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Fair Value Measurements

8 Months Ended

Aug. 31, 2020

. Fair Value Measurements

The fair value of the Company’s financial instruments under the Going Concern Basis are estimates of the amounts that would be received if the Company were to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The assets and liabilities are categorized and disclosed in one of the following three categories:

Level 1 – based on quoted market prices in active markets for identical assets and liabilities;

Level 2 – based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 – based on unobservable inputs using management’s best estimate and assumptions when inputs are unavailable.

Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following table presents the fair value of the Company’s financial instruments measured at fair value on a recurring basis by level within the valuation hierarchy under the Going Concern Basis:


	December 31, 2019
(in thousands)		Level 1		Level 2		Level 3		Total
Financial assets:
Money market funds		$	131,264	$	—	$	—	$	131,264
Corporate securities (1)		82,267		—		—		82,267
Warrants (2)		—		14,152		—		14,152
Royalty rights - at fair value (3)		—		—		266,196		266,196
Total		$	213,531	$	14,152	$	266,196	$	493,879

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(1) Corporate securities are classified as “Long-term assets held for sale” on the December 31, 2019 Consolidated Balance Sheet.

(2) Warrants consist of Evofem warrants, which are classified as “Long-term assets held for sale” and CareView Communications, Inc. (“CareView”) warrants, classified as “Other assets” on the Consolidated Balance Sheet as of December 31, 2019.

(3) Royalty rights are classified as “Long-term assets held for sale” on the Consolidated Balance Sheet as of December 31, 2019.

Money Market Funds - The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments.

Corporate Securities - Corporate securities consisted of common stock shares of Evofem. For additional information, see Note 4, Discontinued Operations Classified as Assets Held for Sale, and Note 5, Investment in Evofem Biosciences, Inc.

Warrants - Warrants consist of rights to purchase shares of common stock in Evofem and CareView, see Note 4, Discontinued Operations Classified as Assets Held for Sale, Note 5, Investment in Evofem Biosciences, Inc., and Note 9, Notes and Other Long-Term Receivables. The fair value of the warrants is based upon recently quoted market prices of the underlying equity security and the Black-Scholes option pricing model and adjusted by an estimated discount to sell.

Royalty Rights - At Fair Value

During the quarter ended March 31, 2020, it was determined that the Company’s royalty rights assets met the criteria as an asset held for sale, see Note 4, Discontinued Operations Classified as Assets Held for Sale. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sale under the Going Concern Basis. The Company historically accounted for such royalty rights assets at fair value, which, as discussed below, primarily reflected the expected future cash to be received but did not consider the expected costs to sell the assets. The Company’s royalty rights assets are comprised of several separate and distinct royalty rights.

Assertio (Depomed) Royalty Agreement

On October 18, 2013, the Company entered into the Royalty Purchase and Sale Agreement (the “Assertio Royalty Agreement”) with Assertio Therapeutics, Inc. (formerly known as Depomed, Inc.), and Depo DR Sub, LLC (together, “Assertio”), whereby the Company acquired the rights to receive royalties and milestones payable on sales of five Type 2 diabetes products licensed by Assertio in exchange for a $240.5 million cash payment. Total consideration was $241.3 million, which was comprised of the $240.5 million cash payment to Assertio and $0.8 million in transaction costs.

The rights acquired included Assertio’s royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus, Inc., which was subsequently acquired by Salix Pharmaceuticals, Inc., which itself was acquired by Valeant Pharmaceuticals International, Inc. (“Valeant”), which, in July 2018, changed its name to Bausch Health Companies Inc. (“Bausch Health”) with respect to sales of Glumetza (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. with respect to sales of Janumet® XR (sitagliptin and metformin HCL extended-release tablets); (c) from Janssen Pharmaceutica N.V. with respect to potential future development milestones and sales of its approved fixed-dose combination of Invokana® (canagliflozin, a sodium glucose cotransporter 2 (SGLT2) inhibitor) and extended-release metformin tablets, marketed as Invokamet XR®; (d) from Boehringer Ingelheim and Eli Lilly (“Lilly”) and Company with respect to

potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to Assertio’s license agreement with Boehringer Ingelheim, including its approved products, Jentadueto XR® and Synjardy XR®; and (e) from LG Chem, Ltd. and Bausch Health for sales of extended-release metformin tablets in Korea and Canada, respectively.

The Company determined that its royalty purchase interest in Depo DR Sub, LLC represented a variable interest in a variable interest entity. However, the Company did not have the power to direct the activities of Depo DR Sub, LLC that most significantly impact Depo DR Sub, LLC’s economic performance and was not the primary beneficiary of Depo DR Sub, LLC; therefore, Depo DR Sub, LLC was not subject to consolidation by the Company.

On August 2, 2018, PDL Investment Holding, LLC (“PDLIH”), a wholly-owned subsidiary of the Company and assignee from the Company under the Assertio Royalty Agreement, entered into an amendment to the Assertio Royalty Agreement with Assertio. Pursuant to the amendment, PDLIH purchased all of Assertio’s remaining interests in royalty and milestone payments payable on sales of Type 2 diabetes products licensed by Assertio for $20.0 million. Prior to the amendment, the Assertio Royalty Agreement provided that the Company would have received all royalty and milestone payments due under license agreements between Assertio and its licensees until the Company received payments equal to two times the cash payment it made to Assertio, or approximately $481.0 million, after which all net payments received by Assertio would have been shared equally between the Company and Assertio. Following the amendment, the Assertio Royalty Agreement provides that the Company will receive all royalty and milestone payments due under the license agreements between Assertio and its licensees. After the amendment, the Company elected to continue to follow the fair value option and carry the financial asset at fair value.

The Assertio Royalty Agreement terminates on the third anniversary following the date upon which the later of the following occurs: (a) October 25, 2021, or (b) at such time as no royalty payments remain payable under any license agreement and each of the license agreements has expired by its terms.

As of December 31, 2018, in conjunction with the amendment described above, the Company was provided the power to direct the activities of Depo DR Sub, LLC and is the primary beneficiary of Depo DR Sub, LLC; therefore, Depo DR Sub, LLC is subject to consolidation by the Company. As of December 31, 2020, Depo DR Sub, LLC did not have any assets or liabilities of value for consolidation with the Company.

The financial asset acquired represents a single unit of accounting. Under the Going Concern Basis, this financial asset is classified as a Level 3 asset as of December 31, 2019 within the fair value hierarchy, as the Company’s valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future commercialization for products not yet approved by regulatory agencies outside of the United States. The estimated fair value was determined by using a discounted cash flow analysis related to the expected amount and timing of future cash flows to be generated by each licensed product. The discounted cash flows were based upon expected royalties from sales of licensed products over approximately a nine-year period. Significant judgment is required in selecting appropriate discount rates. The discount rates utilized range from 10% to 24%.

As of December 31, 2020, under the Liquidation Basis, the expected cash realizable value of the Assertio royalty asset was $204.5 million and included in the “Royalty assets” in the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of Assertio under the Liquidation Basis.

Viscogliosi Brothers Royalty Agreement

On June 26, 2014, the Company entered into a Royalty Purchase and Sale Agreement (the “VB Royalty Agreement”) with Viscogliosi Brothers, LLC (“VB”) whereby VB conveyed to the Company the right to receive royalties payable on sales of a spinal implant that received pre-market approval from the FDA held by VB and commercialized by Paradigm Spine, LLC (“Paradigm Spine”) in exchange for a $15.5 million cash payment, less fees. Paradigm Spine was acquired in March 2019 by RTI Surgical Holdings, Inc.

The royalty rights acquired included royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company was eligible to receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until the Company received payments equal to 2.3 times the cash payment made to VB, after which all rights to receive royalties would be returned to VB. VB’s ability to repurchase the royalty right for a specified amount expired on June 26, 2018.

In August 2020, the Company sold the royalty rights to a third-party for $4.2 million. No gain or loss was recognized on the date of sale due to an adjustment to the royalty rights fair value in the prior quarter that was informed by bids received.

University of Michigan Royalty Agreement

On November 6, 2014, the Company acquired a portion of all royalty payments of the U-M worldwide royalty interest in Cerdelga® (eliglustat) for $65.6 million pursuant to the Royalty Purchase and Sale Agreement with U-M (the “U-M Royalty Agreement”). Under the terms of the U-M Royalty Agreement, the Company receives 75% of all royalty payments due under the U-M license agreement with Genzyme Corporation, a Sanofi company (“Genzyme”) until expiration of the licensed patents, excluding any patent term extension. Cerdelga, an oral therapy for adult patients with Gaucher disease type 1, was developed by Genzyme. Cerdelga was approved in the United States in August 2014, in the European Union (“EU”) in January 2015, and in Japan in March 2015. In addition, marketing applications for Cerdelga are under review by other regulatory authorities. While marketing applications have been approved in the United States, the EU and Japan, national pricing and reimbursement decisions are delayed in some countries.

The estimated fair value of the royalty right at December 31, 2019, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. Under the Going Concern Basis, this asset was classified as a Level 3 asset as the Company’s valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the licensed product. The estimated fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected amount and timing of future cash flows. The discounted cash flow was based upon expected royalties from sales of licensed product over approximately a three-year period. Significant judgment is required in selecting the appropriate discount rate. The discount rate utilized was approximately 12.8%.

As of December 31, 2020, under the Liquidation Basis, the expected cash realizable value of the Cerdelga royalty asset was $15.5 million and included in the “Royalty assets” in the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of the U-M Royalty Agreement under the Liquidation Basis.

AcelRx Royalty Agreement

On September 18, 2015, the Company entered into a royalty interest assignment agreement (the “AcelRx Royalty Agreement”) with ARPI LLC, a wholly-owned subsidiary of AcelRx Pharmaceuticals, Inc. (“AcelRx”), whereby the Company acquired the rights to receive a portion of the royalties and certain milestone payments on sales of Zalviso® (sufentanil sublingual tablet system) in the EU, Switzerland and Australia by AcelRx’s commercial partner, Grünenthal, in exchange for a $65.0 million cash payment. Under the terms of the AcelRx Royalty Agreement, the Company was eligible to receive 75% of all royalty payments and 80% of the first four commercial milestone payments due under AcelRx’s license agreement with Grünenthal until the earlier to occur of (i) receipt by the Company of payments equal to three times the cash payments made to AcelRx and (ii) the expiration of the licensed patents. Zalviso received marketing approval by the European Commission in September 2015. Grünenthal launched Zalviso in the second quarter of 2016 and the Company started to receive royalties in the third quarter of 2016. On May 15, 2020, AcelRx received notice that the product marketer of Zalviso, Grünenthal GmbH, would exercise its right to terminate the license agreement with AcelRx, effective as of 180 days from the date of the notice. AcelRx is obligated to use commercially reasonable efforts to find a new license agreement under the terms no less favorable than those in the license with Grünenthal.

In August 2020, the Company sold the asset to a third-party for zero consideration. No gain or loss was recognized on the date of sale, due to an adjustment to the royalty rights fair value in the prior quarter that resulted from the notification that the license agreement was terminated by the marketer of the product.

Kybella Royalty Agreement

On July 8, 2016, the Company entered into a royalty purchase and sales agreement with an individual, whereby the Company acquired that individual’s rights to receive certain royalties on sales of KYBELLA® by Allergan plc in exchange for a $9.5 million cash payment and up to $1.0 million in future milestone payments based upon product sales targets. The Company started to receive royalty payments during the third quarter of 2016.

In August 2020, the Company sold the asset to a third-party for $0.2 million. No gain or loss was recognized on the date of sale, due to an adjustment to the royalty rights fair value in the prior quarter that was informed by bids received.

The following tables summarize the changes in Level 3 Royalty Right Assets and the gains and losses included in earnings for the eight months ended August 31, 2020 under the Going Concern Basis:


Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Right Assets

(in thousands)				Royalty Rights - At Fair Value
Fair value as of December 31, 2019					$	266,196



	Total net change in fair value for the period
		Change in fair value of royalty rights - at fair value		(8,804)
		Cash received from royalty rights		(35,129)
			Total net change in fair value for the period		(43,933)
	Sale of royalty rights				(4,350)

Fair value as of August 31, 2020					$	217,913

The table above does not include the aggregate remaining estimated cost to sell the royalty right assets of $4.6 million.


Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Right Assets
	Fair Value as of		Sale of		Royalty Rights -		Fair Value as of
(in thousands)	December 31, 2019		Royalty Rights (1)		Change in Fair Value		August 31, 2020 (2)
Assertio	$	218,672	$	—	$	(18,209)	$	200,463
VB	13,590		(4,182)		(9,408)		—
U-M	20,398		—		(2,948)		17,450

AcelRx	12,952		—		(12,952)		—

KYBELLA	584		(168)		(416)		—
	$	266,196	$	(4,350)	$	(43,933)	$	217,913

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(1) In August 2020 the Company sold the royalty rights to VB, AcelRx, and KYBELLA to a third-party.

(2) Excludes the aggregate remaining estimated costs to sell of $4.6 million.

Gains and losses from changes in Level 3 assets are included in earnings under the Going Concern Basis and are presented as “Royalty rights - change in fair value” as follows:


	Eight Months Ended August 31,		Year Ended December 31,
(in thousands)	2020		2019


Total change in fair value for the period included in earnings for royalty right assets held at the end of the reporting period	$	(8,804)	$	(31,042)

Assets/Liabilities Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company remeasures the fair value of certain assets and liabilities upon the occurrence of certain events. Such assets consist of long-lived assets, including property and equipment and intangible assets and the shares of AEON common stock, received in connection with the loans made to LENSAR by the Company prior to its acquisition of LENSAR.

The Company’s carrying value of the 1.7 million shares of AEON common stock as of December 31, 2019 under the Going Concern Basis was $6.6 million based on an estimated per share value of $3.84, which was established by a valuation performed when the shares were acquired. The value of the Company’s investment in AEON is not readily determinable as AEON’s shares are not publicly traded. Under the Going Concern Basis, the Company evaluated the fair value of this investment by performing a qualitative assessment each reporting period. If the results of this qualitative assessment indicate that the fair value was less than

the carrying value, the investment is written down to its fair value. Based on additional financial information received from AEON, the Company performed an analysis on August 31, 2020 and concluded the investment was impaired and wrote it down to $1.0 million. The loss is reported as Loss on investment on the Company’s Consolidated Statement of Operations for the eight months ended August 31, 2020. This investment is included in Other Assets on the Company’s Consolidated Statement of Net Assets as of September 30, 2020 and as Other long-term assets on the December 31, 2019 Consolidated Balance Sheet. For additional information on the AEON investment, see Note 9, Notes and Other Long-Term Receivables. As of December 31, 2020, under the Liquidation Basis, the expected cash realizable value of the AEON asset was $1.0 million and included in “Other assets” on the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of AEON under the Liquidation Basis.

During the quarter ended March 31, 2020, it was determined that Noden met the criteria as an asset held for sale. As a result of the Company’s analysis of the fair value of Noden, the Company recorded a loss on classification as held for sale of $6.7 million during the quarter ended March 31, 2020 of which $1.8 million related to the estimated costs to sell Noden and $4.9 million related to the difference in carrying value versus fair value. The fair value calculation was made using a discounted cash flow model, utilizing a discount rate of approximately 19%, and included level 3 inputs. During the quarter ended June 30, 2020, the Company recorded an additional loss of $16.8 million related primarily to the difference in carrying value and fair value. The reduction in fair value reflected lower estimated sales proceeds as informed by the Company’s sales process. At June 30, 2020, the fair value calculation was made using a discounted cash flow model, utilizing a discount rate of approximately 17%, and included level 3 inputs. For information on the sale of the business in September 2020, see Note 4, Discontinued Operations Classified as Assets Held for Sale.

Assets/Liabilities Not Subject to Fair Value Recognition

The following tables present the fair value of assets and liabilities not subject to fair value recognition by level within the valuation hierarchy:


	December 31, 2019
(in thousands)		Carrying Value		Fair Value Level 2		Fair Value Level 3
Assets:
Wellstat Diagnostics note receivable		$	50,191	$	—	$	55,389
Hyperion note receivable		1,200		—		1,200








CareView note receivable		690		—		690
Total		$	52,081	$	—	$	57,279
Liabilities:




December 2021 Notes		$	16,950	$	20,978	$	—
December 2024 Notes		10,300		12,953		—

Total		$	27,250	$	33,931	$	—

There were no impairment losses on notes receivable in the eight months ended August 31, 2020. During the years ended December 31, 2019 and 2018 the Company recorded impairment losses of $10.8 million and $8.2 million, respectively, for the note receivable with CareView.

The Company had two notes receivable assets as of December 31, 2019 under the Going Concern Basis. The notes receivable were classified under the Going Concern Basis as Level 3 in the fair value hierarchy as the Company’s valuations utilized significant unobservable inputs, including estimates of future revenues, discount rates, expectations about settlement, terminal values, required yield and the value of underlying collateral. The Company engages third-party valuation experts when deemed necessary to assist in evaluating its investments and the related inputs needed to estimate the fair value of certain investments.

As of December 31, 2019 under the Going Concern Basis, the estimated fair value of the CareView note receivable was determined using a liquidation analysis. A liquidation analysis considers the asset side of the balance sheet and adjusts the value in accordance with the relative risk associated with the asset and the probable liquidation value. The asset recovery rates varied by asset. As of December 31, 2019 under the Going Concern Basis, the estimated fair value of the Wellstat Diagnostics note receivable was determined by using an asset approach and discounted cash flow model related to the underlying collateral and adjusted to consider estimated costs to sell the asset.

The Company’s liabilities not subject to fair value recognition under the Going Concern Basis consist of its 2021 and 2024 convertible notes. The fair values of the Company’s convertible senior notes were determined using quoted market pricing and were classified as Level 2 in the fair value hierarchy.

The following table represents significant unobservable inputs used in determining the estimated fair value of the Wellstat Diagnostics note receivable investment under the Going Concern Basis:

Asset

Valuation
Technique

Unobservable
Input

December 31,
2019

Wellstat Diagnostics

Wellstat Guarantors intellectual property

Income Approach

Discount rate

12%

Undiscounted royalty amount

$21 million

Settlement Amount

Income Approach

Discount rate

15%

Undiscounted settlement amount

$28 million

Real Estate Property

Market Approach

Annual appreciation rate

—%

Estimated realtor fee

Undiscounted market value

$16 million

- 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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