Fair Value Measurements

The Company applies a fair value framework in order to measure and disclose its financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:


Level 1	Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 asset consists of money market investments.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates and yield curves.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s Level 3 assets and liabilities consist of the contingent purchase prices associated with the Company’s dispositions and business combinations, respectively. The fair value of certain development or regulatory milestone based contingent purchase prices was determined in a discounted cash flow framework by probability weighting the future contractual payment with management's assessment of the likelihood of achieving these milestones and present valuing them using a risk-adjusted discount rate. Certain sales milestone based payments were determined in a discounted cash flow framework where risk-adjusted revenue scenarios were estimated using Monte Carlo simulation models to compute contractual payments which were present valued using a risk-adjusted discount rate.

Financial assets measured at fair value on a nonrecurring basis

As part of the purchase and sale agreement with Mallinckrodt, the Company may receive up to an additional $235.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of PreveLeak and Raplixa. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates. The Company utilized the “income method,” which applies a probability weighting that considers the estimated future net sales of each of the respective products to determine the probability that each sale milestone will be met. These projections were based on factors such as relevant market size, patent protection, historical pricing of similar products and expected industry trends. The Company anticipates payment from Malinckrodt on these sales milestones between 2017 and 2022 with probabilities of achievement ranging from 15% to 85%. The Company also considers qualitative factors such as development of competing drugs, regulatory developments and other qualitative factors. The Company determined the year in which it believes each of the sales milestones will be achieved. The respective milestones were then discounted to the present value using a discount rate of 10%. Any changes to fair value will be recorded if and when the sales milestones are achieved. The Company calculated the fair value of these contingent payments to be received from Mallinckrodt as $78.0 million, which are reflected as a contingent purchase price from sale of business on the condensed consolidated balance sheet at June 30, 2016. The Company classified these contingent payments as Level 3 assets. Any increases in the carrying amount or impairments of sales milestones would be recognized in selling, general and administrative expenses if and when the milestones are achieved or determined to have no value.

As part of the purchase and sale agreement with Chiesi USA and Chiesi, the Company may receive up to an additional $480.0 million in the aggregate from Chiesi following the achievement of certain specified calendar year net sales milestones with respect to net sales of each of Cleviprex and Kengreal. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates. The Company utilized a risk adjusted revenue simulation model. In this simulation, the chances of achieving many different revenue levels are estimated and then adjusted to reflect the results of similar products and companies in the market to calculate the fair value of each milestone payment. The breadth of all possible revenue scenarios is captured in an estimate of revenue volatility - a measure that can be estimated from performance of similar companies in the market. The Company estimated revenue volatility as the delivered asset volatility observed in comparable companies’ historical performance, where the delivering asset was based on operational leverage of the Company. Under each of these possible scenarios, different amounts of the sales-based milestone payments are calculated, and the average of the payments across a range of possible scenarios is deemed to be the expected value of the earn-out payments. The Company compared the estimated revenue volatility to the delivered asset volatility to arrive at adjusted revenue volatilities between 30% and 41%. The Company then discounted the expected future value of the earn-out payments using a range of discount rates between 3.1% and 6.9%. The Company calculated the fair value of these contingent payments to be received from Chiesi as $65.7 million, which are reflected as a contingent purchase price from sale of business on the condensed consolidated balance sheet at June 30, 2016. The Company classified these contingent payments as Level 3 assets. Any increases in the carrying amount or impairments of sales milestones would be recognized in selling, general and administrative expenses if and when the milestones are achieved or determined to have no value.

Financial assets and liabilities measured at fair value on a recurring basis

Financial assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Except for the Company’s Level 2 liabilities which are discussed in Note 10, “Convertible Senior Notes,” the following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015, by level, within the fair value hierarchy:



	As of June 30, 2016								As of December 31, 2015
Assets and Liabilities	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of June 30, 2016		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2015
	(in thousands)
Assets:
Money market	$	56,058	$	—	$	—	$	56,058	$	6,030	$	—	$	—	$	6,030
Total assets at fair value	$	56,058	$	—	$	—	$	56,058	$	6,030	$	—	$	—	$	6,030
Liabilities:
Contingent purchase price	$	—	$	—	$	118,571	$	118,571	$	—	$	—	$	123,757	$	123,757
Total liabilities at fair value	$	—	$	—	$	118,571	$	118,571	$	—	$	—	$	123,757	$	123,757

There were no transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy that occurred during the six months ended June 30, 2016.

Level 3 disclosures

The Company measures contingent purchase price at fair value based on significant inputs not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of contingent purchase price uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of contingent purchase price related to updated assumptions and estimates are recognized within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

The contingent purchase price may change significantly as additional data is obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.

The following table provides quantitative information associated with the fair value measurements of the Company’s Level 3 liabilities:



	Fair Value as of June 30, 2016		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in thousands)
Targanta:
Contingent purchase price	$	6,171	Probability-adjusted discounted cash flow	Probability of success	20%
				Period in which milestone is expected to be achieved	2020
				Discount rate	11%
Incline:
Contingent purchase price	$	27,000	Probability-adjusted discounted cash flow	Probabilities of successes	64% - 72% (67%)
				Period in which milestones are expected to be achieved	2018 - 2019
				Discount rate	18%
Rempex:
Contingent purchase price: commercial milestones	$	57,400	Probability-adjusted discounted cash flow	Probabilities of successes	11% - 95% (51%)
				Period in which milestones are expected to be achieved	2016 - 2021
				Discount rate	3.0% - 5.7%
Contingent purchase price: sales milestones	$	11,000	Risk-adjusted revenue simulation	Probabilities of successes	11% - 63% (25%)
				Period in which milestones are expected to be achieved	2018 - 2022
				Discount rate	4.5% - 5.9%

Annovation:
Contingent purchase price	$	17,000	Probability-adjusted discounted cash flow	Probabilities of successes	9% - 50% (30%)
				Period in which milestones are expected to be achieved	2017 - 2030
				Discount rate	3.3% - 7.3%



	Fair Value as of December 31, 2015		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in thousands)
Targanta:
Contingent purchase price	$	5,857	Probability-adjusted discounted cash flow	Probability of success	20%
				Period in which milestone is expected to be achieved	2020
				Discount rate	11%
Incline:
Contingent purchase price	$	28,600	Probability-adjusted discounted cash flow	Probabilities of successes	64% - 72% (67%)
				Period in which milestones are expected to be achieved	2017 - 2018
				Discount rate	18%
Rempex:
Contingent purchase price: commercial milestones	$	63,000	Probability-adjusted discounted cash flow	Probabilities of successes	11% - 95% (56%)
				Period in which milestones are expected to be achieved	2016 - 2020
				Discount rate	3.6% - 6.0%
Contingent purchase price: sales milestones	$	10,300	Risk-adjusted revenue simulation	Probabilities of successes	11% - 63% (30%)
				Period in which milestones are expected to be achieved	2018 - 2022
				Discount rate	5.5% - 6.7%

Annovation:
Contingent purchase price	$	16,000	Probability-adjusted discounted cash flow	Probabilities of successes	8% - 50% (31%)
				Period in which milestones are expected to be achieved	2016 - 2030
				Discount rate	4.1% - 8.2%

The fair value of the contingent purchase price represents the fair value of the Company’s liability for all potential payments under the Company’s acquisition agreements for Targanta, Incline Therapeutics, Inc. (Incline), Rempex Pharmaceuticals, Inc. (Rempex) and Annovation BioPharma, Inc. (Annovation). The significant unobservable inputs used in the fair value measurement of the Company’s contingent purchase prices are the probabilities of successful achievement of development, regulatory, and sales milestones that would trigger payments under the Targanta, Incline, Rempex and Annovation agreements, probabilities as to the periods in which the milestones are expected to be achieved and discount rates. Significant changes in any of the probabilities of success or periods in which milestones will be achieved would result in a significantly higher or lower fair value measurement.

The changes in fair value of the Company’s Level 3 contingent purchase price during the three and six months ended June 30, 2016 and 2015 were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands)
Balance at beginning of period	$	119,612		$	369,552		$	123,757		$	351,134
Fair value of contingent purchase price with respect to Annovation as of February 2, 2015	—			—			—			18,000
Settlements	(4,474		)	(174,550		)	(7,247		)	(175,650		)
Fair value adjustment to contingent purchase prices included in net income (loss)	3,433			12,158			2,061			13,676
Balance at end of period	$	118,571		$	207,160		$	118,571		$	207,160

For the three and six months ended June 30, 2016 and 2015, changes in the carrying value of the contingent purchase price obligations resulted from changes in the fair value of the contingent consideration due to either the passage of time, changes in discount rates, changes in probabilities of success, or milestone payments. Additionally, for the six months ended June 30, 2015, changes in the carrying value of the contingent purchase price obligations included the initial estimate of the fair value of the contingent consideration related to the Company’s acquisition of Annovation.

No other changes in valuation techniques or inputs occurred during the three and six months ended June 30, 2016 and 2015.