Basis of Presentation and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Summary of Significant Accounting Policies

B.Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and results of operations of the Company for the interim periods presented. Such adjustments consisted only of normal recurring items. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In accordance with accounting principles generally accepted in the United States of America for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Our accounting policies are described in the Notes to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011. Interim results are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used in, but are not limited to, revenue recognition related to product sales and collaboration agreements, product sales allowances and accruals, assessing investments for potential other-than-temporary impairment and determining values of investments, reserves for doubtful accounts, accrued expenses, reserves for legal matters, income taxes and equity-based compensation expense. Actual results could differ materially from those estimates.

Principles of Consolidation

The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, Alamo Acquisition Sub, Inc., AMAG Europe Limited, and AMAG Securities Corporation. Alamo Acquisition Sub, Inc. was incorporated in Delaware in July 2011. AMAG Europe Limited was incorporated in October 2009 in London, England. AMAG Securities Corporation is a Massachusetts corporation which was incorporated in August 2007. All intercompany account balances and transactions between the companies have been eliminated.

Fair Value of Financial Instruments

Under current accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

Current accounting guidance establishes a hierarchy used to categorize how fair value is measured and which is based on three levels of inputs, of which the first two are considered observable and the third unobservable, as follows:

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.

We hold certain assets that are required to be measured at fair value on a recurring basis, including our cash equivalents and short- and long-term investments. The following tables represent the fair value hierarchy as of March 31, 2012 and December 31, 2011 for those assets that we measure at fair value on a recurring basis (in thousands):

	Fair Value Measurements at March 31, 2012 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	31,546	$	31,546	$	—	$	—
Corporate debt securities	97,581		—		97,581		—
U.S. treasury and government agency securities	58,270		—		58,270		—
Commercial paper	6,982		—		6,982		—
Auction rate securities	17,409		—		—		17,409
	$	211,788	$	31,546	$	162,833	$	17,409

	Fair Value Measurements at December 31, 2011 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	55,995	$	55,995	$	—	$	—
Corporate debt securities	94,626		—		94,626		—
U.S. treasury and government agency securities	48,086		—		48,086		—
Commercial paper	5,991		—		5,991		—
Auction rate securities	17,527		—		—		17,527
	$	222,225	$	55,995	$	148,703	$	17,527

With the exception of our auction rate securities, or ARS, which are valued using Level 3 inputs, as discussed below, and our money market funds, the fair value of our investments is primarily determined from independent pricing services which use Level 2 inputs to determine fair value. Independent pricing services 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 either March 31, 2012 or December 31, 2011. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the three months ended March 31, 2012.

We also analyze when the volume and level of activity for an asset or liability have significantly decreased and when circumstances indicate that a transaction may not be considered orderly. In order to determine whether the volume and level of activity for an asset or liability have significantly decreased, we assess current activity as compared to normal market activity for the asset or liability. We rely on many factors such as trading volume, trading frequency, the levels at which market participants indicate their willingness to buy and sell our securities, as reported by market participants, and current market conditions. Using professional judgment and experience, we evaluate and weigh the relevance and significance of all applicable factors to determine if there has been a significant decrease in the volume and level of activity for an asset, group of similar assets or liabilities. Similarly, in order to identify transactions that are not orderly, we take into consideration the activity in the market which can influence the determination and occurrence of an orderly transaction. Also, we inquire as to whether there may have been restrictions on the marketing of the security to a single or limited number of participants. Where possible, we assess the financial condition of the seller to determine whether observed transactions may have been forced. If there is a significant disparity between the trading price for a security held by us as compared to the trading prices of similar recent transactions, we consider whether this disparity is an indicator of a disorderly trade. Using professional judgment and experience, we evaluate and weigh the relevance and significance of all applicable factors to determine if the evidence suggests that a transaction or group of similar transactions is not orderly. Based upon these procedures, we determined that market activity for our non-ARS assets appeared normal and that transactions did not appear disorderly as of March 31, 2012.

Because there is currently no active market for trading the ARS that we hold, we value these securities using a discounted cash flow model. The assumptions used in preparing this model consist of unobservable inputs, including estimates for interest rates, timing and amount of cash flows and the average expected term over which we expect our ARS to be outstanding. In the process of developing these assumptions, we review the characteristics of each individual ARS, including the frequency of coupon payments, the credit rating of the individual security, the quality of the underlying collateral, the final maturity of each security, the approximate repayment time for student loans underlying the security and any pre-maturity redemption or prepayments for comparable securities. We prepare a discounted cash flow model for three expected term scenarios and then apply a weighted average probability formula to each scenario. We estimate the amount of cash flows for each security by utilizing market forecasts of interest rates to calculate the maximum amount of future interest payments. We then apply a discount rate to these estimated cash flows in order to arrive at a discounted cash flow value for each ARS. We calculate this discount rate by using a base index plus two additional factors which address the current lack of liquidity in the ARS market and the difference in credit risk associated with the specific ARS that we own. A significant increase or decrease in the interest rates used to forecast expected cash flows would result in a significantly higher or lower fair value measurement of our ARS. A significant increase or decrease in the discount rate used to discount these cash flows would result in a significantly lower or higher fair value measurement of our ARS. A significant increase or decrease in the expected term assumption would result in a significantly lower or higher fair value measurement.

The following table provides quantitative information on the unobservable inputs of our fair value measurements for our Level 3 assets for the three months ended March 31, 2012 (in thousands):

	Quantitative Information about Level 3 Fair Value Measurements
	Estimated Fair Value at March 31, 2012		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Auction rate securities	$	17,409	Discounted cash flow	Coupon rate (%)	0.55% - 1.72% (0.85%)
				Discount rate (%)	4.00% - 7.00% (5.14%)
				Expected term (in years)	3 - 10 (4.7)

The following table provides a rollforward of Level 3 assets for the three months ended March 31, 2012 (in thousands):

	Three Months Ended March 31, 2012
Balance at beginning of period	$	17,527
Transfers to Level 3	—
Total gains (losses) (realized or unrealized):
Included in earnings	—
Included in other comprehensive income (loss)	(18		)
Purchases, issuances, sales and settlements:
Purchases	—
Issuances	—
Sales	—
Settlements	(100		)
Balance at end of period	$	17,409
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at end of period	$	—

Gains and losses (realized or unrealized) included in earnings in the table above are reported in other income (expense) in our condensed consolidated statement of operations.

Revenue Recognition

Net Product Sales

We recognize net product sales in accordance with current accounting guidance related to the recognition, presentation and disclosure of revenue in financial statements, which outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure of revenue in financial statements.

We record product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and other rebates, distributor, wholesaler and group purchasing organization, or GPO, fees, and product returns as a reduction of revenue in our condensed consolidated statement of operations at the time product sales are recorded. Calculating these gross-to-net sales adjustments involves estimates and judgments based primarily on actual Feraheme sales data, forecasted customer buying patterns blended with historical experience of products similar to Feraheme sold by others, and other market research. In addition, we also monitor our distribution channel to determine whether additional allowances or accruals are required based on inventory in our sales channel. An analysis of our product sales allowances and accruals for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

	Three Months Ended March 31,
	2012			2011
Product sales allowances and accruals
Discounts and chargebacks	$	5,892		$	2,220
Government and other rebates	1,460			2,534
Returns	(266		)	299
Total provision for product sales allowances and accruals	$	7,086		$	5,053
Total gross product sales	$	20,794		$	16,075
Total provision for product sales allowances and accruals as a percent of total gross product sales	34		%	31		%

Product sales allowances and accruals are primarily comprised of both direct and indirect fees, discounts and rebates and provisions for estimated product returns. Direct fees, discounts and rebates are contractual fees and price adjustments payable to wholesalers, specialty distributors and other customers that purchase products directly from us. Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as certain physicians, clinics, hospitals, GPOs, and dialysis organizations that typically do not purchase products directly from us but rather from wholesalers and specialty distributors. In accordance with guidance related to accounting for fees and consideration given by a vendor to a customer, including a reseller of a vendor’s products, these fees, discounts and rebates are presumed to be a reduction of the selling price of Feraheme. Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities and are recorded in the same period that the related revenue is recognized. We estimate product sales allowances and accruals using either historical, actual and/or other data, including estimated patient usage, applicable contractual rebate rates, contract performance by the benefit providers, other current contractual and statutory requirements, historical market data based upon experience of Feraheme and other products similar to Feraheme, specific known market events and trends such as competitive pricing and new product introductions and current and forecasted customer buying patterns and inventory levels, and the shelf life of Feraheme. As part of this evaluation, we also review changes to federal and other legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale.

We generally offer our wholesalers, specialty distributors and other customers a limited right to return product purchased directly from us, principally based on the product’s expiration date which, once packaged, is currently four years. Reserves for product returns are recorded in the period the related revenue is recognized, resulting in a reduction to product sales. We evaluate our estimated product returns rate each period based on the historical return patterns and known or expected changes in the marketplace. Due to the extended period between the sale of Feraheme and when the limited right of return is allowable, which could be several years, we currently have limited actual returns data and therefore are not able to solely rely on our actual returns experience. During the first quarter of 2012, we reversed approximately $0.5 million of previously reserved product returns allowance due to the lapse of the product return period on certain manufactured Feraheme lots that carried a two year expiration period. As a result, the product returns reserve against gross sales for the three months ended March 31, 2012 was ($0.3) million as compared to $0.3 million in the three months ended March 31, 2011.

Concentrations and Significant Customer Information

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash, cash equivalents, investments, and accounts receivable. As of March 31, 2012, our cash, cash equivalents and investments amounted to approximately $217.9 million. We currently invest our excess cash primarily in U.S. government and agency money market funds, and investments in corporate debt securities, U.S. treasury and government agency securities, commercial paper and ARS. As of March 31, 2012 we had approximately $31.5 million of our total $37.6 million cash and cash equivalents balance invested in institutional money market funds, of which $16.0 million was invested in a single fund, which is collateralized solely by U.S. treasury and government agency securities.

Our operations are located solely within the U.S. We are focused principally on developing, manufacturing, and commercializing Feraheme. We perform ongoing credit evaluations of our customers and generally do not require collateral. The following table sets forth customers who represented 10% or more of our total revenues for the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31,
	2012		2011
AmerisourceBergen Drug Corporation	45	%	38	%
McKesson Corporation	20	%	18	%
Cardinal Health, Inc.	15	%	13	%
Takeda Pharmaceuticals Company Limited	11	%	17	%

In addition, approximately 35% of our end-user demand during the three months ended March 31, 2012 was generated by members of a single GPO with which we have contracted. Revenues from customers outside of the U.S. amounted to approximately 11% and 18% of our total revenues for the three months ended March 31, 2012 and 2011, respectively, and were principally related to collaboration revenue recognized in connection with our collaboration agreement with Takeda, which is based in Japan.