Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.7.0.1
Fair Value Measurements
6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

The following table presents the Company's hierarchy for assets and liabilities measured at fair value.
 
 
June 30, 2017
 
December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments(1)
 
$
2,338

 
$
110,066

 
$

 
$
112,404

 
$
3,054

 
$
119,242

 
$

 
$
122,296

Note receivable Viking (2)
 

 

 
3,207

 
3,207

 

 

 
3,207

 
3,207

Investment in warrants (3)
 
608

 

 

 
608

 
684

 

 

 
684

     Total assets
 
$
2,946

 
$
110,066

 
$
3,207

 
$
116,219

 
$
3,738

 
$
119,242

 
$
3,207

 
$
126,187

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current contingent liabilities-CyDex (4)
 
$

 
$

 
$
86

 
$
86

 
$

 
$

 
$
101

 
$
101

Long-term contingent liabilities-CyDex (4)
 

 

 
1,503

 
1,503

 

 

 
1,503

 
1,503

Long-term contingent liabilities-Metabasis (5)
 

 
2,357

 

 
2,357

 

 
1,413

 

 
1,413

Liability for amounts owed to former licensees(6)
 
351

 

 

 
351

 
371

 

 

 
371

     Total liabilities
 
$
351

 
$
2,357

 
$
1,589

 
$
4,297

 
$
371

 
$
1,413

 
$
1,604

 
$
3,388


(1)
Investments in equity securities, which the Company received as a result of event-based and upfront payments from licensees, 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 was determined using a probability weighted option pricing model using a lattice methodology. 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 June 30, 2017. Changes in these assumptions may materially affect the fair value estimate.
(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. The change of the fair value is recorded in the other income or expenses in the Company's condensed consolidated statement of operations.
(4)
The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach. To the extent the estimated future income may vary significantly given the long-term nature of the estimate, the Company utilizes a Monte Carlo model. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s 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. Changes in these assumptions can materially affect the fair value estimate.
(5)
The liability for CVRs for Metabasis are determined using quoted 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.

The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:
 
June 30, 2017
 
December 31, 2016
Revenue volatility
25%
 
25%
Average probability of commercialization
12.5%
 
12.5%
Market price of risk
0.03
 
0.03
Credit rating
BB
 
BB
Equity risk premium
6%
 
6%

There was no significant change in estimated fair value of the Viking note receivable and contingent consideration during the six months ended June 30, 2017.

Other Fair Value Measurements

2019 Convertible Senior Notes

In August 2014, the Company issued $245.0 million aggregate principal amount of its 2019 Convertible Senior Notes. The Company uses a quoted rate in a market that is not active, which is classified as a Level 2 input, to estimate the current fair value of its 2019 Convertible Senior Notes. The estimated fair value of the 2019 Senior Convertible Notes was $405.5 million as of June 30, 2017. The carrying value of the notes does not reflect the market rate. See Note 3 Convertible Senior Notes for additional information.

Viking

The Company records its investment in Viking under the equity method of accounting. See Note 1 Significant Accounting Policies for the fair value of the Company's equity investment in Viking.