FAIR VALUE MEASUREMENTS

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 counter-parties 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 as of December 31, 2017, the Company used the Black Scholes Model. Based on the fair value hierarchy, the Company classified the derivative liability within Level 3. The Company adopted ASU 2017-11 as of January 1, 2018 and is no longer required to treat outstanding warrants as derivative liabilities measured at fair value. See Note 6 for further discussion.

In estimating the fair value of the Company’s contingent consideration, the Company used the probability-based expected 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, and accounts payable, due to their short term nature. As of June 30, 2018, the estimated fair value of convertible debt was $74.0 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 June 30, 2018 (in thousands):



	As of June 30, 2018
	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	$	89,305	$	89,305	$	—	$	—
Marketable securities, available-for-sale	166,381		—		166,381		—
Total	$	255,686	$	89,305	$	166,381	$	—
Liabilities:
Business combination-related contingent consideration	$	91,500	$	—	$	—	$	91,500
Total	$	91,500	$	—	$	—	$	91,500



	As of December 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	$	99,394	$	92,726	$	6,668	$	—
Marketable securities, available-for-sale	201,236		—		201,236		—
Total	$	300,630	$	92,726	$	207,904	$	—
Liabilities:
Derivative liability related to warrants	$	15,710	$	—	$	—	$	15,710
Business combination-related contingent consideration	90,000		—		—		90,000
Total	$	105,710	$	—	$	—	$	105,710

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 six months ended June 30, 2018 (in thousands):



	Fair Value Measurements of Acquisition-Related Contingent Consideration (Level 3)
Balance at January 1, 2018	$	90,000
Increase from revaluation of contingent consideration	5,786
Contractual payments included in accrued liabilities at June 30, 2018	(2,149		)
Contractual payments	(2,137		)
Balance at June 30, 2018	$	91,500

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 and six months ended June 30, 2018, the Company incurred charges of $2.2 million and $5.8 million, respectively, in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the revaluation of the contingent consideration liabilities. For the six months ended June 30, 2018, $1.9 million, $1.4 million, and $$2.5 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal and 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 and six months ended June 30, 2017, the Company incurred charges of $3.3 million and $6.6 million, respectively, in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the revaluation of the contingent consideration liabilities. For the six months ended June 30, 2017, $2.8 million, $2.2 million, and $1.6 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam and product candidate L-UDCA, respectively. In each case, the value increased due to changes in the estimated timing of payments.