FAIR VALUE

3 Months Ended

Mar. 31, 2022

The following table reflects the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):


March 31, 2022	Financial Statement Classification	Level 1		Level 2		Level 3		Total



Liabilities:
Short-term contingent consideration	Contingent consideration, current portion	$	—	$	—	$	14,600	$	14,600
Long-term contingent consideration	Contingent consideration	—		—		22,859		22,859
Total		$	—	$	—	$	37,459	$	37,459


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



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

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.

During the three months ended March 31, 2022 and March 31, 2021, the Company recognized an expense of $1.6 million and a benefit of $0.6 million, respectively, for the change in fair value of contingent consideration, which was recognized in Fair value of contingent consideration on the Company’s Condensed 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 March 31, 2022 included revenue volatility of 35%, discount rate of 7.5%, credit spread of 6.3% and updated projections of future INDOCIN Product revenues.

Contingent consideration related to CAMBIA was $0.2 million as of March 31, 2022 and December 31, 2021.

The following table summarizes changes in fair value that are measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
	2022		2021
Fair value, beginning of the period	$	37,659	$	38,552
Change in fair value of contingent consideration recorded within costs and expenses	1,645		(593)
Cash payment related to contingent consideration	(1,845)		—
Fair value, end of the period	$	37,459	$	37,959

The carrying value of the Company’s debt for the period ended March 31, 2022 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 three months ended March 31, 2022.

- 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