Fair Value Measurements

3 Months Ended

Mar. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The Company determines the fair value of certain financial assets and liabilities using three levels of inputs as follows:

• Level 1 — Observable inputs, such as quoted prices in active markets for identical assets or liabilities;

• Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

• Level 3 — Valuations based on unobservable inputs to the valuation methodology and including data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The fair value of these instruments was as follows (in thousands):

	As of March 31, 2017
	Fair Value		Level 1		Level 2		Level 3
Assets
Money market funds	$	31,503	$	31,503	$	—	$	—
U.S. treasury securities	117,190		117,190		—		—
U.S. government agency obligations	33,214		—		33,214		—
Total assets measured at fair value	$	181,907	$	148,693	$	33,214	$	—
Liabilities
Derivative liability associated with the Medicis settlement	$	2,082	$	—	$	—	$	2,082
Total liabilities measured at fair value	$	2,082	$	—	$	—	$	2,082

	As of December 31, 2016
	Fair Value		Level 1		Level 2		Level 3
Assets
Money market funds	$	60,639	$	60,639	$	—	$	—
U.S. treasury securities	81,079		81,079		—		—
U.S. government agency obligations	40,947		—		40,947		—
Total assets measured at fair value	$	182,665	$	141,718	$	40,947	$	—
Liabilities
Derivative liabilities associated with the Medicis settlement	$	2,022	$	—	$	—	$	2,022
Total liabilities measured at fair value	$	2,022	$	—	$	—	$	2,022

The fair value of the U.S. government agency obligations is estimated by taking into consideration valuations obtained from third-party pricing services. The pricing services 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 reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data, and other observable inputs. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. The Company did not transfer any assets or liabilities measured at fair value on a recurring basis between Level 1 and Level 2 during the three months ended March 31, 2017 and the year ended December 31, 2016.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments as follows (in thousands):

	Derivative Liability Associated with the Medicis Settlement
Fair value as of December 31, 2016	$	2,022
Change in fair value	60
Fair value as of March 31, 2017	$	2,082

The fair value of the derivative liability resulting from the Medicis litigation settlement was determined by estimating the timing and probability of the related regulatory approval and multiplying the payment amount by this probability percentage and a discount factor based primarily on the estimated timing of the payment and a credit risk adjustment (Note 4). Generally, increases or decreases in these unobservable inputs would result in a directionally similar impact to the fair value measurement of this derivative instrument. The significant unobservable inputs used in the fair value measurement of the Product Approval Payment derivative are the expected timing and probability of the payments at the valuation date and the credit risk adjustment.