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Fair Value

6 Months Ended

Jun. 30, 2021

5. FAIR VALUE

The following table presents information about the Company’s assets and liabilities at June 30, 2021 and December 31, 2020 that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

	June 30,
(In thousands)	2021		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	1,872	$	1,872	$	—	$	—
U.S. government and agency debt securities		113,796		76,337		37,459		—
Corporate debt securities		189,550		—		189,550		—
International government agency debt securities		103,998		—		103,998		—
Contingent consideration		29,061		—		—		29,061
Total	$	438,277	$	78,209	$	331,007	$	29,061

	December 31,
	2020		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	41,849	$	41,849	$	—	$	—
U.S. government and agency debt securities		103,345		73,451		29,894		—
Corporate debt securities		184,956		—		183,979		977
International government agency debt securities		94,871		—		94,871		—
Contingent consideration		32,451		—		—		32,451
Total	$	457,472	$	115,300	$	308,744	$	33,428

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 between the fair value hierarchies during the six months ended June 30, 2021. The following table is a rollforward of the fair value of the Company’s assets whose fair values were determined using Level 3 inputs at June 30, 2021:

(In thousands)	Fair Value
Balance, January 1, 2021	$	33,428
Change in the fair value of contingent consideration		4,518
Milestone and royalty payments received by the Company related to contingent consideration		(7,889	)
Impairment of corporate debt security		(977	)
Royalty payments due to the Company related to contingent consideration		(19	)
Balance, June 30, 2021	$	29,061

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 sold its Gainesville, GA manufacturing facility, the manufacturing and royalty revenue associated with certain products manufactured at the facility, and the rights to IV/IM and parenteral forms of Meloxicam to Recro Pharma, Inc. (“Recro”) and Recro Gainesville LLC (such transaction, the “Gainesville Transaction”). The Gainesville Transaction included in the purchase price contingent consideration tied to low double digit royalties on net sales of the IV/IM and parenteral forms of Meloxicam and 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, pursuant to the Gainesville Transaction (such products, the “Meloxicam Products”), and milestone payments upon the achievement of certain regulatory and sales milestones related to the Meloxicam Products.

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

In Baudax’s Quarterly Report on Form 10-Q for the period ended March 31, 2021, Baudax included disclosures regarding its ability to continue as a going concern. At June 30, 2021, the Company determined the fair value of the contingent consideration due to the Company from Baudax as follows:

•

The Company is due to receive $38.6 million related to the FDA approval in February 2020 of the New Drug Application (“NDA”) for ANJESO, the first Meloxicam Product, to be paid in six equal, annual installments on the anniversary of such approval;

•

The Company is entitled to receive royalties on future net sales of Meloxicam Products; and

•

The Company is entitled to receive payments of up to $80.0 million upon achieving certain sales milestones on future net sales of 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 ANJESO, adjusted by an appropriate factor capturing their respective correlation with the market.

In order to address the substantial doubt about Baudax’s ability to continue as a going concern, the Company split its fair value analysis into two scenarios. In the first scenario, to which the Company applied a 55% and 50% likelihood at June 30, 2021 and December 31, 2020, respectively, the amounts above were discounted using a rate of 13% at June 30, 2021 and December 31, 2020, which the Company believes captures a market participant’s view of the risk associated with the expected payments assuming Baudax is able to continue as a going concern. In the second scenario, to which the Company applied a 45% and 50% likelihood at June 30, 2021 and December 31, 2020, respectively, the Company used the undiscounted values derived from the amounts summarized above and applied a recovery rate of 18% at June 30, 2021 and December 31, 2020, based on an analysis performed by Moody’s Investor Service regarding recoveries in a pandemic-driven default cycle.

At June 30, 2021 and December 31, 2020, the Company determined that the fair value of the contingent consideration related to the Gainesville Transaction was $29.1 million and $32.5 million, respectively. At June 30, 2021 and December 31, 2020, $6.5 million and $7.8 million, respectively, of the fair value of the contingent consideration was included within “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheets, and $22.6 million and $24.7 million, respectively, of the fair value of the contingent consideration was included within “Contingent consideration” in the accompanying condensed consolidated balance sheets. The Company recorded an increase of $3.2 million and $4.5 million during the three and six months ended June 30, 2021, respectively, and an increase of $5.9 million and $12.7 million during the three and six months ended June 30, 2020, respectively, within “Change in the fair value of contingent consideration” in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

The carrying amounts reflected in the accompanying condensed 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 its amended and restated credit agreement, 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 $297.8 million and $275.1 million at June 30, 2021 and December 31, 2020, respectively. See Note 11, Long-Term Debt in these “Notes to Condensed Consolidated Financial Statements” in this Form 10-Q for additional information.

- 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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