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

9 Months Ended

Sep. 30, 2013

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, the fair value of our assets held for sale, contingent consideration, the impairment of long-lived assets, including intangible assets, accrued expenses, 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, AMAG Europe Limited and AMAG Securities Corporation. 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 Measurements

Fair Value Measurements

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 and liabilities that are required to be measured at fair value on a recurring basis, including our cash equivalents, investments, and contingent consideration. The following tables represent the fair value hierarchy as of September 30, 2013 and December 31, 2012 for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):

	Fair Value Measurements at September 30, 2013 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	22,736	$	22,736	$	—	$	—
Corporate debt securities	129,664		—		129,664		—
U.S. treasury and government agency securities	52,931		—		52,931		—
Total Assets	$	205,331	$	22,736	$	182,595	$	—
Liabilities:
Acquisition-related contingent consideration	$	13,975	$	—	$	—	$	13,975
Total Liabilities	$	13,975	$	—	$	—	$	13,975

	Fair Value Measurements at December 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	$	24,058	$	24,058	$	—	$	—
Corporate debt securities	111,690		—		111,690		—
U.S. treasury and government agency securities	59,569		—		59,569		—
Commercial paper	9,491		—		9,491		—
	$	204,808	$	24,058	$	180,750	$	—

With the exception of our money market funds and our acquisition-related contingent consideration, the fair value of our investments listed in the table above is primarily determined from independent pricing services. 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 September 30, 2013 or December 31, 2012. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the nine months ended September 30, 2013.

We are accounting for the acquisition of the MuGard Rights as a business combination under the acquisition method of accounting. Additional details regarding the Access License Agreement and the MuGard Rights can be found in Note G. The fair value measurements of contingent consideration obligations and the related intangible asset arising from business combinations are determined using unobservable, or Level 3, inputs. These inputs include (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factors on which the contingency is based; and (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

During the three months ended September 30, 2013, we completed the valuation for the acquisition of the MuGard Rights. Some of the amounts previously estimated have changed during the measurement period, including the amounts and timing of cash flows related to the royalties we expect to pay to Access under the Access License Agreement. The measurement period adjustments represent revisions to estimates in the interim period subsequent to the acquisition and initial accounting date. As a result of these changes, the fair value of the contingent consideration, which was originally assessed to be $14.0 million as of the Acquisition Date has been adjusted to $13.7 million as of the Acquisition Date. These measurement period adjustments have been retrospectively applied to our condensed consolidated balance sheet at June 30, 2013.

The following table presents a reconciliation of contingent consideration obligations related to our acquisition of the MuGard Rights measured on a recurring basis using Level 3 inputs as of September 30, 2013 (in thousands):

Balance as of June 6, 2013	$	—
Acquisition date fair value of contingent consideration	13,700
Balance as of June 30, 2013	$	13,700
Payments made	(4		)
Adjustments to fair value of contingent consideration	279
Balance as of September 30, 2013	$	13,975

During the three and nine months ended September 30, 2013, we recorded $0.3 million in expense related to the increase in fair value of the contingent consideration liability. This expense represents the time value of money impact of the contingent consideration fair value assessment as of September 30, 2013 and is included in selling, general and administrative expenses in our condensed consolidated statements of operations. As of September 30, 2013, we estimate that the undiscounted royalty amounts we could pay under the Access License Agreement may range from $28.0 million to $34.0 million over a ten year period, which is our best estimate of the period over which we expect the majority of the asset’s cash flows to be derived. This measure is based on significant Level 3 inputs not observable in the market. Key assumptions include a discount rate of approximately 15%. As of September 30, 2013, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the Acquisition Date.

In addition, in connection with the acquisition of the MuGard Rights, we acquired an intangible asset of $16.9 million, which was originally determined based on fair value measurements. These measures were based on significant Level 3 inputs not observable in the market. Key assumptions include a discount rate of 19%. We believe the estimated fair values of the MuGard Rights are based on reasonable assumptions, however, we cannot provide assurance that the underlying assumptions used to forecast the cash flows will materialize as we estimated and thus, our actual results may vary significantly from the estimated results.

Assets Held for Sale

Assets Held for Sale

During 2012, we determined that certain assets related to our Cambridge, Massachusetts manufacturing facility, including the related land, building and certain equipment, met the criteria established by current accounting guidance for classifying assets as held for sale. As a result, during 2012, we reclassified these assets from property and equipment to assets held for sale in our condensed consolidated balance sheet. In anticipation of a future sale, we valued these assets at the lower of their carrying amount or fair value less cost to sell to arrive at the estimated fair value of $2.0 million as of December 31, 2012. During the nine months ended September 30, 2013, we sold $0.5 million of equipment related to our Cambridge, Massachusetts manufacturing facility. In connection with these sales, we recorded a gain of $0.4 million during the nine months ended September 30, 2013 and reduced the carrying value of our assets held for sale by $0.1 million to $1.9 million at September 30, 2013. The fair values of the land, building, and equipment were estimated using Level 3 inputs, which included offers received from potential purchasers, real estate appraisals and other estimates from third-parties. On October 30, 2013, we sold our Cambridge, Massachusetts manufacturing facility, including the land, building and related personal property, to 61 Mooney Street LLC. Refer to Note P for additional information.

Revenue Recognition and Related Sales Allowances and Accruals

Revenue Recognition and Related Sales Allowances and Accruals

An analysis of our product sales allowances and accruals for the three and nine months ended September 30, 2013 and 2012 is as follows (in thousands):

	Three Months Ended September 30,
	2013			2012
Provision for U.S. Feraheme sales allowances and accruals
Discounts and chargebacks	$	10,205		$	6,644
Government and other rebates	3,044			1,595
Medicaid rebate reserve adjustment	(625		)	(861		)
Returns	265			(1,122		)
Total provision for U.S. Feraheme sales allowances and accruals	$	12,889		$	6,256
Total gross U.S. Feraheme sales	$	32,236		$	22,442
Total provision for U.S. Feraheme sales allowances and accruals as a percent of total gross U.S. Feraheme sales	40		%	28		%

	Nine Months Ended September 30,
	2013			2012
Provision for U.S. Feraheme sales allowances and accruals
Discounts and chargebacks	$	26,925		$	19,382
Government and other rebates	8,106			4,487
Medicaid rebate reserve adjustment	(568		)	(621		)
Returns	697			(1,680		)
Total provision for U.S. Feraheme sales allowances and accruals	$	35,160		$	21,568
Total gross U.S. Feraheme sales	$	87,541		$	65,474
Total provision for U.S. Feraheme sales allowances and accruals as a percent of total gross U.S. Feraheme sales	40		%	33		%

We generally offer our wholesalers, specialty distributors and other customers a limited right to return Feraheme purchased directly from us, based on the product’s expiration date which, once packaged, is currently five years in the U.S. Reserves for Feraheme returns for U.S. sales 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. We did not significantly adjust our reserve for product returns during the nine months ended September 30, 2013. During the nine months ended September 30, 2012, we reduced our reserve by approximately $2.1 million as a result of a lower expected rate of product returns based on our actual returns experience to date as well as the lapse of the product return period on certain manufactured Feraheme lots that carried a two-year expiration period. The product returns provision applied to gross product sales for the nine months ended September 30, 2013 was $0.7 million as compared to a credit of $1.7 million for the nine months ended September 30, 2012.

In addition, as part of our sales allowances and accruals, we reserve for estimated Medicaid rebates associated with instances where Medicaid will act as the insurer and for which we are required to pay a statutory rebate to Medicaid. We regularly assess our Medicaid reserve balance and the rate at which we accrue for claims against product sales. If we determine in future periods that our actual rebate experience is not indicative of expected claims, if our actual claims experience changes, or if other factors affect estimated claims rates, we may be required to adjust our current Medicaid accumulated reserve estimate, which could significantly affect our earnings in the period of the adjustment. During each of the nine months ended September 30, 2013 and 2012, we revised our estimated Medicaid reserve rate based on actual product-specific rebate claims received since the July 2009 launch of Feraheme, our expectations of state level activities, and estimated rebate claims not yet submitted, which resulted in a $0.6 million reduction of our then estimated Medicaid rebate reserve related to prior period Feraheme sales. These changes in estimates are reflected as an increase in our net product sales for the nine months ended September 30, 2013 and 2012 and resulted in reductions to our gross to net percentage in the respective periods. The reduction of our estimated Medicaid rebate reserve had an impact of $0.03 per basic and diluted share for the each of the nine months ended September 30, 2013 and 2012.

Acquisitions

Acquisitions

We account for acquired businesses using the acquisition method of accounting, which requires, with limited exceptions, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the estimated fair values of the net assets acquired is recorded as goodwill.

Intangible Assets

Intangible Assets

Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Contingent Consideration

Contingent Consideration

Contingent consideration arising from a business combination is included as part of the acquisition cost and is recognized at fair value as of the acquisition date. Any liability resulting from contingent consideration is remeasured to its fair value at each reporting date until the contingency is resolved. These changes in fair value are recognized in our condensed consolidated statements of operations.