NOTE 3. MARKETABLE SECURITIES

Securities classified as cash and cash equivalents and available-for-sale marketable securities as of December 31, 2014 and 2013 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	22,452	$	—	$	—		$	22,452
Money market funds		179,923		—		—			179,923
Corporate debt securities		286,292		3		(2	)		286,293

Total cash and cash equivalents	$	488,667	$	3	$	(2	)	$	488,668
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	70,777		1		(5	)	$	70,773
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		6,974		—		(13	)		6,961

Total available-for-sale securities	$	77,751	$	1	$	(18	)	$	77,734

Total cash, cash equivalents and marketable securities	$	566,418	$	4	$	(20	)	$	566,402

December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	26,728	$	—	$	—		$	26,728
Money market funds		217,946		—		—			217,946

Total cash and cash equivalents	$	244,674	$	—	$	—		$	244,674
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	12,440	$	8	$	(2	)	$	12,446
Government agency debt securities		14,814		3		—			14,817
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		4,075		5		—			4,080

Total available-for-sale securities	$	31,329	$	16	$	(2	)	$	31,343

Total cash, cash equivalents and marketable securities	$	276,003	$	16	$	(2	)	$	276,017

The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and corporate debt securities. The Company invests its cash in marketable securities with U.S. Treasury and government agency securities, and high quality securities of financial and commercial institutions. To date, the Company has not experienced material losses on any of its balances. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in "accumulated other comprehensive loss" within shareholders' equity on the consolidated balance sheets. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in "interest and other income" in the consolidated statement of operations.

At December 31, 2014, the Company had 45 securities in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014 (in thousands):

	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	80,854	$	(20	)	$	—	$	—	$	80,854	$	(20	)

Total available-for-sale	$	80,854	$	(20	)	$	—	$	—	$	80,854	$	(20	)

The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the securities held by the Company. Based on the Company's review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company's ability and intent to hold the investments until maturity, there were no material other-than-temporary impairments for these securities at December 31, 2014.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

•	Level 1: Quoted prices in active markets for identical assets or liabilities.
•	Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•	Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	179,923	$	—	$	—	$	179,923
Commercial Paper		—		253,837		—		253,837
Corporate debt securities		110,190		—		—		110,190

Total	$	290,113	$	253,837	$	—	$	543,950


Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,800	$	1,800
Contingent consideration—Lazanda		—		—		11,209		11,209
Contingent consideration—CAMBIA		—		—		1,243		1,243
Unfavorable contract assumed		—		—		3,343		3,343

	$	—	$	—	$	17,595	$	17,595

The fair value measurement of the contingent consideration obligations arises from the Zipsor®, CAMBIA® and Lazanda® acquisitions and relates to fair value of the potential future milestone payments and royalties payable under the respective agreements which are determined using Level 3 inputs. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company re-measures the contingent consideration obligation arising from the above acquisitions to their estimated fair values. Any changes in the fair value of contingent consideration resulting from a change in the underlying is recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of contingent consideration resulting from the passage of time are recorded within interest expense until the contingent consideration is settled. The table below provides a summary of the changes in fair value recorded in interest expense and selling, general and administrative expense for the year ended December 31, 2014. Changes in fair value included within interest expense in the accompanying Consolidated Statement of Operations was $0.9 million and $0.1 million for the years ended December 31, 2013 and 2012, respectively.

The liability for the unfavorable contract assumed represents an obligation for the Company to make certain payments to a vendor upon the achievement of certain milestones by such vendor. This contract was entered into by Nautilus Neurosciences, Inc. (Nautilus) as part of a legal settlement unrelated to the CAMBIA® acquisition. The liability of $3.3 million recorded above, as of December 31 2014, represents the fair value of the amounts by which the contract terms are unfavorable compared to the current market pricing and a probability—weighted assessment of the likelihood that the stipulated milestones will be achieved by the third party. The contract may be terminated if the third party fails to achieve these milestones, in which case the fair value of the liability as of the date of the termination will be reversed on the consolidated balance sheet and reflected in the consolidated statement of operations. Any changes in the fair value of this liability resulting from a change in the underlying inputs are recognized in operating expenses until the contract is settled. Changes in the fair value of the liability resulting from the passage of time are recorded within interest expense until the contract is settled.

The table below provides a summary of the changes in fair value of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2014 (in thousands):

	Balance at December 31, 2013		Changes in fair value recorded in interest expense		Changes in fair value recorded in selling, general and administrative expense			Balance at December 31, 2014
Liabilities:
Contingent consideration obligations—Zipsor®	$	1,638	$	162	$	—		$	1,800
Contingent consideration obligations—Lazanda®		8,616		1,533		1,060			11,209
Contingent consideration obligations—CAMBIA®		1,010		233		—			1,243
Unfavorable contract assumed		3,540		445		(642	)		3,343

Total	$	14,804	$	2,373	$	418		$	17,595

The estimated fair value of the 2.50% Convertible Senior Notes Due 2021, which the Company issued on September 9, 2014 (the 2021 Notes), is based on a market approach. The estimated fair value was approximately $375.2 million (par value $345.0 million) as of December 31, 2014 and represents a Level 2 valuation. When determining the estimated fair value of the Company's long-term debt, the Company used a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

The following table represents the Company's fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	217,946	$	—	$	—	$	217,946
Corporate debt securities		—		16,526		—		16,526
Government agency debt securities		—		14,817		—		14,817

Total	$	217,946	$	31,343	$	—	$	249,289


Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,638	$	1,638
Contingent consideration—Lazanda		—		—		8,616		8,616
Contingent consideration—CAMBIA		—		—		1,010		1,010
Unfavorable contract assumed		—		—		3,540		3,540

	$	—	$	—	$	14,804	$	14,804