Fair Value Measurements

9 Months Ended

Sep. 30, 2015

E.FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of September 30, 2015 and December 31, 2014 for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):


	Fair Value Measurements at September 30, 2015 Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	35,325	$	35,325	$	—	$	—
Corporate debt securities		173,606		—		173,606		—
Commercial paper		7,490		—		7,490		—
Certificates of deposit		10,001		—		10,001		—
Municipal securities		84,246		—		84,246		—
Total Assets	$	310,668	$	35,325	$	275,343	$	—
Liabilities:
Contingent consideration-Lumara Health	$	214,285	$	—	$	—	$	214,285
Contingent consideration-MuGard		8,660		—		—		8,660
Total Liabilities	$	222,945	$	—	$	—	$	222,945


	Fair Value Measurements at December 31, 2014 Using:
			Quoted Prices in
			Active				Significant
			Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	77,254	$	77,254	$	—	$	—
Corporate debt securities		24,890		—		24,890		—
Total Assets	$	102,144	$	77,254	$	24,890	$	—

Liabilities:
Contingent consideration - Lumara Health	$	206,600	$	—	$	—	$	206,600
Contingent consideration - MuGard		12,102		—		—		12,102
Total Liabilities	$	218,702	$	—	$	—	$	218,702

Investments

Our money market funds are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets without any valuation adjustment. 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 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 September 30, 2015. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the nine months ended September 30, 2015.

Contingent consideration

We accounted for the acquisitions of Lumara Health, CBR and the MuGard Rights as business combinations under the acquisition method of accounting. Additional details regarding the Lumara Health acquisition can be found in Note C, “Business Combinations.” There were no contingent consideration obligations related to the CBR acquisition. The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are determined using unobservable inputs (“Level 3”). 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 acquisitions of Lumara Health and the MuGard Rights measured on a recurring basis using Level 3 inputs as of September 30, 2015 (in thousands):


Balance as of December 31, 2014	$	218,702
Payments made		(322)
Adjustments to fair value of contingent consideration		4,525
Other adjustments		40
Balance as of September 30, 2015	$	222,945

The $4.5 million of adjustments to the fair value of the contingent consideration liability were due primarily to a $7.7 million increase to the Makena contingent consideration related to the time value of money, partially offset by a $3.2 million reduction to the MuGard contingent consideration due to changes in estimated amounts and timing of cash flows related to the royalties we expect to pay to Abeona under the MuGard License Agreement. These adjustments are included in selling, general and administrative expenses in our condensed consolidated statements of operations. We have classified $96.1 million of the Makena contingent consideration and $0.7 million of the MuGard contingent consideration as short-term liabilities in our condensed consolidated balance sheet as of September 30, 2015.

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. The cash flows were discounted at a rate of 5%, which we believe is reasonable given the estimated likelihood of the pay-out.

The fair value of the contingent royalty payments payable by us to Abeona was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately 12%. As of September 30, 2015, we estimate that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from $10.0 million to $18.0 million over a ten year period beginning 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, 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.

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, 2015, the estimated fair value of our 2023 Senior Notes and 2.5% Convertible Notes were approximately $477.5 million and $322.1 million, respectively, and the estimated fair value of our term loan facilities were approximately equal to their respective book values. See Note Q, "Debt" for additional information on our debt obligations.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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