Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of September 30, 2019 and December 31, 2018, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):

	Fair Value Measurements at September 30, 2019 Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents	$	25,047	$	25,047	$	—	$	—
Marketable securities:
Corporate debt securities	62,000		—		62,000		—
U.S. treasury and government agency securities	6,244		—		6,244		—
Certificates of deposit	3,500		—		3,500		—
Commercial paper	—		—		—		—
Total marketable securities	$	71,744	$	—	$	71,744	$	—
Total assets	$	96,791	$	25,047	$	71,744	$	—
Liabilities:
Contingent consideration - MuGard	$	293	$	—	$	—	$	293
Total liabilities	$	293	$	—	$	—	$	293

	Fair Value Measurements at December 31, 2018 Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents	$	71,568	$	71,568	$	—	$	—
Corporate debt securities	113,097		—		113,097		—
U.S. treasury and government agency securities	10,323		—		10,323		—
Certificates of deposit	13,500		—		13,500		—
Commercial paper	3,995		—		3,995		—
Total assets	$	212,483	$	71,568	$	140,915	$	—
Liabilities:
Contingent consideration - MuGard	359		—		—		359
Total liabilities	$	359	$	—	$	—	$	359

Cash Equivalents

Our cash equivalents are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. As of September 30, 2019 and December 31, 2018 cash equivalents were primarily comprised of funds in money market accounts.

Marketable Securities

Our marketable securities are classified as Level 2 assets under the fair value hierarchy as the values of these assets are primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value

measurements provided by our pricing services as of September 30, 2019. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the nine months ended September 30, 2019.

Contingent Consideration

We recorded contingent consideration related to the November 2014 acquisition of Lumara Health Inc (“Lumara Health”) for our Makena product and related to our June 2013 license agreement for MuGard (the “MuGard License Agreement”) with Abeona Therapeutics, Inc., under which we acquired the U.S. commercial rights for the management of oral mucositis and stomatitis (the “MuGard Rights”).

During the nine months ended September 30, 2018, we reduced the fair value of our Makena-related contingent consideration liability by approximately $49.2 million based primarily on actual Makena net sales to date and our expectations for future performance, which indicated that achievement of future milestones was not probable. This adjustment was based on our estimates, which were reliant on a number of external factors as well as the exercise of judgment.

The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are classified as Level 3 estimates under the fair value hierarchy as these items have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

The fair value of the contingent royalty payments payable by us to Abeona under the MuGard License Agreement was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately 13%. As of September 30, 2019, we estimated that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from approximately $0.3 million to $0.6 million over the remainder of the ten year period, which commenced on June 6, 2013, the acquisition date, which is our best estimate of the period over which we expect the majority of the asset’s cash flows to be derived.

We believe the estimated fair value of contingent consideration obligations is based on reasonable assumptions; however, our actual results may vary significantly from the estimated results.

Debt

We estimate the fair value of our debt obligations by using quoted market prices obtained from third-party pricing services, which are classified as Level 2 inputs. As of September 30, 2019, the estimated fair value of our 2022 Convertible Notes (as defined below) was $265.6 million, which differed from its carrying value. See Note R, “Debt” for additional information on our debt obligations.