Fair Value Disclosures

9 Months Ended

Sep. 30, 2015

NOTE 13. FAIR VALUE DISCLOSURES

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis:


			Fair value measurements using:
	Fair Value		Level 1		Level 2		Level 3
September 30, 2015:
Cash equivalents:
Money market funds	$	89,044	$	89,044		—		—
Current liabilities:
Contingent consideration	$	10,000		—		—	$	10,000
Long-term liabilities:
Contingent consideration	$	102,799		—		—	$	102,799

December 31, 2014:
Cash equivalents:
Money market funds	$	189,031	$	189,031		—		—
Current liabilities:
Contingent consideration	$	10,000		—		—	$	10,000
Long-term liabilities:
Contingent consideration	$	96,000		—		—	$	96,000

The Company classifies money market funds, which are based on quoted market prices in active markets with no valuation adjustments, as Level 1 assets within the valuation hierarchy.

The Company estimates the fair values of Level 2 assets by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly, or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar assets, issuer credit spreads, benchmark yields, and other observable inputs. The Company validates the prices provided by its third-party pricing sources by understanding the models used, obtaining market values from other pricing sources, and/or analyzing pricing data in certain instances.

In connection with the CureTech license transaction, the Company recorded contingent consideration liabilities pertaining to amounts potentially payable to CureTech. The fair value of contingent consideration is considered a Level 3 liability and was estimated utilizing a model with key assumptions that included estimated revenues or completion of certain development and sales milestone targets during the earn-out period, volatility, and estimated discount rates corresponding to the periods of expected payments. The estimated fair value of the contingent consideration liability is measured at each reporting date based on significant inputs not observable in the market. The Company assesses these estimates on an ongoing basis as additional data impacting the assumptions is obtained. Changes in the estimated fair value of contingent consideration are reflected as non-cash adjustments to operating expenses in the consolidated statements of operations. During the three months ended September 30, 2015, the Company recorded a non-cash fair value adjustment of $0.2 million and $1.6 million to increase R&D expenses and SG&A expenses, respectively. During the nine months ended September 30, 2015, the Company recorded non-cash fair value adjustments of $1.1 million and $5.7 million to increase R&D expenses and SG&A expenses, respectively.

Contingent consideration may change significantly as development progresses and additional data is obtained that will affect the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. Considerable judgment is required to interpret the market data used to develop the assumptions. The estimates of fair value may not be indicative of amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates.

The $1.8 million and $6.8 million increases in the fair value of the contingent consideration liability during the three and nine months ended September 30, 2015, respectively, are primarily due to the time value of money. The aggregate remaining, undiscounted amount of contingent consideration that the Company could potentially be required to pay to CureTech under the License Agreement is included in the table below:


Potential sales milestones	$	245,000
Potential development and regulatory milestones	$	85,000
Potential payment upon completion of Manufacturing Technology Transfer	$	5,000
Potential future tiered royalties on annual worldwide net sales		5% to 11	%

There were no transfers between Level 1 and Level 2 financial instruments during the three and nine months ended September 30, 2015. The following table includes a roll-forward of the fair value of Level 3 financial instruments for the three and nine months ended September 30, 2015:


	Three Months Ended September 30, 2015		Nine Months Ended September 30, 2015
Contingent Consideration (Current and Long-Term):
Balance at beginning of period	$	111,013	$	106,000
Amounts acquired or issued		—		—
Net change in fair value		1,786		6,799
Settlements		—		—
Transfers in and/or out of Level 3		—		—

Balance at end of period	$	112,799	$	112,799

The following table presents the total balance of the Company’s other financial instruments that are not measured at fair value on a recurring basis:


			Fair value measurements using:
	Total Balance		Level 1		Level 2		Level 3
September 30, 2015:
Assets:
Bank deposits (included in “Cash and cash equivalents”)	$	399,900	$	399,900		—		—
Liabilities:
Borrowings under Revolving Credit Facility	$	75,000	$	75,000		—		—

December 31, 2014:
Assets:
Bank deposits (included in “Cash and cash equivalents”)	$	313,646	$	313,646		—		—
Liabilities:
Convertible Notes	$	359,219		—	$	359,219		—

Due to their short-term maturities, the Company believes that the fair value of its bank deposits, receivable from collaboration partner, accounts payable and accrued expenses, short-term borrowings under the Revolving Credit Facility, and other current assets and liabilities approximate their carrying value.

The estimated fair value of the Company’s Convertible Notes, including the equity component, was $496.8 million at December 31, 2014 and was determined using recent trading prices of the Convertible Notes. The fair value of the Convertible Notes included in the table above at December 31, 2014 represents only the liability component of the Convertible Notes, because the equity component is included in stockholders’ equity on the consolidated balance sheet. The Company settled its remaining Convertible Notes in the third quarter of 2015 as discussed further in Note 10, “Debt.”

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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