XML 111 R13.htm IDEA: XBRL DOCUMENT v3.19.3.a.u2
Fair Value
 12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value

5. FAIR VALUE

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy and the valuation techniques the Company utilized to determine such fair value:

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

8,064

 

 

$

8,064

 

 

$

—

 

 

$

—

 

U.S. government and agency debt securities

 

 

117,376

 

 

 

73,795

 

 

 

43,581

 

 

 

—

 

Corporate debt securities

 

 

195,855

 

 

 

—

 

 

 

193,902

 

 

 

1,953

 

International government agency debt securities

 

 

93,779

 

 

 

—

 

 

 

93,779

 

 

 

—

 

Contingent consideration

 

 

32,400

 

 

 

—

 

 

 

—

 

 

 

32,400

 

Total

 

$

447,474

 

 

$

81,859

 

 

$

331,262

 

 

$

34,353

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

54,590

 

 

$

54,590

 

 

$

—

 

 

$

—

 

U.S. government and agency debt securities

 

 

98,513

 

 

 

60,107

 

 

 

38,406

 

 

 

—

 

Corporate debt securities

 

 

173,637

 

 

 

—

 

 

 

173,145

 

 

 

492

 

International government agency debt securities

 

 

77,504

 

 

 

—

 

 

 

77,504

 

 

 

—

 

Contingent consideration

 

 

65,200

 

 

 

—

 

 

 

—

 

 

 

65,200

 

Common stock warrants

 

 

1,205

 

 

 

—

 

 

 

—

 

 

 

1,205

 

Total

 

$

470,649

 

 

$

114,697

 

 

$

289,055

 

 

$

66,897

 

 

The Company transfers its financial assets and liabilities, measured at fair value on a recurring basis, between the fair value hierarchies at the end of each reporting period.

There were no transfers of any securities from Level 1 to Level 2 or from Level 2 to Level 1 during the year ended December 31, 2019. The following table is a rollforward of the fair value of the Company’s investments whose fair value was determined using Level 3 inputs at December 31, 2019:

 

(In thousands)

 

Fair Value

 

Balance, January 1, 2019

 

$

66,897

 

Purchase of corporate debt security

 

 

1,953

 

Change in the fair value of warrants

 

 

1,837

 

Change in the fair value of contingent consideration

 

 

(22,800

)

Payments received from contingent consideration

 

 

(10,000

)

Proceeds from the sale of shares acquired upon exercise of warrants

 

 

(3,042

)

Impairment of corporate debt security

 

 

(492

)

Balance, December 31, 2019

 

$

34,353

 

 

The Company’s investments in U.S. government and agency debt securities, international government agency debt securities and corporate debt securities classified as Level 2 within the fair value hierarchy were initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing market-observable data. The market-observable data included reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validated the prices developed using the market-observable data by obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active.

In April 2015, the Company completed the sale of its Gainesville, GA manufacturing facility, the related manufacturing and royalty revenue associated with certain products manufactured at the facility, and the rights to IV/IM and parenteral forms of Meloxicam. On December 20, 2018, the Company entered into a Second Amendment to the Purchase and Sale Agreement (“Purchase and Sale Agreement Amendment”) dated March 7, 2015 with Recro and Recro Gainesville LLC and a Second Amendment to the Asset Transfer and License Agreement dated April 10, 2015 with Recro Gainesville LLC (the “License Agreement Amendment” and, together with the Purchase and Sale Agreement Amendment, the “Amendments”).

Under the terms of the Amendments, the milestone payment of $45.0 million previously due to the Company upon approval of an NDA for IV/IM and parenteral forms of Meloxicam or any other product with the same active ingredient as Meloxicam IV/IM that is discovered or identified using certain of the Company’s IP to which Recro was provided a right of use, through license or transfer (the “Meloxicam Product(s)”) was amended and replaced with (i) a $5.0 million payment due within 30 days of signing of the Amendments; (ii) a $5.0 million payment due by April 23, 2019; (iii) a $5.0 million payment due within 180 days following approval of an NDA for injectable Meloxicam; and (iv) an additional $45.0 million following approval of an NDA for Meloxicam Product(s), payable in seven equal annual payments of approximately $6.4 million beginning on the first anniversary of such approval.

At December 31, 2019, the Company determined the value of the contingent consideration receivable using the following valuation approaches:

 

•

Based upon the terms of the Amendments, the fair value of the regulatory milestone was estimated based on the likelihood of achieving this regulatory milestone and applying a discount rate from the expected time the milestone occurs to the balance sheet date. The Company received the first $5.0 million milestone payment in January 2019 and received the second $5.0 million in April 2019. Additionally, the Company expects the regulatory milestone event to occur in the first quarter of 2020 and to receive milestone payments on the subsequent seven anniversary years thereafter. A discount rate of 16.0% was utilized in this analysis;

 

•

The Company is entitled to receive future royalties on net sales of Meloxicam Products. To estimate the fair value of the future royalties, the Company assessed the likelihood of a Meloxicam Product being approved for sale and estimated the expected future sales of such Meloxicam Product assuming approval and IP protection. The Company then discounted these expected payments using a discount rate of 16.0%, which it believes captures a market participant’s view of the risk associated with the expected payments; and

 

•

The Company is entitled to receive payments of up to $80.0 million upon achieving certain sales milestones on future sales of the Meloxicam Products. The fair value of the sales milestones was determined through the use of a real options approach, where net sales are simulated in a risk-neutral world. To employ this methodology, the Company used a risk-adjusted expected growth rate based on its assessments of expected growth in net sales of the approved Meloxicam Product, adjusted by an appropriate factor capturing their respective correlation with the market. A resulting expected (probability-weighted) milestone payment was then discounted at a cost of debt, which was 16.0%.

At December 31, 2019 and 2018, the Company determined that the value of the contingent consideration was $32.4 million and $65.2 million, respectively. The Company recorded a decrease of $22.8 million and $19.6 million and an increase of $21.6 million during the years ended December 31, 2019, 2018 and 2017, respectively, within “Change in the fair value of contingent consideration” in the accompanying consolidated statements of operations and comprehensive loss.

In November 2019, Recro completed a spin out of its acute care segment, Baudax Bio, Inc. (“Baudax”), a publicly traded pharmaceutical company. As part of this transaction, Recro’s obligations to pay certain of the contingent consideration from the Gainesville Transaction were assigned and/or transferred to Baudax.

In addition to the signing of the Amendments, as described above, on December 20, 2018, the Company and Recro entered into a First Amendment to the Warrant to Purchase Stock (the “Warrant Amendment”), pursuant to which the exercise price of the warrant to purchase 350,000 shares of Recro’s common stock, was decreased to a per share exercise price of $8.26 from $19.46, subject to adjustment as set forth therein. In November 2019, the Company elected to convert those warrants into shares and sell those shares. The Company sold the shares for $3.0 million and recorded a realized gain of $0.9 million within “Other (expense) income, net” in the accompanying consolidated statement of operations and comprehensive loss during the year ended December 31, 2019. During the years ended December 31, 2018 and 2017, the Company recorded a decrease of $0.2 million and an increase of less than $0.1 million, respectively, in the fair value of the warrants. These changes were recorded within “Other (expense) income, net” in the accompanying consolidated statements of operations and comprehensive loss.

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, contract assets, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term nature.

The estimated fair value of the Company’s long-term debt under the 2023 Term Loans, which was based on quoted market price indications (Level 2 in the fair value hierarchy) and which may not be representative of actual values that could have been, or will be, realized in the future, was $277.9 million and $274.7 million at December 31, 2019 and 2018, respectively. Please refer to Note 11, Long-Term Debt within these “Notes to Consolidated Financial Statements” in this Annual Report.