Fair Value Measurements

12 Months Ended

Dec. 31, 2014

5. Fair Value Measurements

Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant in measuring fair value:

Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.

Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

Assets and liabilities subject to fair value measurements are as follows (in thousands):

	As of December 31, 2014
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds(1)	$	298,416	$	—	$	—	$	298,416
Federally-sponsored and corporate debt securities(2)				420,731		—		420,731

Total assets	$	298,416	$	420,731	$	—	$	719,147


Liabilities
Convertible notes due 2016(3)	$	388,153	$	—	$	—	$	388,153
Contingent consideration(4)		—		—		11,502		11,502

Total liabilities	$	388,153	$	—	$	11,502	$	399,655

	As of December 31, 2013
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds(1)	$	145,194	$	—	$	—	$	145,194
Federally-sponsored and corporate debt securities(2)		—		857,711		—		857,711

Total assets	$	145,194	$	857,711	$	—	$	1,002,905


Liabilities
Convertible notes due 2016(3)	$	593,750	$	—	$	—	$	593,750
Contingent consideration(4)		—		—		6,616		6,616

Total liabilities	$	593,750	$	—	$	6,616	$	600,366

(1)	Included in cash and cash equivalents on the accompanying consolidated balance sheets.
(2)	Included in current and non-current marketable investments on the accompanying consolidated balance sheets. The fair value of these securities is principally measured or corroborated by trade data for identical securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input or comparable securities that are more actively traded. See also Note 4—Investments—Marketable Investments—Held-to-Maturity Investments to these consolidated financial statements.
(3)	Included in convertible notes on the accompanying consolidated balance sheets. The fair value of our Convertible Notes is estimated using Level 1 observable inputs since our Convertible Notes are trading with sufficient frequency such that we believe related pricing can be used as the primary basis for measuring their fair value. As of December 31, 2014 and December 31, 2013, the fair value of the Convertible Notes was substantially higher than their book value. This was primarily due to the excess conversion value of the notes compared to the notes' par value, and the fact that any such excess would be paid in shares of our common stock.
(4)	Included in other liabilities on the accompanying consolidated balance sheets. The fair value of contingent consideration has been estimated using probability weighted discounted cash flow (DCF) models. The DCF models incorporate Level 3 inputs including estimated discount rates that we believe market participants would consider relevant in pricing and the projected timing and amount of cash flows, which are estimated and developed, in part, based on the requirements specific to each acquisition agreement. We analyze and evaluate these fair value measurements quarterly to determine whether valuation inputs continue to be relevant and appropriate or whether current period developments warrant adjustments to valuation inputs and related measurements. Any increases or decreases in discount rates would have an inverse impact on the corresponding fair value, while increases or decreases in expected cash flows would result in corresponding increases or decreases in fair value. As of the years ending December 31, 2014 and 2013, the cost of debt and weighted average cost of capital used to discount projected cash flows relating to our contingent consideration ranged from 6.1 percent to 15.5 percent and 8.7 percent to 16.5 percent, respectively.

The tables below provide a reconciliation of the beginning and ending balances of Level 3 assets and liabilities for the years ended December 31, 2014 and 2013 (in thousands):

	Contingent Consideration
Balance January 1, 2014—Asset (Liability)	$	(6,616	)
Transfers into Level 3		—
Transfers out of Level 3		—
Total gains/(losses) realized/unrealized:
Included in earnings		(1,090	)
Included in other comprehensive income		112
Purchases		(5,200	)
Sales		—
Issuances		—
Settlements		1,292

Balance December 31, 2014—Asset (Liability)	$	(11,502	)


Amount of total gains/(losses) for the year ended December 31, 2014 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities	$	(1,090	)

	Contingent Consideration
Balance January 1, 2013—Asset (Liability)	$	(6,730	)
Transfers into Level 3		—
Transfers out of Level 3		—
Total gains/(losses) realized/unrealized:
Included in earnings		210
Included in other comprehensive income		(96	)
Purchases		—
Sales		—
Issuances		—
Settlements		—

Balance December 31, 2013—Asset (Liability)	$	(6,616	)


Amount of total gains/(losses) for the year ended December 31, 2013 included in earnings that are attributable to the change in unrealized gains related to outstanding liabilities	$	210

- 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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