NOTE 2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Securities classified as cash and cash equivalents and short-term investments as of September 30, 2017 and December 31, 2016 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.


			Gross		Gross
	Amortized		Unrealized		Unrealized
September 30, 2017	Cost		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	88,559	$	—	$	—	$	88,559
Money market funds		101		—		—		101
US Treasury securities		3,605		—		—		3,605
Corporate debt securities and commercial paper		15,320		—		—		15,320
Total cash and cash equivalents	$	107,585	$	—	$	—	$	107,585
Short-term investments
Corporate debt securities and commercial paper with maturities less than 1 year	$	5,873	$	—	$	(1)	$	5,872
Total short-term investments	$	5,873	$	—	$	(1)	$	5,872
Total	$	113,458	$	—	$	(1)	$	113,457


			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

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, 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.

As of September 30, 2017, the Company had 2 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 September 30, 2017 (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	$	2,308	$	(1)	$	—	$	—	$	2,308	$	(1)

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 the recovery or maturity of such investments, there were no material other-than-temporary impairments for these securities at September 30, 2017. 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 September 30, 2017 and December 31, 2016 (in thousands):


September 30, 2017	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	101	$	—	$	—	$	101
Commercial paper		—		18,883		—		18,883
Corporate debt securities		—		2,308		—		2,308
US Treasury securities		—		3,605		—		3,605
Total	$	101	$	24,796	$	—	$	24,897
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	452	$	452
Contingent consideration—Lazanda		—		—		4,219		4,219
Contingent consideration—CAMBIA		—		—		965		965
	$	—	$	—	$	5,636	$	5,636


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
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 revenue forecast, 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 expenses for the three and nine months ended September 30, 2017 and September 30, 2016:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Fair value, beginning of the period	$	7,356	$	14,898	$	14,825	$	14,971
Changes in fair value recorded in interest expense		221		608		1,017		1,802
Changes in fair value recorded in selling, general and administrative expenses		(1,415)		78		(7,542)		(209)
Royalties and milestone paid		(526)		(635)		(2,664)		(1,615)
Total		5,636		14,949		5,636		14,949

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, based on quoted market prices of the Company’s debt, was approximately $257.3 million and $390.0 million (par value $345.0 million) as of September 30, 2017 and December 31, 2016, respectively, and represents a Level 2 valuation. The principal amount of the Senior Notes approximates their fair value as of September 30, 2017 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 three and nine months ended September 30, 2017 and September 30, 2016.