Fair Value Measurements

3 Months Ended

Mar. 31, 2019

Fair Value Measurements. Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of March 31, 2019 and December 31, 2018, consisted of the following (in thousands):



				Fair Value Measurements Using
	Total Fair			Quoted prices in		Significant other			Significant
	Value at			active markets		observable inputs			unobservable inputs
Description	March 31, 2019			(Level 1)		(Level 2)			(Level 3)
Interest rate contracts ⁽¹⁾	$	4,321		$	—	$	4,321		$	—
Foreign currency contract assets, current and long-term ⁽²⁾	$	1,431		$	—	$	1,431		$	—
Foreign currency contract liabilities, current and long-term ⁽³⁾	$	(2,057	)	$	—	$	(2,057	)	$	—
Contingent receivable asset	$	627		$	—	$	—		$	627
Contingent consideration liabilities	$	(82,457	)	$	—	$	—		$	(82,457	)

				Fair Value Measurements Using
	Total Fair			Quoted prices in		Significant other			Significant
	Value at			active markets		observable inputs			unobservable inputs
Description	December 31, 2018			(Level 1)		(Level 2)			(Level 3)
Interest rate contracts ⁽¹⁾	$	5,772		$	—	$	5,772		$	—
Foreign currency contract assets, current and long-term ⁽²⁾	$	1,578		$	—	$	1,578		$	—
Foreign currency contract liabilities, current and long-term ⁽³⁾	$	(1,608	)	$	—	$	(1,608	)	$	—
Contingent receivable asset	$	607		$	—	$	—		$	607
Contingent consideration liabilities	$	(82,236	)	$	—	$	—		$	(82,236	)

(1) The fair value of the interest rate contracts is determined using Level 2 fair value inputs and is recorded as other assets or other long-term obligations in the consolidated balance sheets.

(2) The fair value of the foreign currency contract assets (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid expenses and other assets or other long-term assets in the consolidated balance sheets.

(3) The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued expenses or other long-term obligations in the consolidated balance sheets.

Certain of our business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue milestones. See Note 5 for further information regarding these acquisitions. The contingent consideration liability is re-measured at the estimated fair value at the end of each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income for such period. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent consideration liability during the three-month periods ended March 31, 2019 and 2018, consisted of the following (in thousands):



	Three Months Ended March 31,
	2019			2018
Beginning balance	$	82,236		$	10,956
Fair value adjustments recorded to income during the period	775			(13		)
Contingent payments made	(554		)	(15		)
Ending balance	$	82,457		$	10,928

As of March 31, 2019, approximately $59.2 million in contingent consideration liability was included in other long-term obligations and approximately $23.3 million was included in accrued expenses in our consolidated balance sheet. As of December 31, 2018, approximately $58.5 million in contingent consideration liability was included in other long-term obligations and $23.8 million was included in accrued expenses in our consolidated balance sheet. Cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.

During the year ended December 31, 2016, we sold a cost method investment for cash and for the right to receive additional payments based on various contingent milestones. We determined the fair value of the contingent payments using Level 3 inputs defined under authoritative guidance for fair value measurements, and we recorded a contingent receivable asset, which as of March 31, 2019 and December 31, 2018 had a value of approximately $627,000 and $607,000, respectively, recorded as a current asset in other receivables in our consolidated balance sheets. We record any changes in fair value to operating expenses as part of our cardiovascular segment in our consolidated statements of income. During the three months ended March 31, 2019, we recorded a gain on the contingent receivable of approximately $20,000. During the three months ended March 31, 2018, we recorded a loss of approximately $53,000 and received payments of approximately $153,000 related to the contingent receivable.

The recurring Level 3 measurement of our contingent consideration liability and contingent receivable included the following significant unobservable inputs at March 31, 2019 and December 31, 2018 (amounts in thousands):



Contingent consideration asset or liability	Fair value at March 31, 2019		Valuation technique	Unobservable inputs	Range
Revenue-based royalty	$	9,966	Discounted cash flow	Discount rate	14% - 25%
payments contingent liability			Discounted cash flow	Projected year of payments	2019-2034

Supply chain milestone	$	14,100	Discounted cash flow	Discount rate	3.9%
contingent liability			Discounted cash flow	Probability of milestone payment	95%
				Projected year of payments	2019

Revenue milestones	$	58,391	Discounted cash flow	Discount rate	3.1% - 15%
contingent liability			Discounted cash flow	Projected year of payments	2019-2023

Contingent receivable	$	627	Discounted cash flow	Discount rate	10%
asset			Discounted cash flow	Probability of milestone payment	68%
				Projected year of payments	2019

Contingent consideration asset or liability	Fair value at December 31, 2018		Valuation technique	Unobservable inputs	Range
Revenue-based royalty	$	10,661	Discounted cash flow	Discount rate	9.9% - 25%
payments contingent liability			Discounted cash flow	Projected year of payments	2018-2037

Supply chain milestone	$	13,593	Discounted cash flow	Discount rate	5.3%
contingent liability			Discounted cash flow	Probability of milestone payment	95%
				Projected year of payments	2019

Revenue milestones	$	57,982	Discounted cash flow	Discount rate	3.3% - 13%
contingent liability			Discounted cash flow	Projected year of payments	2019-2023

Contingent receivable	$	607	Discounted cash flow	Discount rate	10%
asset			Discounted cash flow	Probability of milestone payment	67%
				Projected year of payments	2019

The contingent consideration liability and contingent receivable are re-measured to fair value each reporting period using projected revenues, discount rates, probabilities of payment, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. An increase (decrease) in either the discount rate or the time to payment, in isolation, may result in a significantly lower (higher) fair value measurement. A decrease in the probability of any milestone payment may result in lower fair value measurements. Our determination of the fair value of the contingent consideration liability and contingent receivable could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income.

During the three-month period ended March 31, 2019, we had losses of approximately $211,000, compared to losses of approximately $57,000 for the three-month period ended March 31, 2018, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

We believe the carrying amount of cash and cash equivalents, receivables, and trade payables approximate fair value because of the immediate, short-term maturity of these financial instruments. Our long-term debt re-prices frequently due to variable rates and entails no significant changes in credit risk and, as a result, we believe the fair value of long-term debt approximates carrying value. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents, which are Level 1 inputs.

- 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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