CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

6 Months Ended

Jun. 30, 2015

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

All marketable securities have been designated as available for sale securities. Securities included in cash and cash equivalents and marketable securities as of June 30, 2015 and December 31, 2014 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

			Gross		Gross
	Amortized		Unrealized		Unrealized
June 30, 2015	Cost		Gains		Losses			Fair Value
Cash and cash equivalents:
Cash	$	53,548	$	—	$	—		$	53,548
Money market funds	11,282		—		—			11,282
Commercial Paper	29,264		—		—			29,264
Total cash and cash equivalents	$	94,094	$	—	$	—		$	94,094
Marketable securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	23,916	$	1	$	(11	)	$	23,906
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities	4,559		2		(2		)	4,559
Total marketable securities	$	28,475	$	3	$	(13	)	$	28,465
Total cash, cash equivalents and marketable securities	$	122,569	$	3	$	(13	)	$	122,559

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2014	Cost		Gains		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
Marketable 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 marketable securities	$	77,751	$	1	$	(18	)	$	77,734
Total cash, cash equivalents and marketable securities	$	566,418	$	4	$	(20	)	$	566,402

The decrease in cash, cash equivalents and marketable securities during the six months ended June 30, 2015 is primarily attributable to the payment of the purchase price for the NUCYNTA® acquisition on April 2, 2015.

The Company considers all highly liquid investments with a maturity at the 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 Condensed 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 Condensed Consolidated Statement of Operations.

At June 30, 2015, the Company had 27 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, 2015 (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	$	17,584	$	(14	)	$	—	$	—	$	17,584	$	(14	)
Total available-for-sale	$	17,584	$	(14	)	$	—	$	—	$	17,584	$	(14	)

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, 2015. For debt securities, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost.

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, 2015 and December 31, 2014 (in thousands):

June 30, 2015	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	11,282	$	—	$	—	$	11,282
Commercial Paper	—		35,416		—		35,416
Corporate debt securities	22,313		—		—		22,313
Total	$	33,595	$	35,416	$	—	$	69,011
Liabilities:
Contingent consideration- Zipsor	$	—	$	—	$	1,575	$	1,575
Contingent consideration- Lazanda	—		—		11,751		11,751
Contingent consideration- CAMBIA	—		—		1,394		1,394
Unfavorable contract assumed	—		—		661		661
	$	—	$	—	$	15,381	$	15,381

December 31, 2014	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 inputs are 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 six months ended June 30, 2015. Changes in fair value included within interest expense in the accompanying Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2015 were $0.6 million and $1.1 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 $0.7 million recorded above, as of June 30, 2015, represents the fair value of the amounts by which the contract terms are unfavorable compared to the current 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 Condensed Consolidated Balance Sheet and reflected in the Condensed 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 six months ended June 30, 2015 (in thousands):

	Balance at December 31, 2014		Changes in fair value recorded in interest expense		Changes in fair value recorded in selling, general and administrative expense			Royalties Paid			Balance at June 30, 2015
Liabilities:
Contingent consideration obligations- Zipsor®	$	1,800	$	124	$	(349	)	—			1,575
Contingent consideration obligations- Lazanda®	11,209		597		263			(318		)	11,751
Contingent consideration obligations- CAMBIA®	1,243		100		51			—			1,394
Unfavorable contract assumed	3,343		269		(2,951		)				661
Total	$	17,595	$	1,090	$	(2,986	)	$	(318	)	15,381

The Company recorded a reduction of $1.5 million and $3.0 million in selling, general and administrative expense during the three and six months ended June 30, 2015, respectively. The decrease in selling, general and administrative expense was primarily driven by a change in the fair value of the liability related to the unfavorable contract assumed as part of the CAMBIA® acquisition, and arose from a reduction in the probability that the vendor can achieve the milestones by the stipulated deadline. The reduction of $1.2 million and $3.0 million in the fair value of the unfavorable contract assumed, in the three and six months ended June 30, 2015, respectively, is a change in accounting estimate which reduced basic and diluted net loss per share by approximately ($0.02) and ($0.05) for the three and six months ended June 30, 2015, respectively.

The estimated fair value of the 2.50% Convertible Senior Notes Due 2021, which the Company issued on September 9, 2014 is based on a market approach. The estimated fair value was approximately $437.1 million and $375.2 million (par value $345.0 million) as of June 30, 2015 and December 31, 2014, respectively, and represents a Level 2 valuation.