Basis of Presentation and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2012

Basis of Presentation and Summary of Significant Accounting Policies

Use of Estimates and Assumptions

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

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

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 June 30, 2012 and December 31, 2011 for those assets that we measure at fair value on a recurring basis (in thousands):

	Fair Value Measurements at June 30, 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	$	27,417	$	27,417	$	—	$	—
Corporate debt securities	110,218		—		110,218		—
U.S. treasury and government agency securities	58,876		—		58,876		—
Commercial paper	7,477		—		7,477		—
	$	203,988	$	27,417	$	176,571	$	—

	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 money market funds and, previously, our auction rate securities, or ARS, which we sold in June 2012, and which were valued using Level 3 inputs, as discussed below, 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 June 30, 2012 or December 31, 2011. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the six months ended June 30, 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 assets appeared normal and that transactions did not appear disorderly as of June 30, 2012.

In June 2012, we sold our remaining ARS portfolio, with a par value of $19.8 million, for proceeds of $18.3 million.

The following table provides a rollforward of Level 3 assets for the six months ended June 30, 2012 (in thousands):

	Six Months Ended June 30, 2012
Balance at beginning of period	$	17,527
Transfers to Level 3	—
Total gains (losses) (realized or unrealized):
Included in earnings	(1,471		)
Included in other comprehensive income (loss)	2,373
Purchases, issuances, sales and settlements:
Purchases	—
Issuances	—
Sales	(18,329		)
Settlements	(100		)
Balance at end of period	$	—
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.

Net Product Sales

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 organizations, 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 and six months ended June 30, 2012 and 2011 is as follows (in thousands):

	Three Months Ended June 30,
	2012			2011
Product sales allowances and accruals
Discounts and chargebacks	$	6,846		$	3,579
Government and other rebates	1,672			2,737
Returns	(292		)	369
Total provision for product sales allowances and accruals	$	8,226		$	6,685
Total gross product sales	$	22,646		$	19,766
Total provision for product sales allowances and accruals as a percent of total gross product sales	36		%	34		%

	Six Months Ended June 30,
	2012			2011
Product sales allowances and accruals
Discounts and chargebacks	$	12,738		$	5,799
Government and other rebates	3,132			5,271
Returns	(558		)	668
Total provision for product sales allowances and accruals	$	15,312		$	11,738
Total gross product sales	$	43,440		$	35,841
Total provision for product sales allowances and accruals as a percent of total gross product sales	35		%	33		%

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 half of 2012, we reduced our reserve for product returns by approximately $1.1 million due to the lapse of the product return period on certain manufactured Feraheme lots that carried a two year expiration. As a result, the product returns reserve applied to gross sales for the six months ended June 30, 2012 was ($0.6) million as compared to $0.7 million in the six months ended June 30, 2011.