FAIR VALUE

12 Months Ended

Dec. 31, 2022

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, 2022 and 2021 (in thousands):


December 31, 2022	Financial Statement Classification	Level 1		Level 2		Level 3		Total
Assets:
Commercial paper	Cash and cash equivalents	$	—	$	4,983	$	—	$	4,983
U.S. Treasuries	Cash and cash equivalents	—		3,981		—		3,981
U.S. Government agencies	Cash and cash equivalents	—		10,937		—		10,937
Money market funds	Cash and cash equivalents	38,478		—		—		38,478
Total		$	38,478	$	19,901	$	—	$	58,379
Liabilities:
Short-term contingent consideration	Contingent consideration, current portion	$	—	$	—	$	26,300	$	26,300
Long-term contingent consideration	Contingent consideration	—		—		22,200		22,200
Derivative liability	Long-term debt	—		—		252		252
Total		$	—	$	—	$	48,752	$	48,752


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

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity date of purchase of three months or less to be cash equivalents. The Company invests its cash in money market funds and marketable securities including U.S. Treasury and government agency securities, commercial paper, and higher quality debt securities of financial and commercial institutions. The Company classified money market funds as Level 1, due to their short-term maturity, and measured the fair value based on quoted prices in active markets for identical assets. The Company classified commercial paper, U.S. Treasury and government agency securities as Level 2, as the inputs used to value these instruments are directly observable or can be corroborated by observable market data for substantially the full term of the assets.

Contingent Consideration Obligation

Pursuant to the 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 CRG 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, 2022 and December 31, 2021, INDOCIN product contingent consideration was $48.5 million and $37.5 million, respectively, with $26.3 million and $14.5 million classified as short-term and $22.2 million and $23.0 million classified as long-term contingent consideration, respectively, in the Consolidated Balance Sheets.

During the years ended December 31, 2022 and 2021, the Company recognized an expense of $18.7 million and $3.9 million, respectively, for the change in fair value of contingent consideration, which was recognized in Fair value of contingent consideration in the Company’s Consolidated Statements of Comprehensive Income (Loss). 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, 2022 included revenue volatility of 40%, discount rate of 9.0%, credit spread of 3.8%, and updated projections of future INDOCIN product revenues.

Contingent consideration obligation related to CAMBIA was $0.2 million as of December 31, 2021. During the year ended December 31, 2022, the Company determined this contingent obligation was no longer probable and adjusted its fair value to zero.

The following table summarizes changes in fair value of the contingent consideration that is measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2022, and 2021 (in thousands):


	December 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	18,687		3,914
Cash payment related to contingent consideration	(7,846)		(4,807)
Fair value, end of the period	$	48,500	$	37,659

Financial Instruments Not Required to be Remeasured at Fair Value

The Company’s other financial assets and liabilities, including trade accounts receivable and accounts payable, are not remeasured to fair value, as the carrying cost of each approximates its fair value. On August 22, 2022, the Company issued the 2027 Convertible Notes. As of December 31, 2022, the estimated fair value of the 2027 Convertible Notes, excluding the bifurcated embedded conversion option, was approximately $92.5 million, compared to a par value of $70.0 million. The Company estimated the fair value of its 2027 Convertible Notes as of December 31, 2022 based on a market approach which represents a Level 2 valuation. The carrying value of the Company’s debt as of December 31, 2021 approximated its fair value. As of December 31, 2021, the estimated fair value of the Company’s debt was determined using a commonly accepted valuation methodology and market based risk measurements that are indirectly observable, such as credit risk, which also represents a Level 2 valuation.

- 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.

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