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Fair Value Measurements | 9 Months Ended
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Sep. 26, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | FAIR VALUE MEASUREMENTS On January 1, 2020, we adopted ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("Topic 820"). The amendments in this ASU remove disclosure requirements in Topic 820 related to the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. Additionally, Topic 820 adds disclosure requirements for the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. We have amended certain of our quantitative Level 3 fair value measurement disclosures to add the range and weighted average of significant unobservable inputs used. The table below summarizes the valuation of our financial instruments carried at fair value by the applicable pricing categories (in millions):
|  | September 26, 2020 |  | December 31, 2019
|  | Level 1 |  | Level 2 |  | Level 3 |  | Level 1 |  | Level 2 |  | Level 3
Measured at fair value on a recurring basis: |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities |  | $ | 3.3 |  |  | $ | — |  |  | $ | — |  |  | $ | 6.6 |  |  | $ | — |  |  | $ | — |
Foreign currency forward contracts |  | — |  |  | 8.7 |  |  | — |  |  | — |  |  | 4.3 |  |  | — |
Cross-currency swap |  | — |  |  | 7.7 |  |  | — |  |  | — |  |  | 26.3 |  |  | — |
Funds associated with Israeli severance liability |  | — |  |  | 14.2 |  |  | — |  |  | — |  |  | 14.6 |  |  | — |
Royalty Pharma contingent milestone |  | — |  |  | — |  |  | 121.2 |  |  | — |  |  | — |  |  | 95.3 |
Total assets |  | $ | 3.3 |  |  | $ | 30.6 |  |  | $ | 121.2 |  |  | $ | 6.6 |  |  | $ | 45.2 |  |  | $ | 95.3 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | — |  |  | $ | 8.8 |  |  | $ | — |  |  | $ | — |  |  | $ | 8.4 |  |  | $ | — |
Contingent consideration payments |  | — |  |  | — |  |  | 12.8 |  |  | — |  |  | — |  |  | 11.9 |
Total liabilities |  | $ | — |  |  | $ | 8.8 |  |  | $ | 12.8 |  |  | $ | — |  |  | $ | 8.4 |  |  | $ | 11.9 |
Measured at fair value on a non-recurring basis: |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Goodwill(1) |  | $ | — |  |  | $ | — |  |  | $ | 811.1 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,013.1 |
Definite-lived intangible assets(2) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 23.3 |
Total assets |  | $ | — |  |  | $ | — |  |  | $ | 811.1 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,036.4 |
(1) | During the three months ended September 26, 2020, goodwill with a carrying amount of $1,013.5 million was written down to a fair value of $811.1 million. During the year ended December 31, 2019, goodwill with a carrying amount of $1,122.3 million was written down to a fair value of $1,013.1 million.
(2) | During the year ended December 31, 2019, definite-lived intangible assets with a carrying amount of $55.3 million were written down to a fair value of $23.3 million.
There were no transfers within Level 3 fair value measurements during the three and nine months ended September 26, 2020 or the year ended December 31, 2019. Royalty Pharma Contingent Milestone Receipts The table below summarizes the change in fair value of the Royalty Pharma contingent milestone (in millions):
| Three Months Ended |  | Nine Months Ended
| September 26, 2020 |  | September 28, 2019 |  | September 26, 2020 |  | September 28, 2019
Beginning balance | $ | 99.0 |  |  | $ | 89.1 |  |  | $ | 95.3 |  |  | $ | 323.2 |
Payments received | — |  |  | — |  |  | — |  |  | (250.0 | )
Change in fair value | 22.2 |  |  | 2.6 |  |  | 25.9 |  |  | 18.5 |
Ending balance | $ | 121.2 |  |  | $ | 91.7 |  |  | $ | 121.2 |  |  | $ | 91.7 |
We value our contingent milestone payment from Royalty Pharma using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri® that are received by Royalty Pharma until the contingent milestones are resolved. As of September 26, 2020, volatility and the estimated fair value of the milestones had a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. Rate of return and the estimated fair value of the milestones had an inverse relationship, such that a lower rate of return correlates with a higher estimated fair value of the contingent milestone payments. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. The table below represents the volatility and rate of return:
| Three Months Ended
| September 26, 2020 |  | September 28, 2019
Volatility | 30.0 | % |  | 30.0 | %
Rate of return | 6.84 | % |  | 7.99 | %
During the three and nine months ended September 26, 2020, the fair value of the Royalty Pharma contingent milestone payment related to 2020 increased by $22.2 million and $25.9 million, respectively, to $121.2 million, which is recorded on the Condensed Consolidated Balance Sheets within Prepaid expenses and other current assets. The adjustments were driven by higher projected global net sales of Tysabri® compared to the estimates in the prior period, and the estimated probability of achieving the earn-out. During the three and nine months ended September 28, 2019, the fair value of the Royalty Pharma contingent milestone payments increased by $2.6 million and $18.5 million, respectively. These adjustments were driven by higher projected global net sales of Tysabri® and the estimated probability of achieving the earn-out. The Royalty Pharma payments from Biogen for Tysabri® were $337.5 million in 2018, which triggered the $250.0 million milestone payment received during the first quarter of 2019. There is no contingent milestone based on 2019 sales of Tysabri®. In order for us to receive the remaining contingent milestone payment of $400.0 million, Royalty Pharma payments from Biogen for Tysabri® sales, as defined in the agreement, in 2020 must exceed $351.0 million. If Royalty Pharma payments from Biogen for Tysabri® sales do not meet the prescribed threshold in 2020, we will write off the $121.2 million asset and record a loss. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $278.8 million in Change in financial assets on the Condensed Consolidated Statements of Operations. Contingent Consideration Payments The table below summarizes the change in fair value of contingent consideration payments (in millions):
| Three Months Ended |  | Nine Months Ended
| September 26, 2020 |  | September 28, 2019 |  | September 26, 2020 |  | September 28, 2019
Beginning balance | $ | 12.1 |  |  | $ | 12.1 |  |  | $ | 11.9 |  |  | $ | 15.3 |
Changes in value | 0.7 |  |  | 1.1 |  |  | 0.9 |  |  | (0.9 | )
Settlements and other adjustments | — |  |  | — |  |  | — |  |  | (1.2 | )
Ending balance | $ | 12.8 |  |  | $ | 13.2 |  |  | $ | 12.8 |  |  | $ | 13.2 |
Contingent consideration represents milestone payment obligations obtained through product acquisitions, which are valued using estimates based on probability-weighted outcomes, sensitivity analysis, and discount rates reflective of the risk involved. The estimates are updated quarterly and the liabilities are adjusted to fair value depending on a number of assumptions, including the competitive landscape and regulatory approvals that may impact the future sales of a product. The fair value adjustments are recorded in Other operating expense (income) on the Condensed Consolidated Statements of Operations. As of September 26, 2020, the contingent consideration payments liability was primarily comprised of sales-based milestones related to an IPR&D asset acquired in a prior transaction in our RX segment. The contingent consideration payments liability also included certain event-based milestones, which were immaterial. The fair value of our contingent consideration sales-based milestones as of September 26, 2020, was calculated using the following significant unobservable inputs:
|  |  |  |  | Nine Months Ended
|  |  |  |  | September 26, 2020
| Valuation Technique |  | Unobservable Input |  | Range (Weighted Average)(1)
Contingent consideration payments: sales-based milestones | Discounted cash flow |  | Projected royalties |  | $ | 36.8 |
|  |  | Projected year of payment of sales-based milestones |  | 2021 - 2036 (2027) |
|  |  | Discount rate |  | 26.0 | %
(1) | Unobservable inputs were weighted based on the relative estimated milestone payments.
The discount rate of 26.0% was based on our assessment of the rate of return and development and commercialization risk of the related IPR&D project. We reevaluate the significant unobservable inputs of the sales-based milestones quarterly based on project developments and changes in contingent elements of the liability. Non-recurring Fair Value Measurements The non-recurring fair values represent only those assets whose carrying values were adjusted to fair value during the reporting period. Goodwill RX U.S. Reporting Unit Goodwill When determining the fair value of our RX U.S. reporting unit for the three months ended September 26, 2020, we utilized a combination of comparable company and discounted cash flow techniques. In our comparable company market approach, we considered observable market information and transactions for companies that we deemed to be of a comparable nature, scope, and size of our RX U.S. reporting unit (Level 2 inputs). Our cash flow projections included revenue assumptions related to new and existing products, plus gross margin and operating expenses based on the reporting unit’s growth plans (Level 3 inputs). In our discounted cash flow analysis, we used a long-term growth rate of 0.0%, which assumes new product launches will, over time, offset decreases in cash flows of existing portfolio products with definite lives. We used a discount rate of 10.3% in this analysis. The discount rate correlates with the required investment return and risk that we believe market participants would apply to the projected growth rate. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows and applied blended jurisdictional tax rates ranging from 19.1% to 21.7%. We weighted indications of fair value resulting from the market approach and present value techniques, considering the reasonableness of the range of measurements and the point within the range that we determined was most representative of fair market conditions (refer to Note 4). Fixed Rate Long-term Debt Our fixed rate long-term debt consisted of the following (in millions):
| September 26, 2020 |  | December 31, 2019
| Level 1 |  | Level 2 |  | Level 1 |  | Level 2
Public Bonds |  |  |  |  |  |  |
Carrying Value (excluding discount) | $ | 2,760.0 |  |  | $ | — |  |  | $ | 2,600.0 |  |  | $ | — |
Fair value | $ | 2,969.9 |  |  | $ | — |  |  | $ | 2,618.4 |  |  | $ | — |
Private placement note |  |  |  |  |  |  |
Carrying value (excluding premium) | $ | — |  |  | $ | 157.1 |  |  | $ | — |  |  | $ | 151.4 |
Fair value | $ | — |  |  | $ | 168.0 |  |  | $ | — |  |  | $ | 168.4 |
The fair values of our public bonds for all periods were based on quoted market prices. The fair values of our private placement note for all periods were based on interest rates offered for borrowings of a similar nature and remaining maturities. The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt, revolving credit agreements, promissory notes related to our equity method investment in Kazmira, and variable rate long-term debt, approximate their fair value.

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- 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 Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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