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Fair Value Measurements
3 Months Ended
Mar. 31, 2016
Fair Value Measurements  
Fair Value Measurements

E.FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of March 31, 2016 and December 31, 2015, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2016 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

 

$

36,339

 

$

36,339

 

$

 —

 

$

 —

 

Corporate debt securities

 

 

250,809

 

 

 —

 

 

250,809

 

 

 —

 

U.S. treasury and government agency securities

 

 

4,528

 

 

 —

 

 

4,528

 

 

 —

 

Commercial paper

 

 

18,977

 

 

 

 

18,977

 

 

 

Municipal securities

 

 

2,502

 

 

 

 

2,502

 

 

 

Total Assets

 

$

313,155

 

$

36,339

 

$

276,816

 

$

 —

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration - Lumara Health

 

$

219,581

 

$

 —

 

$

 —

 

$

219,581

 

Contingent consideration - MuGard

 

 

7,969

 

 

 —

 

 

 —

 

 

7,969

 

Total Liabilities

 

$

227,550

 

$

 —

 

$

 —

 

$

227,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 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

    

$

73,676

 

$

73,676

 

$

 —

 

$

 —

 

Corporate debt securities

 

 

200,677

 

 

 —

 

 

200,677

 

 

 —

 

Commercial paper

 

 

34,449

 

 

 —

 

 

34,449

 

 

 —

 

Municipal securities

 

 

2,500

 

 

 —

 

 

2,500

 

 

 —

 

Total Assets

 

$

311,302

 

$

73,676

 

$

237,626

 

$

 —

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration - Lumara Health

 

$

214,895

 

$

 —

 

$

 —

 

$

214,895

 

Contingent consideration - MuGard

 

 

7,664

 

 

 —

 

 

 —

 

 

7,664

 

Total Liabilities

 

$

222,559

 

$

 —

 

$

 —

 

$

222,559

 

 

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 and do not have any restrictions on redemption. 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 March 31, 2016. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the three months ended March 31, 2016.

Contingent consideration

We accounted for the acquisitions of Lumara Health and CBR and the licensing of the MuGard Rights as business combinations under the acquisition method of accounting. Additional details regarding our acquisitions and license agreements 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 classified as Level 3 assets under the fair value hierarchy as these assets have been valued using unobservable inputs. 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 acquisition of Lumara Health and the MuGard Rights (in thousands):

 

 

 

 

 

 

Balance as of December 31, 2015

    

$

222,559

 

Payments made

 

 

(65)

 

Adjustments to fair value of contingent consideration

 

 

5,056

 

Balance as of March 31, 2016

 

$

227,550

 

 

The $5.1 million of adjustments to the fair value of the contingent consideration liability during the three months ended March 31, 2016 was due to a $4.7 million increase to the Makena contingent consideration and a $0.4 million increase to the MuGard contingent consideration related to the time value of money. These adjustments were included in selling, general and administrative expenses in our condensed consolidated statements of operations. We have classified $97.5 million of the Makena contingent consideration and $0.9 million of the MuGard contingent consideration as short-term liabilities in our condensed consolidated balance sheet as of March 31, 2016.

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. As of March 31, 2016, the total undiscounted milestone payment amounts we could pay in connection with the Lumara Health acquisition is $350.0 million over the period from December 1, 2014 to December 31, 2019.

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 9%. As of March 31, 2016, we estimate that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from $9.0 million to $13.0 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, 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 March 31, 2016, the estimated fair value of our 2023 Senior Notes, Convertible Notes and 2015 Term Loan Facility (each as defined below) was $445.0 million, $215.0 million and $335.3 million, respectively, which differed from their carrying values. See Note Q, "Debt" for additional information on our debt obligations.