Fair Value of Financial Instruments and Contingent Consideration

6 Months Ended

Jun. 30, 2021

Fair Value of Financial Instruments and Contingent Consideration

The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between unrelated market participants.

The Company reports the fair value of assets and liabilities using a three level measurement hierarchy that prioritizes the inputs used to measure fair value. Fair value hierarchy consists of the following three levels:

•Level 1—Valuations based on unadjusted quoted prices in active markets that are accessible at measurement date for identical assets.

•Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and model-based valuations in which all significant inputs are observable in the market, either directly or indirectly (e.g., interest rates; yield curves).

•Level 3—Valuations using significant inputs that are unobservable in the market and inputs that reflect the Company’s own assumptions. These are based on the best information available, including the Company’s own data.

The fair value of the restricted marketable securities which are classified as level 2 financial assets is recorded in Other assets on the condensed consolidated balance sheets. There were no level 3 financial assets as of June 30, 2021 or December 31, 2020. There have been no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy.

Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The Company’s financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in thousands):


			Fair Value Measurements at June 30, 2021 (unaudited)
	Total Fair Value at June 30, 2021		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents
Cash	$	200,493	$	200,493	$	—	$	—
Money market funds	23,278		23,278		—		—
Marketable securities
Corporate debt securities	183,944		253		183,691		—
Municipal debt securities	2,126		—		2,126
Long term marketable securities
Corporate debt securities	445,473		—		445,473		—

Other noncurrent assets
Marketable securities - restricted (SERP)	604		5		599		—
Total assets at fair value	$	855,918	$	224,029	$	631,889	$	—
Liabilities:
Contingent consideration	$	68,970	$	—	$	—	$	68,970
Total liabilities at fair value	$	68,970	$	—	$	—	$	68,970


			Fair Value Measurements at December 31, 2020
	Total Fair Value at December 31, 2020		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents
Cash	$	218,550	$	218,550	$	—	$	—
Money market funds	70,090		70,090		—		—
Marketable securities
Corporate debt securities	133,893		—		133,893		—
Long term marketable securities
Corporate debt securities	350,359		256		350,103		—
Other noncurrent assets
Marketable securities - restricted (SERP)	547		3		544		—
Total assets at fair value	$	773,439	$	288,899	$	484,540	$	—
Liabilities:
Contingent consideration	$	76,700	$	—	$	—	76,700
Total liabilities at fair value	$	76,700	$	—	$	—	$	76,700

Other Financial Instruments

The carrying amounts of other financial instruments, including accounts receivable, accounts payable, and accrued expenses, approximate fair value due to their short-term maturities.

The Company records its convertible debt at carrying value. The fair value of the outstanding convertible debt is based on actual trading information as well as quoted prices, both provided by bond traders. Refer to Note 8, Convertible Senior Notes Due 2023.

The Company also had an investment in Navitor LLC, a privately held company, which it classifies as Level 3 as it does not have a readily determinable fair value. In the first quarter of 2021, the $15 million investment in Navitor LLC was expensed. Refer to Note 5, Investments.

Contingent Consideration

The contingent consideration liabilities are measured at fair value on a recurring basis. In the fourth quarter of 2020, the Company recorded a measurement period adjustment of $40.9 million. Refer to Note 3, USWM Acquisition. In the second quarter of 2021, the Company recorded a change in fair value of $7.7 million, which is primarily due to the write-down of the sales based contingent consideration liabilities offset by an increase in the estimated fair value of regulatory and developmental milestones due to passage of time. The Company assessed that these sales-based milestones will not be achieved based on the revised net sales projections. The probability of achieving these milestones were significantly lower compared to prior estimates. The Company updated its projected net sales of the Products based on recent historical sales trend experience.

The following table provides a reconciliation of the beginning and ending balances related to the contingent consideration for the USWM Acquisition and composition of the contingent consideration liabilities (dollars in thousands):


			Balance
Initial measurement at Closing Date at June 9, 2020			115,700
Measurement period adjustment			(40,900)
Change in fair value recognized in earnings			1,900
Balance at December 31, 2020			$	76,700

Balance at December 31, 2020			$	76,700
Change in fair value recognized in earnings (unaudited)			(7,730)
Balance at June 30, 2021 (unaudited)			$	68,970

	June 30, 2021		December 31, 2020
	(unaudited)
Regulatory and developmental contingent consideration liabilities	$	68,970	$	68,000
Sales-based contingent consideration liabilities	—		8,700
Total	$	68,970	$	76,700

- 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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