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, 2013 and 2012:



	2013										2012
	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	$	171,339		$	171,339	$	—	$	—		$	306,604		$	306,604	$	—	$	—
Available-for-sale equity securities	—			—		—		—			4,410			4,410		—		—
Available-for-sale debt securities:
Auction rate floating securities	—			—		—		—			7,167			—		—		7,167
Total financial assets	$	171,339		$	171,339	$	—	$	—		$	318,181		$	311,014	$	—	$	7,167
Cash equivalents	$	171,339		$	171,339	$	—	$	—		$	306,604		$	306,604	$	—	$	—
Marketable securities	—			—		—		—			11,577			4,410		—		7,167
Total financial assets	$	171,339		$	171,339	$	—	$	—		$	318,181		$	311,014	$	—	$	7,167
Liabilities:
Acquisition-related contingent consideration	$	(355,765	)	$	—	$	—	$	(355,765	)	$	(455,082	)	$	—	$	—	$	(455,082	)

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, 2013.

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, 2013 and 2012:



	2013			2012
Balance, beginning of year	$	(455,082	)	$	(420,084	)
Total unrealized gains:
Included in net (loss) income:
Arising during the year⁽¹⁾	29,259			5,266
Reclassification from other comprehensive income (loss)	—			—
Included in other comprehensive income (loss):
Arising during the year	4,938			(784		)
Acquisition-related contingent consideration:
Issuances⁽²⁾	(76,064		)	(145,728		)
Payments⁽³⁾	141,184			106,248
Balance, end of year	$	(355,765	)	$	(455,082	)

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(1)

For the year ended December 31, 2013, a net gain of $29.3 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 a net gain related to the Elidel®/Xerese®/Zovirax® agreement entered into with Meda in June 2011 (the “Elidel®/Xerese®/Zovirax® agreement”). In April 2013, Mylan Inc. launched a generic Zovirax® ointment, which was earlier than we previously anticipated. Also, in April 2013, we entered into an agreement with Actavis to launch the authorized generic ointment for Zovirax®. Refer to note 5 titled “COLLABORATION AGREEMENTS” for further information regarding the agreement with Actavis. As a result of analysis in the third quarter of 2013 of performance trends since the generic entrant, the Company adjusted the projected revenue forecast, resulting in an acquisition-related contingent consideration net gain of $20.0 million in the year ended December 31, 2013. Also contributing to the acquisition-related contingent consideration net gain was a net gain of $6.9 million which resulted from the termination, in the third quarter of 2013, of the A007 (Lacrisert®) development program acquired by Valeant as part of Aton Pharma, Inc. (“Aton”) acquisition in May 2010, which impacted the probability associated with potential milestone payments. The termination of this program also resulted in an IPR&D impairment charge in the third quarter of 2013, as described in note 12 titled “INTANGIBLE ASSETS AND GOODWILL”.

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®/Zovirax® 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.


(2)	Relates to the 2013 acquisitions, primarily the Eisai acquisition and other smaller acquisitions, and the 2012 acquisitions, primarily the OraPharma, Gerot Lannach, QLT, and Atlantis acquisitions, as described in note 3 titled “BUSINESS COMBINATIONS”.


(3)	Relates primarily to payments of acquisition-related contingent consideration related to the Elidel®/Xerese®/Zovirax® agreement and the OraPharma and the Gerot Lannach acquisitions. See note 3 titled “BUSINESS COMBINATIONS”.

During the year ended December 31, 2013, the Company sold its entire investment in auction rate floating securities assumed in connection with the Medicis Acquisition in December 2012 (as described in note 3) and realized a gain of $1.9 million.

As of December 31, 2012, the Company also held investments in auction rate floating securities assumed in connection with the Medicis Acquisition, which were 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, 2013, the Company’s assets measured at fair value on a non-recurring basis subsequent to initial recognition included:

(i) an intangible asset within the Company’s Developed Markets segment, related to ezogabine/retigabine (immediate-release formulation) which is co-developed and marketed under a collaboration agreement with GSK. The Company recognized an impairment charge of $551.6 million in the third quarter of 2013 in Amortization and impairments of finite-lived intangible assets in the consolidated statements of (loss) income. In addition, the Company fully impaired an IPR&D asset, within the Company’s Developed Markets segment, relating to a modified-release formulation of ezogabine/retigabine, which resulted in a charge of $93.8 million. The $93.8 million write-off was recognized in the third quarter of 2013 in In-process research and development impairments and other charges in the consolidated statements of (loss) income. These impairment charges were driven by analysis of expected future cash flows based on the communication received from the FDA in September 2013 regarding labeling changes and a required modification of the approved risk evaluation and mitigation strategy (REMS), which includes restrictions on distribution and additional patient monitoring. Further, as a result of this feedback received from the FDA, GSK decided that all sales force promotion for the product will be eliminated in the United States, and they will not launch the product in certain other planned territories. Per the terms of the collaboration agreement, GSK controls all sales force promotion for the product. Such changes are expected to have a significant impact on future cash flows of ezogabine/retigabine. The adjusted carrying amount of the ezogabine/retigabine (immediate-release formulation) of $45.1 million was equal to its estimated fair value, which was determined using discounted cash flows and represents Level 3 inputs. As a result of the events noted above, the Company believes that the value of the modified-release formulation of ezogabine/retigabine to a market participant would be zero.

(ii) assets held for sale within the Company’s Developed Markets segment, related to certain suncare and skincare brands, including inventory on hand, sold primarily in Australia. The Company recognized additional impairment charges of $31.5 million in 2013 for these brands in Amortization and impairments of finite-lived intangible assets in the consolidated statements of (loss) income. The additional impairment charges, which were recognized primarily in the first quarter, were driven by assessment of offers received and analysis of updated market data. During the fourth quarter of 2013, the Company sold the skincare brands that were classified as held for sale (see note 4 titled “ACQUISITIONS AND DISPOSITIONS” for further information). With respect to the remaining suncare brands, the plan of sale changed in the fourth quarter of 2013, and the Company no longer intends to sell these assets. Consequently, the carrying amount of $5.6 million, in the aggregate, for the remaining brands, is no longer classified as held for sale as of December 31, 2013; and

(iii) an intangible asset within the Company’s Developed Markets segment, related to Cortaid®, a dermatological product sold in the U.S. The Company recognized an impairment charge of $5.7 million in 2013 for this brand in Amortization and impairments of finite-lived intangible assets in the consolidated statements of (loss) income. The impairment charge was driven by discontinuations of the product by certain retailers. The adjusted carrying amount of $1.0 million for this asset was equal to its estimated fair value, which was determined using discounted cash flows and represents Level 3 inputs.

As of December 31, 2012, the Company’s assets measured at fair value on a non-recurring basis subsequent to initial recognition included:

(i) an 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 and impairments of finite-lived 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 as of December 31, 2012, in the aggregate, was 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 and impairments of finite-lived intangible assets in the consolidated statements of (loss) income. The adjusted carrying amount of $2.2 million for this asset as of December 31, 2012 was equal to its estimated fair value less costs to sell, 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”.