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Fair Value

3 Months Ended

Mar. 31, 2022

5. FAIR VALUE

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy and the valuation techniques that the Company utilized to determine such fair value:

	March 31,
(In thousands)	2022		Level 1		Level 2		Level 3
Assets:
U.S. government and agency debt securities	$	160,499	$	130,612	$	29,887	$	—
Corporate debt securities		225,482		—		224,982		500
Non-U.S. government debt securities		88,339		—		88,339		—
Contingent consideration		3,440		—		—		3,440
Total	$	477,760	$	130,612	$	343,208	$	3,940

	December 31,
	2021		Level 1		Level 2		Level 3
Assets:
U.S. government and agency debt securities	$	126,139	$	96,597	$	29,542	$	—
Corporate debt securities		196,478		—		196,478		—
Non-U.S. government debt securities		103,760		—		103,760		—
Contingent consideration		23,048		—		—		23,048
Total	$	449,425	$	96,597	$	329,780	$	23,048

The Company transfers its financial assets and liabilities, measured at fair value on a recurring basis, between the fair value hierarchies at the end of each reporting period.

There were no transfers of any securities between levels during the three months ended March 31, 2022. The following table is a rollforward of the fair value of the Company’s investments with fair values that were determined using Level 3 inputs at March 31, 2022:

(In thousands)	Fair Value
Balance, January 1, 2022	$	23,048
Purchase of corporate debt security		500
Change in the fair value of contingent consideration		(19,067	)
Milestone and royalty payments received by the Company related to contingent consideration		(501	)
Royalty payments due to the Company related to contingent consideration		(40	)
Balance, March 31, 2022	$	3,940

The Company’s investments in U.S. government and agency debt securities, non-U.S. government agency debt securities and corporate debt securities classified as Level 2 within the fair value hierarchy were initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing market-observable data. The market-observable data included reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validated the prices developed using the market-observable data by obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active.

In April 2015, the Company sold its Gainesville, GA manufacturing facility, the related manufacturing and royalty revenue associated with certain products manufactured at the facility, and the rights to intravenous/intramuscular (“IV/IM”) and parenteral forms of Meloxicam to Recro Pharma, Inc. (“Recro”) and Recro Gainesville LLC (such transaction, the “Gainesville Transaction”). The Gainesville Transaction included in the purchase price contingent consideration tied to low double digit royalties on net sales of the IV/IM and parenteral forms of Meloxicam and any other product with the same active ingredient as Meloxicam IV/IM that is discovered or identified using certain of the Company’s IP to which Recro was provided a right of use, through license or transfer, pursuant to the Gainesville Transaction (such products, the “Meloxicam Products”), and milestone payments upon the achievement of certain regulatory and sales milestones related to the Meloxicam Products.

In November 2019, Recro spun out its acute care segment to Baudax Bio, Inc. (“Baudax”), a publicly-traded pharmaceutical company. As part of this transaction, Recro’s obligations to pay certain contingent consideration from the Gainesville Transaction were assigned and/or transferred to Baudax.

At March 31, 2022, the Company determined the fair value of the contingent consideration to be received as follows:

•

As of December 31, 2021, the Company had received $7.8 million in milestone payments and was due to receive an additional $38.6 million related to the FDA approval of the New Drug Application (“NDA”) for ANJESO. This amount is due in six equal, annual installments from March 2022 through March 2027. At March 31, 2022, Baudax had paid the Company $0.5 million of the $6.4 million payment that was due in March 2022;

•

The Company is entitled to receive future royalties on net sales of Meloxicam Products; and

•

The Company is entitled to receive payments of up to $80.0 million related to the achievement of certain sales milestones on future sales of the Meloxicam Products. At March 31, 2022, the Company did not believe it was probable that any of the sales milestones would be achieved.

In Baudax’s Annual Report on Form 10-K for the year ended December 31, 2021, Baudax included disclosures regarding its ability to continue as a going concern and a subsequent event note that announced a plan to reduce expenses including an approximately 80% reduction in its workforce, effective in March 2022. In light of Baudax’s disclosures regarding its ability to continue as a going concern and the fact that Baudax paid $0.5 million of the $6.4 million that was due in March 2022, the Company has applied a 100% likelihood that Baudax would default on its obligations and applied a recovery rate of 9% based on an analysis performed by Standard and Poor’s regarding post-default recoveries. However, for avoidance of doubt, the Company has not waived its right to receive any portion of the payments owing by Baudax. For discussion on the calculation of the fair value of the contingent consideration at December 31, 2021, refer to Note 5, Fair Value within the “Notes to Consolidated Financial Statements” in the Annual Report.

At March 31, 2022 and December 31, 2021, the Company determined that the fair value of the contingent consideration was $3.4 million and $23.0 million, respectively. At March 31, 2022 and December 31, 2021, $3.4 million and $6.4 million, respectively, of the fair value of the contingent consideration was included within “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheets, and none and $16.6 million, respectively, of the fair value of the contingent consideration was included within “Other assets” in the accompanying condensed consolidated balance sheets. Changes in the fair value of the contingent consideration are recorded within “Change in the fair value of contingent consideration” in the accompanying condensed consolidated statements of operations and comprehensive loss.

The carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, contract assets, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term nature.

The estimated fair value of the Company’s long-term debt under its amended and restated credit agreement (such debt, the “2026 Term Loans”), which was based on quoted market price indications (Level 2 in the fair value hierarchy) and which may not be representative of actual values that could have been, or will be, realized in the future, was $285.1 million and $285.8 million at March 31, 2022 and December 31, 2021, respectively.

- 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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