FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2017

Financial Instruments and Fair Value

The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The valuation techniques used to measure the fair value of the Company’s marketable securities and all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. Based on the fair value hierarchy, the Company classified marketable securities within Level 2.

In estimating the fair value of the Company’s derivative liabilities, the Company used the Black Scholes Model as of March 31, 2017 and the Monte Carlo Simulation as of December 31, 2016. Based on the fair value hierarchy, the Company classified the derivative liability within Level 3.

In estimating the fair value of the Company’s contingent consideration, the Company used the comparable uncontrolled transaction (“CUT”) method for royalty payments based on projected revenues. Based on the fair value hierarchy, the Company classified contingent consideration within Level 3 because valuation inputs are based on projected revenues discounted to a present value.

Financial instruments with carrying values approximating fair value include cash and cash equivalents, accounts receivable, notes receivable, and accounts payable, due to their short term nature. We estimate the fair value of convertible debt is $62.3 million, considering factors such as market conditions, prepayment and make-whole provisions, variability in pricing from multiple lenders and the term of the debt.

The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of March 31, 2017 (in thousands):



	As of March 31, 2017
	Total carrying and estimated fair value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets:
Cash and cash equivalents	$	41,871	$	41,871	$	—	$	—
Marketable securities, available-for-sale	206,290		—		206,290		—
Total	$	248,161	$	41,871	$	206,290	$	—
Liabilities:
Derivative liability related to warrants	$	21,180	$	—	$	—	$	21,180
Business combination-related contingent consideration	89,082		—		—		89,082
Total	$	110,262	$	—	$	—	$	110,262



	As of December 31, 2016
	Total carrying and estimated fair value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets:
Cash and cash equivalents	$	41,002	$	39,929	$	1,073	$	—
Marketable securities, available-for-sale	214,871		—		214,871		—
Total	$	255,873	$	39,929	$	215,944	$	—
Liabilities:
Derivative liability related to warrants	$	22,440	$	—	$	—	$	22,440
Business combination-related contingent consideration	87,478		—		—		87,478
Total	$	109,918	$	—	$	—	$	109,918

The following table sets forth a summary of changes in the estimated fair value of the Company’s derivative financial instrument-warrants liability for the three months ended March 31, 2017 (in thousands):



	Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)
Balance at January 1, 2017	$	22,440
Change in estimated fair value of liability classified warrants	(1,260		)
Balance at March 31, 2017	$	21,180

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820. See Note 7 for further discussion of derivative financial instruments relating to warrants.

The following table sets forth a summary of changes in the estimated fair value of the Company's business combination-related contingent consideration for the three months ended March 31, 2017 (in thousands):



	Fair Value Measurements of Acquisition-Related Contingent Consideration (Level 3)
Balance at January 1, 2017	$	87,478
Increase from revaluation of contingent consideration	3,344
Contractual payments accrued at March 31, 2017	(1,808		)
Foreign currency impact	68
Balance at March 31, 2017	$	89,082

The fair value of contingent consideration liabilities was determined by applying a form of the income approach (a level 3 input), based upon the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions included in the calculations were the earn-out period payment probabilities, projected revenues, discount rate and the timing of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments.

During the three months ended March 31, 2017, the Company incurred charges of $3.3 million in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the revaluation of the contingent consideration liabilities. For the three months ended March 31, 2017, $1.4 million, $1.1 million and $0.8 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal, Cholbam and product candidate L-UDCA, respectively. In each case, the value increased due to changes in the estimated timing of payments. During the three months ended March 31, 2016, the Company incurred charges of $2.7 million in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). For the three months ended March 31, 2016, $1.4 million, and $1.3 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam, respectively.

- 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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