BUSINESS COMBINATIONS AND CONTINGENT CONSIDERATION

(a) Acquisition of Talon Therapeutics, Inc.

Overview of Talon Acquisition

On July 17, 2013, we purchased all of the outstanding shares of common stock of Talon Therapeutics, Inc. (“Talon”). Through the acquisition of Talon, we gained worldwide rights to MARQIBO. We accounted for this transaction as a business combination, which required that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the transaction date. The Talon purchase consideration comprised of (i) an aggregate upfront cash amount of $11.3 million, (ii) issuance of 3.0 million shares of our common stock, then equivalent to $26.3 million (based on a closing price of $8.77 per share on July 17, 2013), and (iii) the issuance of contingent value rights (“Talon CVR”) initially valued at $6.5 million.

The Talon CVR was valued using a valuation model that probability-weights expected outcomes (ranging from 50% to 100%) and discounts those amounts to their present value, using an appropriate discount rate (these represent unobservable inputs and are therefore classified as Level 3 inputs – see Note 2 (xiii)). The Talon CVR has a maximum payout of $195 million if all sales and regulatory approval milestones are achieved, as summarized below:


•	$5 million upon the achievement of net sales of MARQIBO in excess of $30 million in any calendar year


•	$10 million upon the achievement of net sales of MARQIBO in excess of $60 million in any calendar year


•	$25 million upon the achievement of net sales of MARQIBO in excess of $100 million in any calendar year


•	$50 million upon the achievement of net sales of MARQIBO in excess of $200 million in any calendar year


•	$100 million upon the achievement of net sales of MARQIBO in excess of $400 million in any calendar year


•	$5 million upon receipt of marketing authorization from the FDA regarding Menadione Topical Lotion

Talon CVR Fair Value as of December 31, 2017 and December 31, 2016

The Talon CVR fair value will continue to be evaluated on a quarterly basis. Current and future changes in its fair value results from the likelihood and timing of milestone achievement and/or the corresponding discount rate applied thereon. Adjustments to Talon CVR fair value are recognized within “change in fair value of contingent consideration related to acquisitions” in the accompanying Consolidated Statements of Operations.



	Fair Value of Talon CVR
December 31, 2016	$	1,253
Fair value adjustment for the year ended December 31, 2017	4,957
December 31, 2017	$	6,210

(b) Acquisition of Rights to EVOMELA and Related Contingent Consideration

Overview of Acquisition of Rights to EVOMELA

In March 2013, we completed the acquisition of exclusive global development and commercialization rights to Captisol-enabled®, propylene glycol-free MELPHALAN (which we market as “EVOMELA”) for use as a conditioning treatment prior to autologous stem cell transplant for patients with MM. We acquired these rights from CyDex, a wholly-owned subsidiary of Ligand, for an initial license fee of $3 million, and assumed responsibility for EVOMELA's then-ongoing clinical and regulatory development program. We accounted for this transaction as a business combination, which required that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the transaction date.

We are required to pay Ligand additional amounts up to an aggregate $60 million, upon the achievement of annual net sales thresholds (exclusive of the $6 million milestone payment triggered in March 2016, as discussed below), however, we do not expect to achieve these sales thresholds based on our estimated market size for this product and our projected market share at the time of the acquisition and to date. We also must pay Ligand royalties of 20% on our net sales of EVOMELA in all territories.

Our EVOMELA royalty obligation and sales-based milestones are jointly treated as part of an "executory contract" (as defined under GAAP) that is connected with an at-market supply agreement for Captisol that was executed concurrently with this acquistion (requiring the continuing involvement of CyDex). As a result, our royalty and sales-based milestone arrangements are treated as separate transactions, distinct from the consideration paid for the EVOMELA rights. Our royalty expenses are reported through "cost of sales" on our Consolidated Statement of Operations in the same period of our recognized revenue for the product sale.

Consideration Transferred

The acquisition-date fair value of the consideration transferred consisted of the following:



Cash consideration	$	3,000
Ligand Contingent Consideration	4,700
Total purchase consideration	$	7,700

Fair Value Estimate of Asset Acquired and Liability Assumed

The total purchase consideration is allocated to the acquisition of the net tangible and intangible assets based on their estimated fair values as of the transaction date. The allocation of the total purchase price to the net assets acquired is as follows:



IPR&D EVOMELA rights	$	7,700

We estimated the fair value of the in-process research and development using the income approach. The income approach uses valuation techniques to convert future net cash flows to a single present value (discounted) amount. We applied our net cash flow projections for EVOMELA over 10 years and a discount rate of 25%, taking into account our estimates of future incremental earnings that may be achieved upon regulatory approval and commercialization of the product(s). The fair value of the Ligand Contingent Consideration liability was determined using the probability of success and the discounted cash flow method of the income approach (representing unobservable "Level 3" inputs (see Note 2(xiii)) for regulatory and sales-based milestones due to Ligand upon achievement).

In March 2016, the FDA approved EVOMELA, triggering a $6 million milestone payment to Ligand that was paid in April 2016. "EVOMELA IPR&D" of $7.7 million was reclassified in April 2016 to "EVOMELA" distribution rights" that is reported within "Intangible assets, net of accumulated amortization and impairment charges" in the accompanying Consolidated Balance Sheets as of December 31, 2017 (see Note 3(g)). Amortization related to this intangible asset commenced on April 1, 2016.

Ligand Contingent Consideration Fair Value as of December 31, 2016

The fair value of the Ligand Contingent Consideration immediately prior to its payment was the full $6 million payment due upon EVOMELA's FDA approval. Accordingly, in the first quarter of 2016, we recorded a $0.8 million adjustment to the “change in fair value of the contingent consideration related to acquisitions” in the accompanying Consolidated Statements of Operations. We have no further contingent consideration obligations as part of this transaction.



	Fair Value of Ligand Contingent Consideration
December 31, 2015	$	5,227
Fair value adjustment for the three months ended March 31, 2016	773
Payment to Ligand in April 2016 for FDA approval milestone achievement	(6,000		)
December 31, 2016	$	—

We acquired Allos Therapeutics, Inc. on September 5, 2012 for cash consideration of $205.2 million and assumed FOLOTYN distribution rights (see Note 16). We accounted for this transaction as a business combination, which required that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the transaction date. We have no ongoing contingent consideration obligations from this transaction.