31, 2017. As a result of our DCF analysis, we determined that the fair value of our reporting unit exceeded its carrying value by 18% and as such, no impairment was recorded as of October 31, 2017. In performing a sensitivity analysis, had we increased the weighted average discount rate by 1%, the fair value of the reporting unit would have still exceeded the carrying value. In addition, we determined that there were no other indicators of impairment through December 31, 2017 requiring further assessment.

Assumptions related to revenue, growth rates and operating margin are based on management’s annual and ongoing forecasting, budgeting and planning processes and represent our best estimate of the future results of operations across the company as of that point in time. These estimates are subject to many assumptions, such as the economic environment in which our reporting unit operates, expectations of regulatory approval of our products in development or under review with the FDA, demand for our products and competitor actions. If we were to apply different assumptions, or if the outcome of regulatory or other developments, or actual demand for our products and competitor actions, are inconsistent with our assumptions, our estimated discounted future cash flows and the resulting estimated fair value of our reporting unit would increase or decrease, and could result in the fair value of our reporting unit being less than its carrying value in an impairment test.

Prior to our adoption of ASU 2017-04, we utilized the two-step approach prescribed under ASC 350 in performing our goodwill impairment tests. The first step required a comparison of the reporting unit’s carrying value to its fair value. If the carrying value of a reporting unit exceeded its estimated fair value, a second step was required to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of a reporting unit’s goodwill to its carrying value. The second step required us to perform a hypothetical purchase price allocation as of the measurement date and estimate the fair value of net tangible and intangible assets. The fair value of intangible assets is determined as described above and is subject to significant judgment. We conducted our 2016 and 2015 annual goodwill impairment tests on October 31 of each respective year. We used the market approach, as more fully described above, in making our impairment test conclusions. As a result of our analysis, our reporting unit had a fair value well in excess of its carrying value for both 2016 and 2015, and as such, no impairments were recorded in either of the respective periods.

Intangible Assets



	December 31, 2017								December 31, 2016
			Accumulated								Accumulated
	Cost		Amortization		Impairments		Net		Cost		Amortization		Impairments		Net
Amortizable intangible assets:
Makena base technology	$	797,100	$	255,754	$	319,246	$	222,100	$	797,100	$	128,732	$	—	$	668,368
CBR customer relationships	297,000		29,309		—		267,691		297,000		13,590		—		283,410
Intrarosa developed technology	77,655		3,376		—		74,279		—		—		—		—
CBR Favorable lease	—		—		—		—		358		119		239		—
MuGard Rights	—		—		—		—		16,893		1,169		15,724		—
	1,171,755		288,439		319,246		564,070		1,111,351		143,610		15,963		951,778
Indefinite-lived intangible assets:
Makena IPR&D	79,100		—		—		79,100		79,100		—		—		79,100
CBR trade names and trademarks	65,000		—		3,700		61,300		65,000		—		3,700		61,300
Total intangible assets	$	1,315,855	$	288,439	$	322,946	$	704,470	$	1,255,451	$	143,610	$	19,663	$	1,092,178

The Makena base technology and IPR&D intangible assets were acquired in November 2014 in connection with our acquisition of Lumara Health. During the third quarter of 2017, we received new information from a variety of sources, including from external consulting firms and our authorized generic partner, regarding the potential competitive landscape for the Makena intramuscular (“IM”) product (the “Makena IM product”) upon loss of orphan drug exclusivity in February 2018. The information received from one of our external consulting firms included competitive intelligence information, which indicated that several generic manufacturers had either likely filed an Abbreviated New Drug Application (“ANDA”) with the FDA in the third quarter of 2017 or were likely to file an ANDA in the fourth quarter of 2017. During the third quarter of 2017, we also began negotiations with our own authorized generic partner and gained industry insight into how the competitive landscape of the market might evolve once multiple generics entered. This information, combined with continued progress on our own authorized generic strategy, was incorporated into our revised long-range revenue forecasts for the Makena IM product during the third quarter of 2017. This new information received in the third quarter, altered our previous assumptions, including the potential number of generic entrants and potential timing of entry following the loss of its orphan drug exclusivity, which significantly impacted our long-term revenue forecast for the Makena IM product.

We determined that the revised long-term forecast resulting from the information received in the third quarter of 2017 constituted a triggering event with respect to our Makena base technology intangible asset, which relates solely to the Makena IM product. We estimated that the sum of the undiscounted projected cash flows of the Makena IM product was less than the carrying value of the corresponding intangible asset. Therefore, we reassessed the fair value of the Makena base technology intangible asset using an income approach, a Level 3 measurement technique. We determined that as of September 30, 2017, the fair value of the Makena base technology intangible asset was less than the carrying value and accordingly, we recorded an impairment charge of $319.2 million, which was recorded within a separate operating expense line item in our consolidated statements of operations.

Amortization of the Makena base technology asset is being recognized using an economic consumption model. Prior to the third quarter of 2017, this asset was being amortized over 20 years from the acquisition date, which we believed was an appropriate amortization period. During the third quarter of 2017, we reassessed the remaining useful life of the Makena base technology intangible asset. Based on the revised long-term forecast for the Makena IM product, we believe that the substantive period of revenue from the Makena IM asset will be through 2024 and thus concluded that seven years is an appropriate amortization period based on its revised estimated remaining economic life. Accordingly, we prospectively adjusted the remaining useful life of the Makena base technology intangible asset to seven years.

Further, during the third and fourth quarters of 2017, we evaluated our Makena IPR&D intangible asset, which is related to the Makena auto-injector, for impairment and concluded that its fair value was greater than its carrying value, and therefore it was not impaired. Furthermore, additional information may become available, which may cause us to identify additional impairment charges. Such charges could have a material adverse effect on our earnings in future periods.

The CBR intangible assets (the CBR customer relationships, favorable lease and trade names and trademarks) were acquired in August 2015 in connection with our acquisition of CBR. Amortization of the CBR customer relationships is being recognized using an estimated useful life of 20 years from the CBR Acquisition Date, which we believe is an appropriate amortization period due to the estimated economic lives of the CBR intangible assets. The favorable lease was being amortized on a straight-line basis over the remaining term of the lease. In May 4, 2016, we entered into a sublease arrangement for a portion of our former CBR office space in San Bruno, California with a sublessee at a rate lower than the market rate used to determine the favorable lease intangible asset. We reevaluated the favorable lease asset based on the negotiated sublease rate, resulting in an impairment charge for the full $0.2 million net intangible asset in 2016. As part of our 2017 annual impairment test, we evaluated our CBR trade name and trademark intangible assets and concluded that its fair value was greater than its carrying value and therefore it was not impaired. As part of our 2016 annual impairment test, we recorded an impairment charge of $3.7 million related to the impairment of a portion of the CBR trade names and trademarks indefinite-lived intangible asset based on a revised long-term revenue forecast for CBR.

The Intrarosa developed technology was acquired in April 2017 from Endoceutics. Amortization of the Intrarosa developed technology is being recognized on a straight line basis over 11.5 years.

The MuGard Rights were acquired from Abeona in June 2013. Amortization of the MuGard Rights was being recognized using an economic consumption model over ten years from the acquisition date, which represented our best estimate of the period over which we expected the majority of the asset’s cash flows to be derived. Based on interactions with government payers during 2016, we determined that broader reimbursement coverage for MuGard by was unlikely and we assessed the MuGard Rights for potential impairment. From this assessment, we concluded that based on the lack of broad reimbursement and insurance coverage for MuGard and the resulting decrease in expected revenues and cash flows, the projected undiscounted cash flows were less than the book value, indicating impairment of this intangible asset. As a result of an analysis of the fair value of the net MuGard Rights intangible asset as compared to its recorded book value, we recognized an impairment charge for the full $15.7 million net intangible asset in the second quarter of 2016.

As of December 31, 2017, the weighted average remaining amortization period for our finite-lived intangible assets was approximately 10.8 years. Total amortization expense for 2017, 2016 and 2015, was $146.1 million, $84.9 million and $53.5 million, respectively. Amortization expense for the Makena base technology, Intrarosa developed technology, and the MuGard Rights is recorded in cost of product sales in our consolidated statements of operations. Amortization expense for the CBR related intangible assets is recorded in selling, general and administrative expenses in our consolidated statements of operations. We expect amortization expense related to our finite-lived intangible assets to be as follows (in thousands):



Period	Estimated Amortization Expense
Year Ending December 31, 2018	$	188,574
Year Ending December 31, 2019	39,527
Year Ending December 31, 2020	31,907
Year Ending December 31, 2021	31,696
Year Ending December 31, 2022	31,640
Thereafter	240,726
Total	$	564,070