FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of March 31, 2018 and December 31, 2017, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):



	Fair Value Measurements at March 31, 2018 Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents	$	2,255	$	2,255	$	—	$	—
Corporate debt securities	110,450		—		110,450		—
U.S. treasury and government agency securities	12,258		—		12,258		—
Certificates of deposit	10,150				10,150		—
Commercial paper	$	5,962	$	—	$	5,962	$	—
Total Assets	$	141,075	$	2,255	$	138,820	$	—
Liabilities:
Contingent consideration - Lumara Health	$	49,797	$	—	$	—	$	49,797
Contingent consideration - MuGard	870		—		—		870
Total Liabilities	$	50,667	$	—	$	—	$	50,667



	Fair Value Measurements at December 31, 2017 Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents	$	4,591	$	4,591	$	—	$	—
Corporate debt securities	116,152		—		116,152		—
U.S. treasury and government agency securities	9,291		—		9,291		—
Certificates of deposit	9,151		—		9,151		—
Commercial paper	1,999		—		1,999		—
Total Assets	$	141,184	$	4,591	$	136,593	$	—
Liabilities:
Contingent consideration - Lumara Health	$	49,187	$	—	$	—	$	49,187
Contingent consideration - MuGard	898		—		—		898
Total Liabilities	$	50,085	$	—	$	—	$	50,085

Marketable Securities

Our cash equivalents, are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value measurements provided by our pricing services as of March 31, 2018. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the three months ended March 31, 2018.

Contingent Consideration

For asset acquisitions, such as Intrarosa, we record contingent consideration for obligations we consider to be probable and estimable and these liabilities are not adjusted to fair value. As of March 31, 2018, $10.0 million of contingent consideration was recorded in accrued expenses and is required to be paid to Endoceutics, Inc. (“Endoceutics”) in connection with the first anniversary of the closing pursuant to the agreement entered into with Endoceutics (the “Endoceutics License Agreement”). In addition, as of March 31, 2018, we recorded an accrual for acquired in-process research and development (“IPR&D”) expense of $20.0 million in anticipation of the regulatory milestone payment to Palatin Technologies, Inc. (“Palatin”) due upon the FDA acceptance of the bremelanotide NDA, pursuant to the terms of a license agreement we entered into with Palatin in January 2017 (the “Palatin License Agreement”). We also recorded contingent consideration related to the November 2014 acquisition of Lumara Health, Inc. (“Lumara Health”) and related to our June 2013 license agreement for MuGard® Mucoadhesive Oral Wound Rinse (the “MuGard License Agreement”) with Abeona Therapeutics, Inc. (“Abeona”), under which we acquired the U.S. commercial rights for the management of oral mucositis and stomatitis (the “MuGard Rights”).

The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are classified as Level 3 assets under the fair value hierarchy as these assets have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents a reconciliation of contingent consideration obligations related to the acquisition of Lumara Health (related to our Makena product) and the MuGard Rights (in thousands):



Balance as of December 31, 2017	$	50,085
Payments made	(44		)
Adjustments to fair value of contingent consideration	626
Balance as of March 31, 2018	$	50,667

During the three months ended March 31, 2018, we adjusted the fair value of our contingent consideration liability by approximately $0.6 million, due to an increase of approximately $0.6 million to the Makena contingent consideration. We have classified $49.8 million of the Makena contingent consideration and $0.2 million of the MuGard contingent consideration as short-term liabilities in our consolidated balance sheet as of March 31, 2018.

The fair value of the contingent milestone payments payable by us to the former stockholders of Lumara Health was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of Makena from December 1, 2014 through December 31, 2019. As of March 31, 2018, the total potential undiscounted milestone payment amount we could pay in connection with the Lumara Health acquisition was $200.0 million through December 31, 2019.

The fair value of the contingent royalty payments payable by us to Abeona under the MuGard License Agreement was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately 14%. As of March 31, 2018, we estimated that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from approximately $2.0 million to $6.0 million over the remainder of the ten year period, which commenced on June 6, 2013, the acquisition date, which is our best estimate of the period over which we expect the majority of the asset’s cash flows to be derived.

We believe the estimated fair values of Lumara Health and the MuGard Rights are based on reasonable assumptions; however; our actual results may vary significantly from the estimated results.

Debt

We estimate the fair value of our debt obligations by using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input. As of March 31, 2018, the estimated fair value of our 2023 Senior Notes, 2022 Convertible Notes and 2019 Convertible Notes (each as defined below) was $470.3 million, $323.3 million and $20.7 million, respectively, which differed from their carrying values. See Note Q, “Debt” for additional information on our debt obligations.