NOTE 6. FAIR VALUE MEASUREMENTS

Financial Instruments

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents (including money market funds and time deposits), 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 pay dividends that generally reflect short-term interest rates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds and time deposits), accounts receivable, accounts payable and accrued expenses approximate their fair values.

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.

Marketable Securities

Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the above-defined fair value hierarchy. 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 our Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016.

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. The Company reviews any 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.

Acquisition-Related Contingent Consideration

The fair value of contingent consideration liabilities is determined using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. Changes in any of the inputs may result in a significant adjustment to fair value. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.

Recurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016 were as follows (in thousands):



	Fair Value Measurements at Reporting Date using:
June 30, 2017	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	$	96,888	$	—	$	—	$	96,888
Time deposits	—		100,000		—		100,000
Equity securities	2,494		—		—		2,494
Total	$	99,382	$	100,000	$	—	$	199,382
Liabilities:
Acquisition-related contingent consideration—short-term	$	—	$	—	$	94,460	$	94,460
Acquisition-related contingent consideration—long-term	—		—		116,000		116,000
Total	$	—	$	—	$	210,460	$	210,460

At June 30, 2017, money market funds include $21.9 million in QSFs to be disbursed to mesh-related product liability claimants. See Note 11. Commitments and Contingencies for further discussion of our product liability cases.



	Fair Value Measurements at Reporting Date using:
December 31, 2016	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	$	26,210	$	—	$	—	$	26,210
Time deposits	—		100,000		—		100,000
Equity securities	2,267		—		—		2,267
Total	$	28,477	$	100,000	$	—	$	128,477
Liabilities:
Acquisition-related contingent consideration—short-term	$	—	$	—	$	109,373	$	109,373
Acquisition-related contingent consideration—long-term	—		—		152,740		152,740
Total	$	—	$	—	$	262,113	$	262,113

At December 31, 2016, money market funds include $26.2 million in QSFs to be disbursed to mesh-related product liability claimants. See Note 11. Commitments and Contingencies for further discussion of our product liability cases.

Fair Value Measurements Using Significant Unobservable Inputs

The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2017 and 2016 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Beginning of period	$	234,391		$	124,511		$	262,113		$	143,502
Amounts settled	(26,219		)	(12,646		)	(60,310		)	(22,120		)
Changes in fair value recorded in earnings	1,950			23,892			8,134			13,204
Effect of currency translation	338			39			523			1,210
End of period	$	210,460		$	135,796		$	210,460		$	135,796

The fair value measurements of the contingent consideration obligations at June 30, 2017 were determined using risk-adjusted discount rates ranging from 3% to 22%. Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items, and amounts recorded for the short-term and long-term portions of acquisition-related contingent consideration are included in Accounts payable and accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.

The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the six months ended June 30, 2017 by acquisition (in thousands):



	Balance as of December 31, 2016		Acquisitions		Fair Value Adjustments and Accretion			Payments and Other			Balance as of June 30, 2017
Auxilium acquisition	$	21,097	$	—	$	(1,720	)	$	(4,219	)	$	15,158
Lehigh Valley Technologies, Inc. acquisitions	96,000		—		16,755			(36,754		)	76,001
VOLTAREN^® Gel acquisition	118,395		—		4,384			(17,909		)	104,870
Other	26,621		—		(11,285		)	(905		)	14,431
Total	$	262,113	$	—	$	8,134		$	(59,787	)	$	210,460

The following is a summary of available-for-sale securities held by the Company at June 30, 2017 and December 31, 2016 (in thousands):



	Available-for-sale
June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
Money market funds	$	96,888	$	—	$	—	$	96,888
Total included in cash and cash equivalents	$	75,000	$	—	$	—	$	75,000
Total included in restricted cash and cash equivalents	$	21,888	$	—	$	—	$	21,888
Equity securities	$	1,766	$	728	$	—	$	2,494
Long-term available-for-sale securities	$	1,766	$	728	$	—	$	2,494



	Available-for-sale
December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
Money market funds	$	26,210	$	—	$	—	$	26,210
Total included in cash and cash equivalents	$	—	$	—	$	—	$	—
Total included in restricted cash and cash equivalents	$	26,210	$	—	$	—	$	26,210
Equity securities	$	1,766	$	501	$	—	$	2,267
Long-term available-for-sale securities	$	1,766	$	501	$	—	$	2,267

Nonrecurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2017 were as follows (in thousands):



	Fair Value Measurements at Reporting Date using:						Total Expense for the Six Months Ended June 30, 2017
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Expense for the Six Months Ended June 30, 2017
Assets:
Certain U.S. Branded Pharmaceuticals intangible assets (Note 8)	$	—	$	—	$	17,781	$	(52,096	)
Certain U.S. Generic Pharmaceuticals intangible assets (Note 8)	—		—		409,874		(398,423		)
Certain International Pharmaceuticals intangible assets (Note 8)	—		—		21,772		(145,359		)
Branded reporting unit goodwill (Note 8)	—		—		828,818		(180,430		)
Paladin reporting unit goodwill (Note 8)	—		—		84,881		(82,602		)
Somar reporting unit goodwill (Note 8)	—		—		—		(25,712		)
Certain property, plant and equipment (1)	—		—		—		(44,384		)
Total	$	—	$	—	$	1,363,126	$	(929,006	)

__________

(1)

Amounts relate primarily to an aggregate charge of $32.0 million recorded in connection with the 2017 U.S. Generics Pharmaceuticals restructuring initiative, which is described further in Note 4. Restructuring, and $9.9 million recorded following the initiation of held-for-sale accounting resulting from the Company’s June 30, 2017 definitive agreement to sell Somar, which is described in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale.