NOTE 3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Securities classified as cash and cash equivalents and short-term investments as of December 31, 2016 and 2015 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.


			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2016	Cost		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	87,845	$	—	$	—	$	87,845
Money market funds		532		—		—		532
Corporate debt securities and commercial paper		29,334		—		(2)		29,332
Total cash and cash equivalents	$	117,711	$	—	$	(2)	$	117,709
Short-term investments
Corporate debt securities and Commercial paper with maturities less than 1 year	$	59,728	$	—	$	(17)	$	59,711
Total short-term investments	$	59,728	$	—	$	(17)	$	59,711
Total	$	177,439	$	—	$	(19)	$	177,420


			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2015	Cost		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	65,600	$	—	$	—	$	65,600
Money market funds		64		—		—		64
Corporate debt securities and commercial paper		35,420		—		—		35,420
Total cash and cash equivalents	$	101,084	$	—	$	—	$	101,084
Short-term investments
Corporate debt securities, commercial paper and US Treasury securities with maturities less than 1 year	$	108,717	$	1	$	(34)	$	108,684
Total short-term investments	$	108,717	$	1	$	(34)	$	108,684
Total	$	209,801	$	1	$	(34)	$	209,768

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, 2016, the Company had 25 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, 2016 (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	$	35,935	$	(19)	$	—	$	—	$	35,935	$	(19)

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, 2016. Gross realized gains and losses on marketable securities were not material for the years ended December 31, 2016 and 2015.

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, 2016 (in thousands):


December 31, 2016	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	532	$	—	$	—	$	532
Commercial paper		—		52,192		—		52,192
Corporate debt securities		—		36,850		—		36,850
US Treasury securities		—		—		—		—
Total	$	532	$	89,042	$	—	$	89,574
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,489	$	1,489
Contingent consideration—Lazanda		—		—		11,742		11,742
Contingent consideration—CAMBIA		—		—		1,594		1,594
	$	—	$	—	$	14,825	$	14,825

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 measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2016 and December 31, 2015 (in thousands):


					Changes in
					fair value
			Changes in		recorded in
			fair value		selling,
	Balance at		recorded in		general and				Balance at
	December 31,		interest		administrative		Royalties		December 31,
	2015		expense		expense		paid		2016
Liabilities:
Contingent consideration obligations—Zipsor	$	1,504	$	141	$	(156)	$	—	$	1,489
Contingent consideration obligations—Lazanda		12,002		2,031		141		(2,432)		11,742
Contingent consideration obligations—CAMBIA		1,465		236		(107)		—		1,594
Total	$	14,971	$	2,408	$	(122)	$	(2,432)	$	14,825


					Changes in
					fair value
			Changes in		recorded in
			fair value		selling,
	Balance at		recorded in		general and				Balance at
	December 31,		interest		administrative		Royalties		December 31,
	2014		expense		expense		paid		2015
Liabilities:
Contingent consideration obligations—Zipsor	$	1,800	$	206	$	(502)	$	—	$	1,504
Contingent consideration obligations—Lazanda		11,209		1,621		419		(1,247)		12,002
Contingent consideration obligations—CAMBIA		1,243		211		11		—		1,465
Unfavorable contract assumed		3,343		269		(3,612)		—		—
Total	$	17,595	$	2,307	$	(3,684)	$	(1,247)	$	14,971

The liability for the unfavorable contract assumed represented 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. In September 2015, the Company provided notice of termination to the vendor because the third party failed to achieve these milestones within the stipulated timeline. As a result, the fair value of the liability as of the date of the termination was reduced to zero with the associated change recorded in “selling, general and administrative expense” in the consolidated statement of operations. The reduction of $3.6 million in 2015 in the fair value of the unfavorable contract assumed is a change in accounting estimate which reduced basic and diluted net loss per share by approximately ($0.06) for the year ended December 31, 2015.

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 $390.0 million (par value $345.0 million) as of December 31, 2016 and represents a Level 2 valuation. The principal amount of the Senior Notes approximates their fair value as of December 31, 2016 and represents a Level 2 valuation. When determining the estimated fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 2016 and December 31, 2015.

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, 2015 (in thousands):


December 31, 2015	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	64	$	—	$	—	$	64
Commercial paper		—		56,383		—		56,383
Corporate debt securities		—		44,956		—		44,956
US Treasury securities		—		42,765				42,765
Total	$	64	$	144,104	$	—	$	144,168
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,504	$	1,504
Contingent consideration—Lazanda		—		—		12,002		12,002
Contingent consideration—CAMBIA		—		—		1,465		1,465
	$	—	$	—	$	14,971	$	14,971