NOTE 2—FAIR VALUE MEASUREMENT

The Company measures certain financial assets at fair value on a recurring basis, including cash equivalents, available-for sale-securities and contingent consideration liability. The fair value of these assets was determined based on a three-tier hierarchy under the authoritative guidance for fair value measurements and disclosures that prioritizes the inputs used in measuring fair value as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The Company generally classifies its available-for-sale debt instruments as Level 2. Instruments can be classified as Level 2 when observable market prices for identical securities that are traded in less active markets are used. When observable market prices for identical securities are not available, such instruments are priced using benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, as well as model processes. These models are proprietary to the pricing providers or brokers. These valuation models incorporate a number of inputs, including, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. For certain security types, additional inputs may be used, or some of the standard inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on any given day.

The fair value measurements of our cash equivalents, available-for-sale marketable securities and contingent consideration liability are identified at the following levels within the fair value hierarchy (in thousands):


	March 31, 2014 Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents:
Money market funds	$	7,234	$	7,234	$	—	$	—
U.S. government sponsored entity debt securities		116,991		—		116,991		—

Total		124,225		7,234		116,991		—
Liabilities:
Contingent consideration liability	$	1,620	$	—	$	—	$	1,620

Total		1,620		—		—		1,620


	December 31, 2013 Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents:
Money market funds	$	6,934	$	6,934	$	—	$	—
U.S. government sponsored entity debt securities		121,290		—		121,290		—

Total		128,224		6,934		121,290		—
Liabilities:
Contingent consideration liability	$	1,570	$	—	$	—	$	1,570

Total		1,570		—		—		1,570

Contingent Consideration Liability

On October 1, 2013 the Company acquired Ceregene and recorded a liability for the estimated fair value of contingent consideration payments to former Ceregene stockholders, as outlined under the terms of the merger agreement with Ceregene. These contingent payments are owed if the Company grants a third-party license to develop and commercialize certain product candidates acquired from Ceregene, or if the Company commercializes any of such product candidates itself. The fair values of these Level 3 liabilities are estimated using a probability-weighted discounted cash flow analysis. Such valuations require significant estimates and assumptions including but not limited to: determining the timing and estimated costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows and developing appropriate discount rates.

Subsequent changes in the fair value of these contingent consideration liabilities are recorded to the “Change in fair value of contingent liability” expense line item in the Condensed Consolidated Statements of Operations as operating expenses. During the three months ended March 31, 2014, the recognized amount of the liability for contingent consideration increased by $0.1 million primarily as the result of the passage of time.


Fair value as of December 31, 2013	$	1,570
Change in fair value		50

Fair value as of March 31, 2014	$	1,620