NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Securities classified as cash and cash equivalents and available-for-sale marketable securities as of June 30, 2014 and December 31, 2013 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

			Gross		Gross
	Amortized		Unrealized		Unrealized
June 30, 2014	Cost		Gains		Losses			Fair Value

Cash and cash equivalents:
Cash	$	29,891	$	—	$	—		$	29,891
Money market funds	181,254		—		—			181,254
Total cash and cash equivalents	$	211,145	$	—	$	—		$	211,145

Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	6,886	$	7	$	—		$	6,893
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities	5,665		1		(5		)	5,661
Total available-for-sale securities	$	12,551	$	8	$	(5	)	$	12,554

Total cash, cash equivalents and marketable securities	$	223,696	$	8	$	(5	)	$	223,699

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2013	Cost		Gains		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 and money market instruments. The Company invests its cash in marketable securities with U.S. Treasury and government agency securities, and high quality securities of U.S. financial and commercial institutions and, to date 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 gain (loss) within shareholders’ equity. 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 condensed consolidated statement of operations.

At June 30, 2014 the Company had nine 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 June 30, 2014 (in thousands):

	Less than 12 months					12 months or greater				Total
			Gross					Gross				Gross
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses

Corporate debt securities	$	4,154	$	(5	)	$	—	$	—	$	4,154	$	(5	)
Total available-for-sale	$	4,154	$	—		$	—	$	—	$	4,154	$	(5	)

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 June 30, 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.

The Company utilizes the following fair value hierarchy based on three levels of 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 tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):

June 30, 2014	Level 1		Level 2		Level 3		Total

Assets:
Money market funds	$	181,254	$	—	$	—	$	181,254
Corporate debt securities	—		12,554		—		12,554
Total	$	181,254	$	12,554	$	—	$	193,808

Liabilities:
Contingent consideration- Zipsor	$	—	$	—	$	1,708	$	1,708
Contingent consideration- Lazanda	—		—		9,391		9,391
Contingent consideration- CAMBIA	—		—		1,096		1,096
Unfavorable contract assumed	—		—		3,835		3,835

Contingent consideration	$	—	$	—	$	16,030	$	16,030

December 31, 2013	Level 1		Level 2		Level 3		Total

Assets:
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

The fair value measurement of the contingent consideration obligations arises from the Zipsor, CAMBIA and Lazanda acquisitions and relates to 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. Changes in the fair value of the contingent consideration obligations are recorded as a component of operating income in our condensed consolidated statement of operations. Changes in fair value included within interest and other expense in the accompanying condensed consolidated statement of operations for the three and six months ended June 30, 2014 was $0.6 million and $1.2 million, respectively. Changes in fair value included within interest and other expense in the accompanying condensed consolidated statement of operations for the three and six months ended June 30, 2013 was $0.1 million and $0.2 million, 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 $3.8 million recorded above 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 within a specified time frame. 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 condensed consolidated balance sheet and reflected in the condensed consolidated statement of operations as a credit within interest and other income. The Company determines the fair value of this liability at each reporting period and records any changes within “Interest expense” in the condensed consolidated statement of operations.

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 six months ended June 30, 2014 (in thousands):

	Balance at		Changes		Balance at
	December 31,		in		June 30,
	2013		fair value		2014
Liabilities:
Contingent consideration obligations- Zipsor	$	1,638	$	70	$	1,708
Contingent consideration obligations- Lazanda	8,616		775		9,391
Contingent consideration obligations- CAMBIA	1,010		86		1,096
Unfavorable contract assumed	3,540		295		3,835
Total	$	14,804	$	1,226	$	16,030