FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2012

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

7. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value as of December 31, 2012 and 2011:

	2012										2011
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	306,604		$	306,604	$	—	$	—		$	27,711		$	27,711	$	—	$	—
Available-for-sale equity securities	4,410			4,410		—		—			3,364			3,364		—		—
Available-for-sale debt securities:
Corporate bonds	—			—		—		—			2,974			2,974		—		—
Auction rate floating securities	7,167			—		—		7,167			—			—		—		—
Total financial assets	$	318,181		$	311,014	$	—	$	7,167		$	34,049		$	34,049	$	—	$	—
Cash equivalents	$	306,604		$	306,604	$	—	$	—		$	27,711		$	27,711	$	—	$	—
Marketable securities	11,577			4,410		—		7,167			6,338			6,338		—		—
Total financial assets	$	318,181		$	311,014	$	—	$	7,167		$	34,049		$	34,049	$	—	$	—
Liabilities:
Acquisition-related contingent consideration	$	(455,082	)	$	—	$	—	$	(455,082	)	$	(420,084	)	$	—	$	—	$	(420,084	)

Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:

· Level 1 — Quoted prices in active markets for identical assets or liabilities;

· Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, 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 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

There were no transfers between Level 1 and level 2 during the year ended December 31, 2012.

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The fair value measurement of contingent consideration obligations arising from business combinations is determined using unobservable (Level 3) inputs. These inputs include (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) 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 (higher) fair value measurement.

The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:

	2012			2011
Balance, beginning of year	$	(420,084	)	$	(20,220	)
Total unrealized gains:
Included in net (loss) income:
Arising during the year(1)	5,266			10,986
Reclassification from other comprehensive income (loss)	—			—
Included in other comprehensive income (loss):
Arising during the year	(784		)	831
Acquisition-related contingent consideration:
Issuances(2)	(145,728		)	(443,481		)
Payments(3)	106,248			31,800
Balance, end of year	$	(455,082	)	$	(420,084	)

(1) For the year ended December 31, 2012, a net gain of $5.3 million was recognized as Acquisition-related contingent consideration in the consolidated statements of (loss) income. The Acquisition-related contingent consideration net gain was primarily driven by (i) a net gain of $10.3 million related to the iNova acquisition, primarily due to changes in the estimated probability of achieving the milestones, partially offset by (ii) a net loss of $6.5 million related to the Elidel®/Xerese® license agreement, primarily driven by fair value adjustments to reflect accretion for the time value of money, partially offset by changes in the projected revenue forecast resulting from the FDA’s denial of the Company’s Citizen’s Petition regarding Zovirax® ointment, as described in note 3.

For the year ended December 31, 2011, $11.0 million was recognized as Acquisition-related contingent consideration in the consolidated statements of (loss) income.  The Acquisition-related contingent consideration gain was primarily driven by a $13.2 million gain related to assessment of the net sales milestones for the 2011 calendar year with respect to the PharmaSwiss acquisition and a $9.4 million gain related to assessment of the milestones with respect to the A002 program, which was suspended in 2011. These gains were partially offset by fair value adjustments to reflect accretion for the time value of money related to the Elidel®/Xerese® license agreement.

(2) Relates primarily to the OraPharma, Gerot Lannach, QLT, Atlantis and University Medical acquisitions as described in note 3.

(3) Relates primarily to payments of acquisition-related contingent consideration related to the Elidel®/Xerese® license agreement and the PharmaSwiss acquisition.

As of December 31, 2012, the Company also held investments in auction rate floating securities assumed in connection with the Medicis acquisition, which are classified as available-for-sale securities and reflected at fair value (level 3).

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of December 31, 2012, the Company’s assets measured at fair value on a non-recurring basis subsequent to initial recognition included an (i) IPR&D asset related to a Xerese® life-cycle product.  The Company recognized an impairment charge in 2012 of $24.7 million in In-process research and development impairments and other charges related to this asset due to higher projected development spend and revised timelines for potential commercialization. The adjusted carrying amount of $8.8 million as of December 31, 2012 for this asset was equal to its estimated fair value, which was determined using discounted cash flows and represents Level 3 inputs; (ii) intangible assets related to certain suncare and skincare brands sold primarily in Australia, which are classified as held for sale on the consolidated balance sheet. The Company recognized impairment charges in 2012 of $31.3 million for these brands in Amortization of intangible assets  in the consolidated statements of (loss) income.   These charges included an allocation of goodwill of $12.8 million based on the relative fair value of these brands as compared to the total fair value of the Australia reporting unit.  The adjusted carrying amount of $60.5 million for these assets, in the aggregate, is equal to their estimated fair values less costs to sell, which was determined using discounted cash flows and represents  Level 3 inputs; and (iii) intangible asset related to the Dermaglow® product classified as held for sale on the consolidated balance sheet. The Company recognized impairment charges in 2012 of $18.7 million for the Dermaglow® product in Amortization of intangible assets in the consolidated statements of (loss) income.  The adjusted carrying amount of $2.2 million for this asset is equal to its estimated fair value less costs to sell, which was determined using discounted cash flows and represents Level 3 inputs.

As of December 31, 2011, the Company’s assets measured at fair value on a non-recurring basis subsequent to initial recognition included intangible assets related to the IDP-111 and 5-FU products classified as held for sale on the consolidated balance sheet. Refer to note 4 for additional information. The Company recognized impairment charges in 2011 of $7.9 million and $19.8 million for IDP-111 and 5-FU, respectively, in Amortization of intangible assets in the consolidated statements of (loss) income. The adjusted carrying amounts of $54.4 million and $14.8 million for IDP-111 and 5-FU, respectively, are equal to estimated fair value, less costs to sell, which was based on observable market prices and represents Level 2 inputs. On February 3, 2012, the Company sold the IDP-111 and 5-FU products.

Also, the Company recognized impairment charges on IPR&D assets of $105.2 million in the fourth quarter of 2011 in In-process research and development impairments and other charges, relating to the A002, A004, and A006 programs acquired as part of the Aton acquisition in 2010 described above under note 3, as well as the IDP-109 and IDP-115 dermatology programs. The adjusted carrying amounts of $12.6 million as of December 31, 2011, in the aggregate, for these assets were equal to their estimated fair value, which was determined using discounted cash flows and represents Level 3 inputs.

For further information regarding asset impairment charges, see note 12 titled “INTANGIBLE ASSETS AND GOODWILL”.