Fair Value Measurements

6 Months Ended

Jun. 30, 2014

Fair Value Measurements

Fair Value Measurements

D.Fair Value Measurements

The following tables represent the fair value hierarchy as of June 30, 2014 and December 31, 2013 for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):

	Fair Value Measurements at June 30, 2014 Using:
			Quoted Prices in Active Markets for Identical  Assets		Significant Other  Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	196,826	$	196,826	$	—	$	—
Corporate debt securities	131,274		—		131,274		—
U.S. treasury and government agency securities	51,642		—		51,642		—
Commercial paper	1,500		—		1,500		—
Total Assets	$	381,242	$	196,826	$	184,416	$	—
Liabilities:
Acquisition-related contingent consideration	$	15,741	—		—		15,741
Total Liabilities	$	15,741	$	—	$	—	$	15,741

	Fair Value Measurements at December 31, 2013 Using:
			Quoted Prices in Active Markets for Identical  Assets		Significant Other  Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	18,767	$	18,767	$	—	$	—
Corporate debt securities	134,123		—		134,123		—
U.S. treasury and government agency securities	52,680		—		52,680		—
Total Assets	$	205,570	$	18,767	$	186,803	$	—
Liabilities:
Acquisition-related contingent consideration	$	14,550	$	—	$	—	$	14,550
Total Liabilities	$	14,550	$	—	$	—	$	14,550

With the exception of our money market funds and our acquisition-related contingent consideration, the fair value of our investments is primarily determined from independent pricing services. Independent pricing services 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 analyses of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analyses, we did not adjust or override any fair value measurements provided by our pricing services as of June 30, 2014. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the six months ended June 30, 2014.

Contingent consideration

We are accounting for the acquisition of the MuGard Rights as a business combination under the acquisition method of accounting. Additional details regarding the Access License Agreement and the MuGard Rights can be found in Note H, “Business Combination.”  The fair value measurements of contingent consideration obligations arising from business combinations are determined using unobservable, or Level 3, 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 following table presents a reconciliation of contingent consideration obligations related to our acquisition of the MuGard Rights measured on a recurring basis using Level 3 inputs as of June 30, 2014 (in thousands):

Balance as of December 31, 2013	$	14,550
Payments made	(90		)
Adjustments to fair value of contingent consideration	1,178
Other adjustments	103
Balance as of June 30, 2014	$	15,741

During the three and six months ended June 30, 2014, we recorded an expense of $0.4 million and $1.2 million, respectively, related to the increase in fair value of the contingent consideration liability. This expense principally represents the time value of money impact of the contingent consideration fair value assessment as of June 30, 2014 and is included in selling, general and administrative expenses in our condensed consolidated statements of operations. As of June 30, 2014, we estimate that the undiscounted royalty amounts we could pay under the Access License Agreement may range from $28.0 million to $34.0 million over a ten year period beginning on 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. This measure is based on significant Level 3 inputs not observable in the market. Key assumptions include a discount rate of approximately 15%. We have classified $1.6 million of the contingent consideration as a short-term liability, which was included in accrued expenses in our condensed consolidated balance sheet as of June 30, 2014.

Debt

In February 2014, we issued $200.0 million of 2.5% convertible senior notes due February 15, 2019, or the Convertible Notes. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2014. As of June 30, 2014, the fair value of our Convertible Notes was $211.3 million, which differs from their carrying values. The fair value of our Convertible Notes is influenced by interest rates and our stock price and stock price volatility and is determined by prices for the Convertible Notes observed in market trading, which are Level 2 inputs. In addition, in connection with the pricing of the Convertible Notes, we entered into convertible bond hedge transactions, or convertible bond hedges, and separate warrant transactions, or warrants, as discussed in more detail in Note P, “Debt.”