Annual report pursuant to Section 13 and 15(d)

Fair Value Measurement

v3.8.0.1
Fair Value Measurement
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurement
Fair Value Measurement

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The Company establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:
Level 1 - Observable inputs such as quoted prices in active markets
Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions
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, 2017 and 2016 (in thousands):

Fair Value Measurements at Reporting Date Using
December 31, 2017
 
 
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)
$
181,041

 
$
1,896

 
$
179,145

 
$

Note receivable Viking (2)
3,877

 

 

 
3,877

Investment in warrants (3)
3,846

 
3,846

 

 

     Total assets
$
188,764

 
$
5,742

 
$
179,145

 
$
3,877

Liabilities:
 
 
 
 
 
 
 
Current contingent liabilities - Crystal (7)
$
4,618

 
$

 
$

 
$
4,618

Current contingent liabilities - Cydex (4)
86

 

 

 
86

Long-term contingent liabilities - Metabasis (5)
3,971

 

 
3,971

 

Long-term contingent liabilities - Crystal (7)

3,783

 

 

 
3,783

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

 

 

 
1,503

Liability for amounts owed to a former licensor (6)
284

 
284

 

 

     Total liabilities
$
14,245

 
$
284

 
$
3,971

 
$
9,990


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

 
$
3,738

 
$
119,242

 
$
3,207

Liabilities:
 
 
 
 
 
 
 
Current contingent liabilities - CyDex (4)
$
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 a former licensor (6)
371

 
371

 

 

     Total liabilities
$
3,388

 
$
371


$
1,413


$
1,604


    

(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, 2017 approximates the book value since the contractual maturity date was within five months from the end of 2017, and there is no plan to extend the maturity date. The fair value at December 31, 2016 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. Changes in these assumptions may materially affect the fair value estimate. For the years ended December 31, 2017, December 31, 2016, and December 31, 2015, the Company reported an increase in the fair value of 0.9 million, a decrease in the fair value $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, is 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 CyDex contingent liabilities was 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 developmental and regulatory milestones. Changes in these assumptions can materially affect the fair value.

The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:
 
 
December 31,
 
 
2017
 
2016
Revenue volatility
 
25%
 
25%
Average of probability of commercialization
 
12.5%
 
12.5%
Market price of risk
 
2.9%
 
3.2%

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

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

(7) The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. At December 31, 2017, most of the development and regulatory milestones were estimated to be highly probable of being achieved between 2018 and 2020. Changes in these estimates may materially affect the fair value.



A reconciliation of the level 3 financial instruments as of December 31, 2017 is as follows (in thousands):

Assets:
 
Fair value of level 3 financial instruments as of December 31, 2016
$
3,207

Viking note receivable fair market value adjustment

870

Cash payment received as partial repayment of note receivable

(200
)
Fair value of level 3 financial instrument assets as of December 31, 2017
$
3,877

 
 
Liabilities
 
Fair value of level 3 financial instruments as of December 31, 2016
$
1,604

Fair value of Crystal contingent consideration
8,401

Payments to CVR holders and other contingency payments
(25
)
Fair value adjustments to contingent liabilities
10

Fair value of level 3 financial instruments as of December 31, 2017
$
9,990



Other Fair Value Measurements-2019 Convertible Senior Notes

In August 2014, the Company issued the 2019 Convertible Senior Notes. The Company uses a quoted market rate in an inactive market, 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 $446.4 million as of December 31, 2017. The carrying value of the notes does not reflect the market rate. See Note 7 Financing Arrangements for additional information.

Viking

The Company records its investment in Viking under the equity method of accounting. The investment is subsequently adjusted for the Company’s share of Viking's operating results, and if applicable, cash contributions and distributions. See Note 2 Investment in Viking for additional information. The market value of the Company's investment in Viking was $25.6 million as of December 31, 2017.