Fair Value Measurement

12 Months Ended

Dec. 31, 2019

Authoritative guidance establishes a valuation hierarchy for disclosure of the inputs to the valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and 2018, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value.



		Fair Value Measurement at December 31, 2019
Balance Sheet Classification	Type of Instrument	Total		Level 1		Level 2		Level 3
Cash equivalents	Money market funds	$	635.9	$	—	$	635.9	$	—
Cash equivalents	Commercial paper	$	227.9	$	—	$	227.9	$	—
Cash equivalents	Corporate bonds	$	20.6	$	—	$	20.6	$	—
Cash equivalents	Bank certificates of deposit	$	19.2	$	—	$	19.2	$	—
Cash equivalents	Other government-related obligations	$	60.4	$	—	$	60.4	$	—
Marketable securities	Mutual funds	$	23.1	$	23.1	$	—	$	—
Marketable securities	Commercial paper	$	19.0	$	—	$	19.0	$	—
Marketable securities	Corporate bonds	$	3.7	$	—	$	3.7	$	—
Marketable securities	Other government-related obligations	$	10.0	$	—	$	10.0	$	—
Marketable securities	Bank certificates of deposit	$	8.2	$	—	$	8.2	$	—
Other assets	Equity securities	$	79.0	$	51.2	$	27.8	$	—
Prepaid expenses and other current assets	Foreign exchange forward contracts	$	29.9	$	—	$	29.9	$	—
Other assets	Foreign exchange forward contracts	$	0.6	$	—	$	0.6	$	—
Other current liabilities	Foreign exchange forward contracts	$	26.6	$	—	$	26.6	$	—
Other liabilities	Foreign exchange forward contracts	$	1.1	$	—	$	1.1	$	—
Other current liabilities	Interest rate contracts	$	19.5	$	—	$	19.5	$	—
Other liabilities	Interest rate contracts	$	41.9	$	—	$	41.9	$	—
Contingent consideration	Acquisition-related contingent consideration	$	192.4	$	—	$	—	$	192.4
Other current liabilities	Other contingent payments	$	24.0	$	—	$	—	$	24.0



		Fair Value Measurement at December 31, 2018
Balance Sheet Classification	Type of Instrument	Total		Level 1		Level 2		Level 3
Cash equivalents	Money market funds	$	569.4	$	—	$	569.4	$	—
Cash equivalents	Commercial paper	$	35.4	$	—	$	35.4	$	—
Cash equivalents	Corporate bonds	$	0.2	$	—	$	0.2	$	—
Cash equivalents	Other government-related obligations	$	8.2	$	—	$	8.2	$	—
Marketable securities	Mutual funds	$	16.5	$	16.5	$	—	$	—
Marketable securities	Commercial paper	$	16.7	$	—	$	16.7	$	—
Marketable securities	Corporate bonds	$	122.6	$	—	$	122.6	$	—
Marketable securities	Other government-related obligations	$	9.3	$	—	$	9.3	$	—
Marketable securities	Bank certificates of deposit	$	33.2	$	—	$	33.2	$	—
Other assets	Equity securities	$	90.8	$	8.9	$	81.9	$	—
Prepaid expenses and other current assets	Foreign exchange forward contracts	$	40.5	$	—	$	40.5	$	—
Other assets	Foreign exchange forward contracts	$	0.3	$	—	$	0.3	$	—
Other current liabilities	Foreign exchange forward contracts	$	18.8	$	—	$	18.8	$	—
Other liabilities	Foreign exchange forward contracts	$	3.1	$	—	$	3.1	$	—
Prepaid expenses and other current assets	Interest rate contracts	$	20.1	$	—	$	20.1	$	—
Other current liabilities	Interest rate contracts	$	0.8	$	—	$	0.8	$	—
Other liabilities	Interest rate contracts	$	17.3	$	—	$	17.3	$	—
Current portion of contingent consideration	Acquisition-related contingent consideration	$	97.6	$	—	$	—	$	97.6
Contingent consideration	Acquisition-related contingent consideration	$	183.2	$	—	$	—	$	183.2

There were no securities transferred between Level 1, 2 and 3 during the year ended December 31, 2019.

Valuation Techniques

We classify mutual fund investments and equity securities, which are valued based on quoted market prices in active markets with no valuation adjustment, as Level 1 assets within the fair value hierarchy.

Cash equivalents and marketable securities classified as Level 2 within the valuation hierarchy include money market funds, commercial paper, U.S. and foreign government-related debt, corporate debt securities and certificates of deposit. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

Other investments in equity securities of publicly traded companies which are subject to holding period restrictions are carried at fair value using an option pricing valuation model and classified as Level 2 equity securities within the fair value hierarchy. The most significant assumptions within the option pricing valuation model are the term of the restrictions and the stock price volatility, which is based upon the historical volatility of the applicable company or similar companies. We also use a constant maturity risk-free interest rate to match the remaining term of the restrictions on such investments.

Our derivative assets and liabilities include foreign exchange and interest rate derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk as well as an evaluation of our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.

Contingent consideration liabilities related to business acquisitions and derivative liabilities associated with other contingent payments are classified as Level 3 within the valuation hierarchy and are valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met.

As of December 31, 2019, there has not been any impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

Acquisition-Related Contingent Consideration

In connection with prior business combinations, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. We determine the fair value of these obligations using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a cost of debt ranging from 3.9% to 5.1% for developmental and regulatory milestones and a weighted average cost of capital ranging from 9.0% to 10.0% for sales-based milestones.

Each reporting period, we adjust the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to the passage of time.

As of December 31, 2019, estimated future contingent milestone payments related to prior business combinations range from zero if no milestone events are achieved, to a maximum of $602.0 if all development, regulatory and sales-based milestones are reached. In the second quarter 2019, a sales-based milestone associated with our acquisition of Enobia Pharma Corp. was achieved. In connection with such achievement, we made a $100.0 milestone payment in the third quarter 2019.

As of December 31, 2019, the fair value of acquisition-related contingent consideration was $192.4. The following table represents a roll-forward of our acquisition-related contingent consideration:



	2019
Balance at beginning of period	$	280.8
Milestone payments	(100.0		)
Changes in fair value	11.6
Balance at end of period	$	192.4

Other Contingent Payments

In January 2019, we entered into an agreement with Caelum, a biotechnology company that is developing CAEL-101 for light chain (AL) amyloidosis. Under the terms of the agreement, we acquired a minority equity interest in preferred stock of Caelum and an exclusive option to acquire the remaining equity in Caelum based on Phase II data, for pre-negotiated economics. We paid $30.0 during the first quarter 2019 and agreed to pay up to an additional $30.0 in contingent development milestones prior to our exercise of the option to acquire the remaining equity in Caelum. These contingent payments meet the definition of a derivative liability and were initially recorded at fair value of $27.1, based on the probability-weighted cash flows, discounted using a cost of debt ranging from 3.3% to 3.5%.

In December 2019, following FDA feedback which resulted in the redesign and expansion of Caelum’s planned clinical development program for CAEL-101, we amended the terms of our existing option agreement with Caelum. The amendment modified the terms of the option to acquire the remaining equity in Caelum based on data from the expanded Phase II/III trials. The amendment also modified the development-related milestone events associated with the initial $30.0 in contingent payments, provided for an additional $20.0 in upfront funding, which we accrued as of December 31, 2019, as well as funding of $60.0 in exchange for an additional equity interest at fair value upon achievement of

a specific development-related milestone event. Following the amendment, the $30.0 in contingent payments continues to meet the definition of a derivative liability.

Each reporting period, we adjust the derivative liability associated with the contingent payments to fair value with changes in fair value recognized in other income and expense. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of the liability related to the passage of time. As of December 31, 2019, the fair value of our contingent payments was $24.0, based on the probability-weighted cash flows, discounted using a cost of debt of 2.1%. We recorded $3.1 in other income and (expense) during the year ended December 31, 2019 related to the change in the fair value of the liability, including $4.1 as a result of the amendment to our agreement with Caelum.

- 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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