Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 28, 2018

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Measurements

18. 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:

	September 28, 2018		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	$	35.3	$	24.5	$	10.8	$	—
Equity securities	—		—		—		—
Foreign exchange forward and option contracts	—		—		—		—
	$	35.3	$	24.5	$	10.8	$	—
Liabilities:
Deferred compensation liabilities	$	41.7	$	—	$	41.7	$	—
Contingent consideration and acquired contingent liabilities	167.3		—		—		167.3
Foreign exchange forward and option contracts	0.1		0.1		—		—
	$	209.1	$	0.1	$	41.7	$	167.3

	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

Debt and equity securities held in rabbi trusts. Debt securities held in rabbi trusts 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 rabbi trusts 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 Limited, 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. During the nine months ended September 28, 2018, the Company's remaining shares were sold for gross proceeds of $25.5 million resulting in a $3.4 million gain being recognized within other income (expense), net within the unaudited condensed consolidated statement of income.

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.

Contingent consideration and acquired contingent liabilities. The Company maintains various contingent consideration and acquired contingent liabilities associated with the acquisitions of Questcor, Stratatech Corporation ("Stratatech"), and Ocera Therapeutics, Inc. ("Ocera").

The contingent liability associated with the acquisition of Questcor pertains to the Company's license agreement with Novartis AG and Novartis Pharma AG (collectively "Novartis") related to the development product MNK-1411. During the nine months ended September 28, 2018, the Company paid the required annual payment of $25.0 million related to the license of development product MNK-1411 from Novartis. The fair value of the remaining contingent payments was measured based on the net present value of a probability-weighted assessment. As of September 28, 2018, the total remaining payments under the license agreement shall not exceed $115.0 million. The Company determined the fair value of the contingent consideration associated with the acquisition of Questcor to be $86.7 million and $111.8 million as of September 28, 2018 and December 29, 2017, respectively.

As part of the acquisition of a development program from Stratatech in August 2016, 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 StrataGraft^®. The Company assesses the likelihood of and timing of making such payments. The fair value of the contingent payments was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the contingent consideration associated with the acquisition of Stratatech to be $56.9 million and $53.5 million as of September 28, 2018 and December 29, 2017, respectively.

As part of the acquisition of Ocera in December 2017, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones for MNK-6105 and MNK-6106 (previously referred to collectively as OCR-002), which represent the intravenous ("IV") and Oral formulations, respectively, and sales-based milestones associated with MNK-6105 and MNK-6106. The Company determined the fair value of the contingent consideration based on an option pricing model to be $23.7 million and $22.0 million as of September 28, 2018 and December 29, 2017, respectively.

Prior to September 28, 2018, the Company maintained various contingent consideration and acquired contingent liabilities associated with the acquisitions of three commercial stage topical hemostasis drugs from the Medicines Company ("the Hemostasis Acquisition") and InfaCare Pharmaceutical Corporation ("InfaCare").

As part of the Hemostasis Acquisition in February 2016, 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 at December 29, 2017, respectively. The Company paid $12.0 million related to the FDA approval of PreveLeak during the three months ended March 30, 2018. On March 16, 2018, the Company sold a portion of the Hemostasis business, inclusive of the Recothrom and PreveLeak products to Baxter and the remaining contingent consideration liability balance of $12.1 million was transferred upon sale.

As part of the acquisition of InfaCare in September 2017, 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. Due to recent developments and discussions with the FDA, as discussed

in further detail in Note 11, the timing of the development program is expected to shift outward. During the three and nine months ended September 28, 2018, the Company recognized a $7.0 million and $35.0 million fair value adjustment due to this shift in timing and its impact on the achievement of milestones per the purchase agreement. The fair value of the contingent consideration is zero after the aforementioned adjustments as of September 28, 2018. The fair value of the contingent consideration based on an option pricing model was determined to be $35.0 million as of December 29, 2017.

Of the total fair value of the contingent consideration of $167.3 million, $52.8 million was classified as current and $114.5 million was classified as non-current in the unaudited condensed consolidated balance sheet as of September 28, 2018. The following table summarizes the fiscal 2018 activity for contingent consideration:

Balance at December 29, 2017	$	246.4
Disposal of business	(12.1		)
Payments	(37.0		)
Accretion expense	3.3
Fair value adjustments	(33.3		)
Balance at September 28, 2018	$	167.3

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 September 28, 2018 and December 29, 2017:

• The carrying amounts of cash and cash equivalents, accounts receivable, notes 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 of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $18.5 million and $18.3 million as of September 28, 2018 and December 29, 2017, (level 1), respectively, which was included in prepaid expenses and other current assets and other assets on the unaudited condensed consolidated balance sheets.

• The Company received a portion of consideration as part of contingent earn-out payments related to the sale of the Nuclear Imaging business in the form of preferred equity certificates during the nine months ended September 28, 2018. These securities are classified as held-to-maturity and are carried at amortized cost, which approximates fair value, of $9.0 million at September 28, 2018 (level 3). These securities are included in other assets on the unaudited condensed 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 $66.1 million and $67.0 million at September 28, 2018 and December 29, 2017, respectively. These contracts are included in other assets on the unaudited condensed consolidated balance sheets.

• The carrying value of the Company's revolving credit facility and variable-rate receivable securitization approximates fair value due to the short-term nature of these instruments (level 1). The Company's 3.50%, 4.875%, 5.75%, 4.75%, 5.625%, and 5.50% notes are classified as level 1, as quoted prices are available in an active market for these notes. Since the quoted market prices for the Company's term loans and 9.50% and 8.00% debentures are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value. The fair value of the ACOA loan is based on the present value of future cash flows under the terms of the agreement (level 3) with future cash flows and interest rates as significant assumptions. The following table presents the carrying values and estimated fair values of the Company's debt, excluding capital leases, as of the end of each period:

	September 28, 2018				December 29, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Level 1
3.50% notes due April 2018	$	—	$	—	$	300.0	$	299.1
4.875% notes due April 2020	700.0		694.7		700.0		675.2
Variable-rate receivable securitization due July 2020	225.0		225.0		200.0		200.0
5.75% notes due August 2022	884.0		815.9		884.0		804.8
4.75% notes due April 2023	500.2		427.7		526.5		412.4
5.625% notes due October 2023	731.4		648.6		738.0		628.8
5.50% notes due April 2025	692.1		583.9		692.1		564.5
Revolving credit facility	300.0		300.0		900.0		900.0
Level 2
9.50% debentures due May 2022	10.4		11.0		10.4		10.9
8.00% debentures due March 2023	4.4		4.5		4.4		4.4
Term loan due September 2024	1,613.8		1,605.5		1,851.2		1,848.7
Term loan due February 2025	597.0		596.8		—		—
Level 3
ACOA loan due December 2028	1.8		1.8		—		—
Total debt	$	6,260.1	$	5,915.4	$	6,806.6	$	6,348.8

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 does not typically 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 10.0% or more of the Company's total net sales:

	Three Months Ended				Nine Months Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
CuraScript, Inc.	44.9	%	55.2	%	46.1	%	55.7	%

The following table shows accounts receivable attributable to distributors that accounted for 10.0% or more of the Company's gross accounts receivable at the end of each period:

	September 28, 2018		December 29, 2017
CuraScript, Inc.	30.8	%	33.8	%

The following table shows net sales attributable to products that accounted for 10.0% or more of the Company's total net sales:

	Three Months Ended				Nine Months Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
H.P. Acthar Gel	45.3	%	51.4	%	44.8	%	51.1	%
Inomax	20.8	%	20.9	%	21.9	%	21.6	%
Ofirmev	13.6	%	12.6	%	13.8	%	12.8	%