

20.	Financial Instruments and Fair Value Measurements

Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:

Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2— significant other observable inputs that are observable either directly or indirectly; and

Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.

The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at the end of each period:



	December 29, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Debt and equity securities held in rabbi trusts	$	35.4	$	24.0	$	11.4	$	—
Equity securities	22.7		22.7		—		—
Foreign exchange forward and option contracts	0.1		0.1		—		—
	$	58.2	$	46.8	$	11.4	$	—
Liabilities:
Deferred compensation liabilities	$	42.7	$	—	$	42.7	$	—
Contingent consideration and acquired contingent liabilities	246.4		—		—		246.4
Foreign exchange forward and option contracts	0.1		0.1		—		—
	$	289.2	$	0.1	$	42.7	$	246.4



	December 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Debt and equity securities held in rabbi trusts	$	33.6	$	22.8	$	10.8	$	—
Foreign exchange forward and option contracts	0.7		0.7		—		—
	$	34.3	$	23.5	$	10.8	$	—
Liabilities:
Deferred compensation liabilities	$	32.5	$	—	$	32.5	$	—
Contingent consideration and acquired contingent liabilities	250.5		—		—		250.5
Foreign exchange forward and option contracts	3.4		3.4		—		—
	$	286.4	$	3.4	$	32.5	$	250.5

Debt and equity securities held in rabbi trust. Debt securities held in the rabbi trust primarily consist of U.S. government and agency securities and corporate bonds. When quoted prices are available in an active market, the investments are classified as level 1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in the rabbi trust primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.

Equity securities. Equity securities consist of shares in Mesoblast Ltd., for which quoted prices are available in an active market; therefore, the investment is classified as level 1 and is valued based on quoted market prices reported on a nationally recognized securities exchange.

Foreign exchange forward and option contracts. Foreign currency option and forward contracts are used to economically manage the foreign exchange exposures of operations outside the U.S. Quoted prices are available in an active market; as such, these derivatives are classified as level 1.

Deferred compensation liabilities. The Company maintains a non-qualified deferred compensation plan in the U.S., which permits eligible employees of the Company to defer a portion of their compensation. A recordkeeping account is set up for each participant and the participant chooses from a variety of funds for the deemed investment of their accounts. The recordkeeping accounts generally correspond to the funds offered in the Company's U.S. tax-qualified defined contribution retirement plan and the account balance fluctuates with the investment returns on those funds.

Goodwill. The Company performs an annual goodwill impairment assessment using an income approach based on the present value of future cash flows. See further discussion in Notes 3 and 12 to the consolidated financial statements.

Contingent consideration and acquired contingent liabilities.

In August 2014, the Company recorded acquired contingent liabilities of $195.4 million from the Questcor Acquisition. The contingent liabilities relate to Questcor's contingent obligations associated with their acquisition of an exclusive, perpetual and irrevocable license to develop, market, manufacture, distribute, sell and commercialize Synacthen and MNK-1411 (collectively "Synacthen") from Novartis AG and Novartis Pharma AG (collectively "Novartis") and their acquisition of BioVectra. The fair value of these contingent consideration obligations at December 29, 2017 and December 30, 2016 were $111.8 million and $124.7 million, respectively.

Under the terms of the license agreement with Novartis, the Company made a $25.0 million payment in fiscal 2017, and is obligated to make annual payments of $25.0 million subsequent to fiscal 2017 until such time that the Company obtains FDA approval of Synacthen and makes a $25.0 million payment upon obtaining FDA approval of Synacthen. If FDA approval is obtained, the Company will pay an annual royalty to Novartis based on a percentage of net sales in the U.S. market. As of December 29, 2017, the total remaining payments under the license agreement shall not exceed $140.0 million. The terms of the license agreement allow the Company to terminate the license agreement upon the occurrence of certain events following the fiscal 2020 payment. The Company measured the fair value of the contingent payments based on a probability-weighted present value of the consideration expected to be transferred using a discount rate of 4.7%.

Based on the terms of the acquisition agreement with the former shareholders of BioVectra, the Company was obligated to pay additional cash consideration of $50.0 million CAD based on BioVectra's financial results from January 2013 through a portion of fiscal 2016. During fiscal 2015, the Company made a $5.0 million CAD payment. During fiscal 2016, the Company paid the remaining obligation of $40.0 million CAD to the former owners of BioVectra to reach the maximum cumulative payment of $50.0 million CAD. At December 29, 2017, there are no further contingent liabilities associated with BioVectra.

As part of the Hemostasis Acquisition, the Company provided contingent consideration to The Medicines Company in the form of sales based milestones associated with Raplixa and PreveLeak, and acquired contingent liabilities associated with The Medicines Company's prior acquisitions of the aforementioned products. The Company determined the fair value of the contingent consideration and acquired contingent liabilities based on an option pricing model to be $7.0 million and $17.1 million, respectively, at December 29, 2017 compared to $58.9 million and $11.2 million, respectively, at December 30, 2016. As of December 29, 2017, the contingent consideration liability associated with Raplixa was reduced to zero, reflective of lower than previously anticipated commercial opportunities for the product, resulting in a $54.6 million fair value adjustment during fiscal 2017.

As part of the Stratatech Acquisition, the Company provided contingent consideration to the prior shareholders of Stratatech, primarily in the form of regulatory filing and approval milestones associated with the deep partial thickness and full thickness indications associated with the StrataGraft product. The Company assesses the likelihood of and timing of making such payments. The Company determined the fair value of the contingent consideration associated with the Stratatech Acquisition to be $53.5 million and $55.7 million at December 29, 2017 and December 30, 2016, respectively.

As part of the InfaCare Acquisition, the Company provided contingent consideration to the prior shareholders of InfaCare in the form of both regulatory approval milestones for full-term and pre-term neonates for stannsoporfin and sales-based milestones associated with stannsoporfin. The Company determined the fair value of the contingent consideration based on an option pricing model to be $35.0 million as of December 29, 2017.

As part of the Ocera Acquisition, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones for IV and Oral formulations of MNK-6105 and sales-based milestones associated with MNK-6105. The Company determined the fair value of the contingent consideration based on an option pricing model to be $22.0 million as of December 11, 2017.

Of the total fair value of the contingent consideration of $246.4 million, $64.0 million was classified as current and $182.4 million was classified as non-current in the consolidated balance sheets as of December 29, 2017. The following table summarizes the fiscal 2017 activity for contingent considerations:



Balance at December 30, 2016	$	250.5
Acquisition date fair value of contingent consideration	57.0
Payments	(25.0		)
Accretion expense	5.3
Fair value adjustment	(41.4		)
Balance at December 29, 2017	$	246.4

Financial Instruments Not Measured at Fair Value

The following methods and assumptions were used by the Company in estimating fair values for financial instruments not measured at fair value as of December 29, 2017 and December 30, 2016:

•

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity to the Company of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash is equivalent to its carrying value of $18.3 million and $19.1 million as of December 29, 2017 and December 30, 2016, respectively (level 1), substantially all of which is included in other assets on the consolidated balance sheets.


•	The Company received a portion of consideration for the sale of the Intrathecal business in the form of a note receivable. The fair value of the note receivable was equivalent to its carrying value of $154.0 million as of December 29, 2017 (level 1).


•	The Company entered into short-term investment certificates during the three months ended December 30, 2016. These certificates are carried at cost, which approximates fair value, of zero and $11.1 million at December 29, 2017 and December 30, 2016, respectively (level 2). These certificates are included in prepaid expenses and other current assets on the consolidated balance sheets.

•

The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $67.0 million and $67.6 million at December 29, 2017 and December 30, 2016, respectively. These contracts are included in other assets on the consolidated balances sheets.

•

The carrying values of the Company's revolving credit facility and variable rate receivable securitization approximate the fair values due to the short-term nature of these instruments, and is therefore classified as level 1. The carrying value of the 4.00% term loan approximates the fair value of this instrument, as calculated using the discounted exit price for the instrument, and is therefore classified as level 3. Since the quoted market prices for the Company's term loans and 8.00% and 9.50% debentures are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value. The Company's 3.50%, 4.75%, 4.875%, 5.50%, 5.625% and 5.75% notes are classified as level 1, as quoted prices are available in an active market for these notes. The following table presents the carrying values and estimated fair values of the Company's long-term debt, excluding capital leases, as of the end of each period:



	December 29, 2017				December 30, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Level 1:
Variable-rate receivable securitization due July 2017	$	—	$	—	$	250.0	$	250.0
3.50% notes due April 2018	300.0		299.1		300.0		298.7
4.875% notes due April 2020	700.0		675.2		700.0		699.5
Variable-rate receivable securitization due July 2020	200.0		200.0		—		—
5.75% notes due August 2022	884.0		804.8		884.0		850.3
4.75% notes due April 2023	526.5		412.4		600.0		520.9
5.625% notes due October 2023	738.0		628.8		738.0		682.4
5.50% notes due April 2025	692.1		564.5		695.0		615.7
Revolving credit facility	900.0		900.0		100.0		100.0
Level 2:
Term loans due March 2021	—		—		1,948.5		1,953.2
9.50% debentures due May 2022	10.4		10.9		10.4		12.0
8.00% debentures due March 2023	4.4		4.4		4.4		4.9
Term loan due September 2024	1,851.2		1,848.7		—		—
Level 3:
4.00% term loan due February 2022	—		—		6.5		6.5

Concentration of Credit and Other Risks

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company generally does not require collateral from customers. A portion of the Company's accounts receivable outside the U.S. includes sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.

The following table shows net sales attributable to distributors that accounted for 10% or more of the Company's total net sales:



	Fiscal Year Ended						Three Months Ended
	December 29, 2017		September 30, 2016		September 25, 2015		December 30, 2016
CuraScript, Inc.	40	%	38	%	35	%	43	%
McKesson Corporation	*		12	%	20	%	10	%
AmerisourceBergen Corporation	*		*		10	%	*
Cardinal Health, Inc.	*		*		11	%	*

* Net sales to these distributors were less than 10% of total net sales during the respective periods presented above.

The following table shows accounts receivable attributable to distributors that accounted for 10% or more of the Company's gross accounts receivable at the end of each period:



	December 29, 2017		December 30, 2016
McKesson Corporation	26	%	28	%
AmerisourceBergen Corporation	15	%	15	%
CuraScript, Inc.	14	%	15	%
Cardinal Health, Inc.	11	%	10	%

The following table shows net sales attributable to products that accounted for 10% or more of the Company's total net sales:



	Fiscal Year Ended						Three Months Ended
	December 29, 2017		September 30, 2016		September 25, 2015		December 30, 2016
H.P. Acthar Gel	37	%	34	%	35	%	39	%
Inomax	16	%	14	%	6	%	14	%