Annual report pursuant to Section 13 and 15(d)

Fair Value Measurement (Tables)

v3.6.0.2
Fair Value Measurement (Tables)
12 Months Ended
Dec. 31, 2016
Fair Value Disclosures [Abstract]  
Schedule of assets and liabilities measured on recurring basis
The following table provide a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2016 and 2015 (in thousands):

Fair Value Measurements at Reporting Date Using
December 31, 2016
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Short-term investments (1)
$
122,296

 
$
3,054

 
$
119,242

 
$

Note receivable Viking (2)
3,207

 

 

 
3,207

Investment in warrants (3)
684

 
684

 

 

     Total assets
$
126,187

 
$
3,054

 
$
119,242

 
$
3,207

Liabilities:
 
 
 
 
 
 
 
Current contingent liabilities - CyDex (4a)
$
101

 
$

 
$

 
$
101

Long-term contingent liabilities - Metabasis (5)
1,413

 

 
1,413

 

Long-term contingent liabilities - CyDex (4)
1,503

 

 

 
1,503

Liability for amounts owed to former licensees (6)
371

 
371

 

 

     Total liabilities
$
3,388

 
$
371

 
$
1,413

 
$
1,604


Fair Value Measurements at Reporting Date Using
December 31, 2015
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents (7)
$
3,015

 
$

 
$
3,015

 
$

Short-term investments (1)
92,775

 
6,786

 
85,989

 

Note receivable Viking (2)
4,782

 

 

 
4,782

     Total assets
$
100,572

 
$
6,786

 
$
89,004

 
$
4,782

Liabilities:
 
 
 
 
 
 
 
Current contingent liabilities - CyDex(4)
$
7,812

 
$

 
$

 
$
7,812

Current contingent liabilities-Metabasis (5)
2,602

 

 
2,602

 

Long-term contingent liabilities - Metabasis (5)
1,355

 

 
1,355

 

Long-term contingent liabilities - CyDex (4)
1,678

 

 

 
1,678

Liability for amounts owed to former licensees (6)
794

 
794

 

 

     Total liabilities
$
14,241

 
$
794


$
3,957


$
9,490


    

(1) Investments in equity securities, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. Short-term investments in marketable securities with maturities greater than 90 days are classified as level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

(2) The fair value of the convertible note receivable from Viking at December 31, 2015 was determined using a probability weighted option pricing model. The fair value is subjective and is affected by certain significant input to the valuation model such as the estimated volatility of the common stock, which was estimated to be 75% at December 31, 2016 and 65% at December 31, 2015. Changes in these assumptions may materially affect the fair value estimate. For the year ended December 31, 2016 and December 31, 2015, the Company reported a decrease in the fair value of the Viking convertible notes of $0.2 million and$0.8 million respectively in "Other, net" of the consolidated statement of operations.

(3) Investment in warrants, which the Company received as a result of Viking’s partial repayment of the Viking note receivable and the Company’s purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities.

(4) The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach using a Monte Carlo analysis. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding revenue volatility, probability of commercialization of products, estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones which may be achieved and affect amounts owed to former license holders and CVR holders. Changes in these assumptions can materially affect the fair value estimate.

(4a) The fair value of the liabilities for short-term CyDex contingent liabilities at December 31, 2016 disclosed herein represents the fair value of the estimated contingent considerations owed to former license holder only, which is determined based on the methodology described in (4) above. The contingent considerations owed to the Cydex CVR holders at December 31, 2016 is determined based on actual amount owed at December 31, 2016 as the Cydex CVR agreement ended at December 31, 2016.

(5) The liability for CVRs for Metabasis are determined using quoted market prices in a market that is not active for the underlying CVR.

(6) The liability for amounts owed to former licensees are determined using quoted market prices in active markets for the underlying investment received from a partner, a portion of which is owed to former licensees.

(7) Highly liquid investments with maturities less than 90 days from the purchase date are recorded as cash equivalents that are classified as Level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.


Significant unobservable inputs used in determining the fair value of contingent liabilities
The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:

 
 
December 31,
 
 
2016
 
2015
Range of annual revenue subject to revenue sharing (1)
 
N/A
 
$22.5 million
Revenue volatility
 
25%
 
25%
Average of probability of commercialization
 
12.5%
 
73%
Sales beta
 
N/A
 
0.40
Credit rating
 
BB
 
BB
Equity risk premium
 
6%
 
6%
Market price of risk
 
3.2%
 
N/A

(1)
For the December 31, 2015 valuation date, revenue subject to revenue sharing represent management’s estimate of the range of total annual revenue subject to revenue sharing (i.e. annual revenues in excess of $15 million) through December 31, 2016, which is the term of the CVR agreement. For the December 31, 2016 valuation date, the Cydex CVR was determined based on the actual $5.0 million amount owed to Cydex CVR holders as the Cydex CVR agreement ended at December 31, 2016. This amount was subsequently paid in February 2017.

Reconciliation of the level 3 financial instruments
A reconciliation of the level 3 financial instruments as of December 31, 2016 is as follows (in thousands):

Assets:
 
Fair value of level 3 financial instruments as of December 31, 2015
$
4,782

Viking note receivable fair market value adjustment

(215
)
Cash payment received as partial repayment of note receivable

(300
)
Fair market value of stock received as partial repayment of note receivable

(1,060
)
Fair value of level 3 financial instrument assets as of December 31, 2016
$
3,207

 
 
Liabilities
 
Fair value of level 3 financial instruments as of December 31, 2015
$
9,490

Payments to CVR holders and other contingency payments
(6,158
)
Fair value adjustments to contingent liabilities
3,259

Other (1)
(4,987
)
Fair value of level 3 financial instruments as of December 31, 2016
$
1,604