NOTE 5. 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
June 30, 2016:
Short-term investments:
Corporate debt securities	$	43,465		—	$	43,465		—
Certificates of deposit	$	10,000		—	$	10,000		—
Commercial paper	$	3,965		—	$	3,965		—
U.S. Government securities	$	2,002		—	$	2,002		—
Current assets:
Foreign currency derivative contracts	$	368		—	$	368		—
Long-term investments
Corporate debt securities	$	21,515		—	$	21,515		—
Non-current assets:
Foreign currency derivative contracts	$	35		—	$	35		—
Current liabilities:
Foreign currency derivative contracts	$	1,469		—	$	1,469		—
Contingent consideration	$	4,951		—		—	$	4,951
Non-current liabilities:
Contingent consideration	$	952,604		—		—	$	952,604
December 31, 2015:
Current liabilities:
Contingent consideration	$	4,900		—		—	$	4,900
Non-current liabilities:
Contingent consideration	$	262,368		—		—	$	262,368

The Company estimates the fair values of Level 2 assets or liabilities, including foreign currency derivative contracts, by taking into consideration valuations obtained from third-party pricing or valuation sources. These 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, foreign currency rates, London Interbank Offered Rates (LIBOR), and other observable inputs. The Company validates the prices provided by its third-party pricing sources by obtaining market values from other pricing sources and/or analyzing pricing data in certain instances. For additional information regarding the Company’s foreign currency derivative transactions, see Note 4, “Derivative Financial Instruments.”

In connection with the acquisitions of MDV3800 and MDV9300, the Company recorded contingent consideration liabilities pertaining to amounts potentially payable to BioMarin and CureTech, respectively. 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 and completion of certain development, regulatory 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 unaudited condensed consolidated statements of operations.

The following table presents fair value adjustments related to contingent consideration liabilities recorded by the Company for the periods presented:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2016		2015			2016		2015
Fair value adjustments:
BioMarin contingent consideration liability:
Increase to R&D expense	$	8,632	$	—		$	9,124	$	—
Increase to SG&A expense		673,983		—			676,468		—

Total BioMarin fair value adjustments		682,615		—			685,592		—

CureTech contingent consideration liability:
Increase (decrease) to R&D expense		365		(70	)		1,013		930
Increase to SG&A expense		1,348		1,083			3,682		4,083

Total CureTech fair value adjustments		1,713		1,013			4,695		5,013

Total fair value adjustments, net	$	684,328	$	1,013		$	690,287	$	5,013

During the three and six months ended June 30, 2016, the fair value of the contingent consideration liability related to BioMarin increased significantly due to changes in the estimated probabilities of success of the development programs and the range and scope of indications currently planned for development. These changes resulted from various market and development-specific events that occurred during the second quarter of 2016, including: the announcement of positive data from a Phase 3 competitor trial of a PARP inhibitor, validating the clinical and commercial potential for MDV3800 and the overall PARP class; positive feedback received from regulatory authorities regarding study protocols and approval pathways for MDV3800 in various tumor types, including alignment on two registrational trials for tumor types in which MDV3800 has the potential to be the first PARP inhibitor to market; data from three abstracts for MDV3800 presented at recent and upcoming medical conferences in several different tumor types; and data from a Phase 1 trial of MDV3800 in several advanced cancers in combination with low-dose chemotherapy. The majority of the fair value adjustment for the three and six months ended June 30, 2016 is classified as SG&A expense because changes in the key measurement assumptions noted above had the largest impact on the value of the sales-based milestone and royalties on annual net sales of MDV3800 products that BioMarin would be entitled to under the terms of the related purchase agreement.

Increases in the fair value of the contingent consideration liability related to CureTech for the three and six months ended June 30, 2016 and 2015 were primarily due to the time value of money.

BioMarin is entitled to contingent payments totaling up to $160.0 million upon the achievement of defined regulatory and sales-based milestones, and mid-single digit royalties on net sales of products that contain MDV3800 during the royalty term specified in the related purchase agreement. CureTech is entitled to contingent payments totaling up to $85.0 million upon attainment of certain development and regulatory milestones, up to $245.0 million upon the achievement of certain annual worldwide net sales thresholds, and tiered royalties ranging from 5% to 11% on annual worldwide net sales. CureTech is also entitled to a $5.0 million milestone payment upon completion of the Manufacturing Technology Transfer as described in Note 11, “Commitments and Contingencies.”

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. Updates to these assumptions could have a significant impact on the Company’s results of operations. For example, a significant increase in the probability of achieving a milestone would result in a significantly higher fair value measurement, while a significant increase in the expected timing of achieving a milestone would result in a significantly lower fair value measurement. 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.

There were no transfers between Level 1 and Level 2 financial instruments during the three and six months ended June 30, 2016. The following table includes a roll-forward of the fair value of Level 3 financial instruments for the periods presented:


	Three Months Ended		Six Months Ended
	June 30, 2016		June 30, 2016
Contingent consideration (current and non-current):
Balance at beginning of period	$	273,227	$	267,268
Amounts acquired or issued		—		—
Net change in fair value		684,328		690,287
Settlements		—		—
Transfers in and/or out of Level 3		—		—

Balance at end of period	$	957,555	$	957,555

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
June 30, 2016:
Assets:
Bank deposits (included in “Cash and cash equivalents”)	$	267,761	$	267,761		—		—
December 31, 2015:
Assets:
Bank deposits (included in “Cash and cash equivalents”)	$	225,853	$	225,853		—		—
Liabilities:
Borrowings under Revolving Credit Facility	$	75,000	$	75,000		—		—

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.