Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
9 Months Ended
Sep. 30, 2014
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including equity securities, co-promote termination payments receivable and the related liability, contingent liabilities, and the Company's convertible senior notes.     

Level 1
The fair value of the Company’s investments which are classified as short-term investments is determined using quoted market prices in active markets. These securities were received by the Company in December 2012 and June 2014 as a result of an event-based payment and an upfront license payment, respectively, under licensees. Additionally, the liability for CVRs for Metabasis are determined using quoted market prices in active markets.

Level 2
The fair value of the Company's convertible senior notes is estimated by using the quoted market rate in an inactive market, which is classified as a Level 2 input.

Level 3
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 are adjusted each reporting period 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 carrying value of assets and liabilities that are measured at fair value on a recurring basis as of September 30, 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 co-promote termination payments receivable
$
523

 
$

 
$

 
$
523

Available-for-sale securities
5,925

 
5,925

 

 

     Total assets
$
6,448

 
$
5,925

 
$

 
$
523

Liabilities:
 
 
 
 
 
 
 
Current contingent liabilities-CyDex
$
4,184

 
$

 
$

 
$
4,184

Current co-promote termination liability
523

 

 

 
523

Long-term contingent liabilities-Metabasis
3,511

 
3,511

 

 

Long-term contingent liabilities-CyDex
8,755

 

 

 
8,755

Liability for short-term investments owed to former licensees
917

 
917

 

 

     Total liabilities
$
17,890

 
$
4,428

 
$

 
$
13,462


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 licensors
651

 
651

 

 

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

 

 

 
7,417

     Total liabilities
$
25,904

 
$
4,847

 
$

 
$
21,057



Other Fair Value Measurements-2019 Convertible Senior Notes

In August 2014, the Company issued $245.0 million aggregate principal amount of convertible senior unsecured notes due 2019 (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 $229.8 million as of September 30, 2014. The carrying value of the notes does not reflect the market rate. See Note 7 Financing Arrangements for additional information.

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

 
September 30, 2014
 
December 31, 2013
Range of annual revenue subject to revenue sharing (1)
$17.9 million-$20.5 million
 
$4.2 million-$19.8 million
Revenue volatility
25%
 
25%
Average of probability of commercialization
83.8%
 
67.6%
Sales beta
0.60
 
0.60
Credit rating
B
 
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 September 30, 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
(1,002
)
Fair value adjustments to co-promote termination liability
(10,221
)
Fair value of level 3 financial instrument assets as of September 30, 2014
$
523

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

Assumed payments made by Pfizer or assignee
(1,002
)
Payments to CVR and other former license holders
(1,936
)
Fair value adjustments to contingent liabilities
5,564

Fair value adjustments to co-promote termination liability
(10,221
)
Fair value of level 3 financial instrument liabilities as of September 30, 2014
$
13,462