Fair Value Measurements

3 Months Ended

Mar. 31, 2015

Fair Value Measurements

Fair Value Measurements

E.FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy as of March 31, 2015 and December 31, 2014 for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):

	Fair Value Measurements at March 31, 2015 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	$	193,868	$	193,868	$	—	$	—
Corporate debt securities	62,567		—		62,567		—
Commercial paper	30,461		—		30,461		—
Certificates of deposit	14,999		—		14,999		—
Municipal securities	9,311		—		9,311		—
Total Assets	$	311,206	$	193,868	$	117,338	$	—
Liabilities:
Contingent consideration - Lumara Health	$	209,037	$	—	$	—	$	209,037
Contingent consideration - MuGard	12,222		—		—		12,222
Total Liabilities	$	221,259	$	—	$	—	$	221,259

	Fair Value Measurements at December 31, 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	$	77,254	$	77,254	$	—	$	—
Corporate debt securities	24,890		—		24,890		—
Total Assets	$	102,144	$	77,254	$	24,890	$	—
Liabilities:
Contingent consideration - Lumara Health	$	206,600	$	—	$	—	$	206,600
Contingent consideration - MuGard	12,102		—		—		12,102
Total Liabilities	$	218,702	$	—	$	—	$	218,702

Investments

Our money market funds are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets without any valuation adjustment. Our investments are classified as Level 2 assets under the fair value hierarchy as these assets were 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 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 March 31, 2015. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the three months ended March 31, 2015.

Contingent consideration

We accounted for the acquisitions of Lumara Health and the MuGard Rights as business combinations under the acquisition method of accounting. Additional details regarding the Lumara Health acquisition and the MuGard License Agreement can be found in Note C, “Business Combinations” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are determined using unobservable inputs (“Level 3”). 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 the acquisition of Lumara Health and the MuGard Rights measured on a recurring basis using Level 3 inputs as of March 31, 2015 (in thousands):

Balance as of December 31, 2014	$	218,702
Payments made	(84		)
Adjustments to fair value of contingent consideration	2,599
Other adjustments	42
Balance as of March 31, 2015	$	221,259

The $2.6 million increase in the fair value of the contingent consideration liability was due to the time value of money. This adjustment is included in selling, general and administrative expenses in our condensed consolidated statements of operations. We have classified all of the Lumara Health contingent consideration as a long-term liability in our condensed consolidated balance sheet as of March 31, 2015. We have classified $0.7 million of the MuGard contingent consideration as a short-term liability, which was included in accrued expenses in our condensed consolidated balance sheet as of March 31, 2015.

The fair value of the contingent milestone payments payable by us to the former stockholders of Lumara Health was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of Makena from December 1, 2014 through December 31, 2019. The cash flows were discounted at a rate of 5%, which we believe is reasonable given the level of certainty of the pay-out.

The fair value of the contingent royalty payments payable by us to PlasmaTech was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately 15%. As of March 31, 2015, we estimate that the undiscounted royalty amounts we could pay under the MuGard License Agreement may range from $20.0 million to $28.0 million over a ten year period beginning 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 values of Lumara Health and the MuGard Rights are based on reasonable assumptions, however, we cannot provide assurance that the underlying assumptions used to forecast the cash flows will materialize as we estimated and thus, our actual results may vary significantly from the estimated results.

Debt

In February 2014, we issued $200.0 million of 2.5% convertible senior notes due February 15, 2019 (the “Convertible Notes”). As of March 31, 2015, the fair value of our Convertible Notes was approximately $433.5 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 November 2014, we borrowed $340.0 million under a term loan facility to fund a portion of the purchase price of Lumara Health (the “Term Loan Facility”). The fair value of our outstanding borrowings under the Term Loan Facility was approximately $345.7 million at March 31, 2015, which differs from their carrying values. The fair value of our Term Loan debt is influenced by interest rates, which are Level 2 inputs.

See Note P, “Debt,” for additional information on our debt obligations.