FAIR VALUE

12 Months Ended

Dec. 31, 2021

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

•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.

The following tables reflect the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands):


December 31, 2021	Financial Statement Classification	Level 1		Level 2		Level 3		Total



Liabilities:
Short-term contingent consideration	Contingent consideration liability	$	—	$	—	$	14,500	$	14,500
Long-term contingent consideration	Contingent consideration liability	—		—		23,159		23,159
Total		$	—	$	—	$	37,659	$	37,659


December 31, 2020	Financial Statement Classification	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	Cash and cash equivalents	$	77	$	—	$	—	$	77
Total		$	77	$	—	$	—	$	77
Liabilities:
Short-term contingent consideration	Contingent consideration liability	$	—	$	—	$	6,776	$	6,776
Long-term contingent consideration	Contingent consideration liability	—		—		31,776		31,776
Total		$	—	$	—	$	38,552	$	38,552

Cash and Cash Equivalents

Cash equivalents consisted of money market funds with overnight liquidity and no stated maturities. The Company classified cash equivalents as Level 1, due to their short-term maturity, and measured the fair value based on quoted prices in active markets for identical assets.

Contingent Consideration Obligation

Pursuant to the May 2020 Zyla Merger, the Company assumed a contingent consideration obligation which is measured at fair value. The Company has obligations to make contingent consideration payments for future royalties to Iroko based upon annual INDOCIN product net sales over $20.0 million at a 20% royalty through January 2029. The Company classified the acquisition-related contingent consideration liabilities to be settled in cash as Level 3, due to the lack of relevant observable inputs and market activity. As of December 31, 2021 and December 31, 2020, INDOCIN Product contingent consideration was $37.5 million and $38.4 million, respectively with $14.5 million and $6.8 million classified as short-term and $23.0 million and $31.6 million classified as long-term contingent consideration, respectively, in the Consolidated Balance Sheet.

During the years ended December 31, 2021 and 2020, the Company recognized a charge of $3.9 million and $1.5 million, respectively, for the change in fair value of contingent consideration, which was recognized in Selling, general and administrative expense in the Company’s Consolidated Statements of Comprehensive Income. The fair value of the contingent consideration is determined using an option pricing model under the income approach based on estimated INDOCIN Product revenues through January 2029 and discounted to present value. The significant assumptions used in the calculation of the fair value as of December 31, 2021 included revenue volatility of 35%, discount rate of 7.0%, credit spread of 5.2% and updated projections of future INDOCIN Product revenues including the probability assigned to the achievement of those projections.

Contingent consideration obligation related to CAMBIA was $0.2 million as of December 31, 2021 and 2020.

The following table summarizes changes in fair value that are measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021, and 2020 (in thousands):


	December 31,
	2021		2020
Fair value, beginning of the period	$	38,552	$	168
Contingent consideration acquired with Zyla Merger	—		39,900
Change in fair value of contingent consideration recorded within costs and expenses	3,914		1,500
Cash payment related to contingent consideration	(4,807)		(3,016)
Total	$	37,659	$	38,552

The carrying value of the Company’s debt for the period ended December 31, 2021 approximates its fair value. When determining the estimated fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 2021 and 2020.

- 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.

+ References + Details