Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v2.4.0.8
Financial Instruments
3 Months Ended
Mar. 31, 2014
Investments, All Other Investments [Abstract]  
Financial Instruments
Financial Instruments

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income, equity securities, co-promote termination payments receivable and the related liability, and contingent liabilities.
The fair value of the Company’s investments which were classified as short-term investments for the three months ended March 31, 2014 and year ended December 31, 2013 is determined using quoted market prices in active markets. These securities were received by the Company in December 2012 as a result of a milestone payment from a licensee. Additionally, the liability for CVRs for Metabasis are determined using quoted market prices in active markets. The co-promote termination payments receivable represents a non-interest bearing receivable for future payments to be made by Pfizer and is recorded at its fair value. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding future Avinza product sales. The receivable and liability will remain equal and adjusted each quarter for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales. 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.



The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2014 (in thousands):

Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Current portion of co-promote termination payments receivable
$
688

 
$

 
$

 
$
688

Available-for-sale securities
12,275

 
12,275

 

 

Long-term portion of co-promote termination payments receivable
448

 

 

 
448

     Total assets
$
13,411

 
$
12,275

 
$

 
$
1,136

Liabilities:
 
 
 
 
 
 
 
Current portion of contingent liabilities-CyDex
$
1,094

 
$

 
$

 
$
1,094

Current portion of co-promote termination liability
688

 

 

 
688

Long-term portion of contingent liabilities-Metabasis
6,657

 
6,657

 

 

Long-term portion of contingent liabilities-CyDex
6,086

 

 

 
6,086

Liability for short-term investments owed to former licensees
1,841

 
1,841

 

 

Long-term portion of co-promote termination liability
448

 

 

 
448

     Total liabilities
$
16,814

 
$
8,498

 
$

 
$
8,316


The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Current portion of co-promote termination payments receivable
$
4,329

 
$

 
$

 
$
4,329

Available-for-sale securities
4,340

 
4,340

 

 

Long-term portion of co-promote termination payments receivable
7,417

 

 

 
7,417

     Total assets
$
16,086

 
$
4,340

 
$

 
$
11,746

Liabilities:
 
 
 
 
 
 
 
Current portion of contingent liabilities-CyDex
$
1,712

 
$

 
$

 
$
1,712

Current portion of co-promote termination liability
4,329

 

 

 
4,329

Long-term portion of contingent liabilities-Metabasis
4,196

 
4,196

 

 

Long-term portion of contingent liabilities-CyDex
7,599

 

 

 
7,599

Liability for short-term investments owed to former licensees
651

 
651

 

 

Long-term portion of co-promote termination liability
7,417

 

 

 
7,417

     Total liabilities
$
25,904

 
$
4,847

 
$

 
$
21,057





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

 
December 31,
 
2014
 
2013
Range of annual revenue subject to revenue sharing (1)
$5.1 million-$17.9 million
 
$4.2 million-$19.8 million
Revenue volatility
25%
 
25%
Average of probability of commercialization
67.4%
 
67.6%
Sales beta
0.60
 
0.60
Credit rating
BBB
 
BBB
Equity risk premium
6%
 
6%
(1)
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.

A reconciliation of the level 3 financial instruments as of March 31, 2014 is as follows (in thousands):

Assets:
 
Fair value of level 3 financial instrument assets as of December 31, 2013
$
11,746

Assumed payments made by Pfizer or assignee
(276
)
Fair value adjustments to co-promote termination liability
(10,334
)
Fair value of level 3 financial instrument assets as of March 31, 2014
$
1,136

 
 
Liabilities:
 
Fair value of level 3 financial instrument liabilities as of December 31, 2013
$
21,057

Assumed payments made by Pfizer or assignee
(276
)
Payments to CVR and other former license holders
(1,618
)
Fair value adjustments to contingent liabilities
(513
)
Fair value adjustments to co-promote termination liability
(10,334
)
Fair value of level 3 financial instrument liabilities as of March 31, 2014
$
8,316