NOTE 7. FAIR VALUE MEASUREMENTS

Financial Instruments

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at $1.00 per unit, which assists in providing adequate liquidity upon demand by the holder. Money market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Also included in cash and cash equivalents are investments in guaranteed investment certificates (GICs) with original maturities of less than three months. GICs are interest-bearing Canadian deposit securities with defined maturities and are redeemable on demand. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.

At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. Fair value is determined based on a variety of approaches as described in more detail below. The Company reviews unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

The following table presents the carrying amounts and estimated fair values of our other financial instruments at March 31, 2014 and December 31, 2013 (in thousands):



	March 31, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Current assets:
Guaranteed investment certificates—original maturities of three months or more	$	49,712	$	49,712	$	—	$	—
Commercial paper	14,752		14,752		—		—
Bonds	9,816		9,816		—		—
Current portion of loans receivable	30,283		30,283		—		—
	$	104,563	$	104,563	$	—	$	—
Long-term assets:
Equity securities	$	2,396	$	2,396	$	2,979	$	2,979
Loans receivable from joint venture	10,463		10,463		—		—
Other loans receivable, less current portion	8,177		8,177		—		—
Equity and cost method investments	43,752		N/A		15,654		N/A
	$	64,788			$	18,633
Current liabilities:
Acquisition-related contingent consideration—short-term	$	3,877	$	3,877	$	3,878	$	3,878
Current portion of 1.75% Convertible Senior Subordinated Notes Due 2015, net	351,728		375,091		345,421		372,481
Current portion of New Term Loan A Facility Due 2019	41,250		41,250		—		—
Current portion of New Term Loan B Facility Due 2021	4,250		4,250		—		—
Current portion of Term Loan A Facility Due 2018	—		—		69,375		69,375
3.25% AMS Convertible Notes due 2036	22		22		22		22
4.00% AMS Convertible Notes due 2041	106		106		111		111
Current portion of Paladin debt	4,889		4,889		—		—
Minimum Voltaren® Gel royalties due to Novartis—short-term	29,260		29,260		28,935		28,935
Other	1,000		1,000		9,000		9,000
	$	436,382	$	459,745	$	456,742	$	483,802
Long-term liabilities:
Acquisition-related contingent consideration—long-term	$	882	$	882	$	869	$	869
New Term Loan A Facility Due 2019, less current portion	1,058,750		1,058,998		—		—
New Term Loan B Facility Due 2021, less current portion	420,750		421,020		—		—
Term Loan A Facility Due 2018, less current portion	—		—		1,266,094		1,265,970
Term Loan B Facility Due 2018	—		—		60,550		60,686
7.00% Senior Notes Due 2019	500,000		540,938		500,000		536,563
7.00% Senior Notes Due 2020, net	397,279		432,500		397,200		430,500
7.25% Senior Notes Due 2022	400,000		436,750		400,000		431,750
5.75% Senior Notes Due 2022	700,000		719,250		700,000		703,500
Paladin debt, less current portion	18,867		18,867		—		—
Minimum Voltaren® Gel royalties due to Novartis—long-term	—		—		7,392		7,392
Other	7,593		7,593		8,443		8,443
	$	3,504,121	$	3,636,798	$	3,340,548	$	3,445,673

Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:


•	Level 1—Quoted prices in active markets for identical assets or liabilities.


•	Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, 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.


•	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.

Our investments in GICs, commercial paper and bonds mature throughout 2014 and 2015 and are held with highly rated financial institutions. Our investments in GICs with original maturities of more than three months are included within marketable securities in our Condensed Consolidated Balance Sheets. They are carried at the deposited value, which is a reasonable approximation of fair value, and are considered to be valued using Level 2 inputs within the fair value hierarchy. Our investments in commercial paper are based on broker quotes provided by our portfolio managers. We consider these investments to be valued using Level 2 inputs within the fair value hierarchy. Our investments in bonds consist of both corporate and Canadian government bonds and are valued using broker quotes, representing Level 2 measurements within the fair value hierarchy.

Our loans receivable at March 31, 2014 relate primarily to a $30.0 million secured debenture between Paladin and Bioniche Life Sciences Inc. (Bioniche), related to Paladin's 2013 acquisition of certain product rights from Bioniche. The full amount of this receivable was collected in April 2014. Based on the short-term nature of this debenture, we believe the carrying amount of this receivable is a reasonable approximation of fair value. Our loans receivable at March 31, 2014 also includes loans totaling $10.5 million to our joint venture owned through our Litha Healthcare Group Limited subsidiary. The joint venture investment is further described below. The majority of this amount is secured by certain of the assets of our joint venture. We believe the carrying amount of this receivable is a reasonable approximation of fair value.

Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on a quoted market prices and thus represent Level 1 measurements within the fair value hierarchy, as defined below. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in marketable securities in the Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013.

We have various investments which we account for using the equity or cost method of accounting, including a $24.3 million joint venture investment in the Biologicals and Vaccines Institute of Southern Africa (Pty) Limited, owned through our Litha Healthcare Group Limited subsidiary, which is accounted for as an equity method investment. The fair value of the equity method and cost method investments is not readily available nor have we estimated the fair value of these investments and disclosure is not required. The Company is not aware of any identified events or changes in circumstances that would have a significant adverse effect on the carrying value of any of our equity or cost method investments included in our Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013.

Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs, hence these instruments represent Level 3 measurements within the fair value hierarchy. See Recurring Fair Value Measurements below for additional information on the fair value methodology used for the acquisition-related contingent consideration.

The fair value of our 1.75% Convertible Senior Subordinated Notes (Convertible Notes) is based on an income approach, which incorporates certain inputs and assumptions, including scheduled coupon and principal payments, the conversion feature inherent in the Convertible Notes, the put feature inherent in the Convertible Notes, and share price volatility assumptions based on historic volatility of the Company’s ordinary shares and other factors. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.

The fair values of the various term loan facilities and senior notes were based on market quotes and transactions proximate to the valuation date. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.

The fair values of the Minimum Voltaren^® Gel royalties due to Novartis were determined using an income approach (present value technique) taking into consideration the level and timing of expected cash flows and an assumed discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The liability is currently being accreted up to the expected minimum payments, less payments made to date. We believe the carrying amount of this minimum royalty guarantee at March 31, 2014 and December 31, 2013 represents a reasonable approximation of the price that would be paid to transfer the liability in an orderly transaction between market participants at the measurement date. Accordingly, the carrying value approximates fair value as of March 31, 2014 and December 31, 2013.

Recurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013 were as follows (in thousands):



	Fair Value Measurements at Reporting Date using:
March 31, 2014	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	698,750	$	—	$	—	$	698,750
Guaranteed investment certificates—original maturities of less than three months	—		18,815		—		18,815
Guaranteed investment certificates—original maturities of three months or more	—		49,712		—		49,712
Commercial paper	—		14,752		—		14,752
Bonds	—		9,816		—		9,816
Equity securities	2,396		—		—		2,396
Total	$	701,146	$	93,095	$	—	$	794,241
Liabilities:
Acquisition-related contingent consideration—short-term	$	—	$	—	$	3,877	$	3,877
Acquisition-related contingent consideration—long-term	—		—		882		882
Total	$	—	$	—	$	4,759	$	4,759



	Fair Value Measurements at Reporting Date using:
December 31, 2013	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	843,390	$	—	$	—	$	843,390
Equity securities	2,979		—		—		2,979
Total	$	846,369	$	—	$	—	$	846,369
Liabilities:
Acquisition-related contingent consideration—short-term	$	—	$	—	$	3,878	$	3,878
Acquisition-related contingent consideration—long-term	—		—		869		869
Total	$	—	$	—	$	4,747	$	4,747

Acquisition-Related Contingent Consideration

On November 30, 2010 (the Qualitest Pharmaceuticals Acquisition Date), our subsidiary Endo Pharmaceuticals Inc. (EPI) acquired Generics International (US Parent), Inc. (doing business as Qualitest Pharmaceuticals), which was party to an asset purchase agreement with Teva Pharmaceutical Industries Ltd (Teva) (the Teva Agreement). Pursuant to this agreement, Qualitest Pharmaceuticals purchased certain pipeline generic products from Teva and could be obligated to pay consideration to Teva upon the achievement of certain future regulatory milestones (the Teva Contingent Consideration).

The current range of the undiscounted amounts the Company could be obligated to pay in future periods under the Teva Agreement is between zero and $7.5 million after giving effect to the first quarter 2013 payment. The Company is accounting for the Teva Contingent Consideration in the same manner as if it had entered into that arrangement with respect to its acquisition of Qualitest Pharmaceuticals. Accordingly, the fair value was estimated based on a probability-weighted discounted cash flow model (income approach). The resultant probability-weighted cash flows were then discounted using a discount rate of U.S. Prime plus 300 basis points. Using this valuation technique, the fair value of the contractual obligation to pay the Teva Contingent Consideration was determined to be approximately $4.8 million at March 31, 2014 and $4.7 million at December 31, 2013. The increase in the balance primarily relates to the changes in the fair value of the liability, primarily reflecting changes to the present value assumptions associated with our valuation model.

Fair Value Measurements Using Significant Unobservable Inputs

The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 (in thousands):



	Acquisition-related Contingent Consideration
Liabilities:
January 1, 2014	$	(4,747	)
Amounts (acquired) sold / (issued) settled, net	—
Transfers in and/or (out) of Level 3	—
Changes in fair value recorded in earnings	(12		)
March 31, 2014	$	(4,759	)

The following table presents changes to the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 (in thousands):



	Acquisition-related Contingent Consideration
Liabilities:
January 1, 2013	$	(8,924	)
Amounts (acquired) sold / (issued) settled, net	5,000
Transfers in and/or (out) of Level 3	—
Changes in fair value recorded in earnings	(40		)
March 31, 2013	$	(3,964	)

The following is a summary of available-for-sale securities held by the Company at March 31, 2014 and December 31, 2013 (in thousands):



	Available-for-sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2014
Money market funds	$	698,750	$	—	$	—		$	698,750
Guaranteed investment certificates—original maturities of less than three months	18,815		—		—			18,815
Total included in cash and cash equivalents	$	710,065	$	—	$	—		$	710,065
Total included in restricted cash and cash equivalents	$	7,500	$	—	$	—		$	7,500
Guaranteed investment certificates—original maturities of three months or more	$	49,712	$	—	$	—		$	49,712
Commercial paper	14,728		24		—			14,752
Bonds	9,846		—		(30		)	9,816
Total other short-term available-for-sale securities	$	74,286	$	24	$	(30	)	$	74,280
Equity securities	$	1,766	$	630	$	—		$	2,396
Long-term available-for-sale securities	$	1,766	$	630	$	—		$	2,396



	Available-for-sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
December 31, 2013
Money market funds	$	843,390	$	—	$	—	$	843,390
Total included in cash and cash equivalents	$	73,390	$	—	$	—	$	73,390
Total included in restricted cash and cash equivalents	$	770,000	$	—	$	—	$	770,000
Equity securities	$	1,766	$	1,213	$	—	$	2,979
Long-term available-for-sale securities	$	1,766	$	1,213	$	—	$	2,979

At March 31, 2014, the unrealized loss positions related to our investments in commercial paper and bonds were not material, individually or in the aggregate. At March 31, 2014 and December 31, 2013, our equity securities consisted of investments in the stock of publicly traded companies. As of March 31, 2014, one investment had been in an unrealized loss position for less than twelve months and one had been in an unrealized loss position for more than twelve months. As of December 31, 2013, one investment had been in an unrealized loss position for less than twelve months and one had been in an unrealized loss position for more than twelve months. The Company does not believe the remaining unrealized losses are other-than-temporary at March 31, 2014 or December 31, 2013 primarily because the Company has both the ability and intent to hold these investments for a period of time we believe will be sufficient to recover such losses.