3. Fair Value Measurements

During the fourth quarter of 2014, all of the $2,208 (net of $192 unrealized loss) auction rate securities remaining at December 31, 2013 have been redeemed at par.

We record auction rate securities at fair value in the accompanying Consolidated Balance Sheets in accordance with ASC 320 Investments – Debt and Equity Securities. The change in the fair value of these securities is recorded as a component of other comprehensive (loss) income. We also record the contingent consideration liability resulting from the MIP acquisition at fair value in accordance with ASC 820-10-50.

PROGENICS PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

(amounts in thousands, except per share amounts or as otherwise noted)

The following tables present our money market funds, included in cash and cash equivalents, auction rate securities assets in 2013, and contingent consideration liability measured at fair value on a recurring basis as of the dates indicated, classified by valuation hierarchy:

			Fair Value Measurements at December 31, 2014
	Balance at December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	112,808	$	112,808	$	-	$	-
Total Assets	$	112,808	$	112,808	$	-	$	-

Liability:
Contingent consideration	$	17,200	$	-	$	-	$	17,200
Total Liability	$	17,200	$	-	$	-	$	17,200

			Fair Value Measurements at December 31, 2013
	Balance at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	60,364	$	60,364	$	-	$	-
Auction rate securities		2,208		-		-		2,208
Total Assets	$	62,572	$	60,364	$	-	$	2,208

Liability:
Contingent consideration	$	15,700	$	-	$	-	$	15,700
Total Liability	$	15,700	$	-	$	-	$	15,700

At December 31, 2013, we held $2,208 in auction rate securities which were classified as Level 3. The fair value of these securities included U.S. government subsidized securities collateralized by student loan obligations, with maturities greater than 10 years. We have received all scheduled interest payments on these securities.

The valuation of auction rate securities we held was based on Level 3 unobservable inputs which consisted of our internal analysis of (i) timing of expected future successful auctions or issuer calls of the securities, (ii) collateralization of underlying assets of the security and (iii) credit quality of the security. Due to the 2014 redemption of auction rate securities, the temporary impairment amount of $192 as of December 31, 2013 has been reversed, which is reflected in the accumulated other comprehensive income (loss) on our accompanying Consolidated Balance Sheets.

The estimated fair value of the contingent consideration liability of $17,200 as of December 31, 2014, represents future potential milestone payments to former MIP stockholders. The Company considers this liability a Level 3 instrument (one with significant unobservable inputs) in the fair value hierarchy. The estimated fair value was determined based on probability adjusted discounted cash flow and Monte Carlo simulation models that included significant estimates and assumptions pertaining to commercialization events and sales targets. The most significant unobservable inputs were the probabilities of achieving regulatory approval of the development projects and subsequent commercial success, and discount rates.

PROGENICS PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

(amounts in thousands, except per share amounts or as otherwise noted)

Significant changes in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant changes in the probabilities as to the periods in which milestones will be achieved would result in a significantly lower or higher fair value measurement, respectively. The Company records the contingent consideration liability at fair value with changes in estimated fair values recorded in change in contingent consideration liability in the Consolidated Statements of Operations.

The following tables present quantitative information pertaining to the fair value measurement of the Level 3 inputs as of December 31, 2014 and 2013:

	Fair Value as of December 31, 2014		Valuation Technique	Unobservable Input	Range (Weighted Average)
Contingent consideration liability:

Azedra commercialization	$	2,300	Probability adjusted discounted cash flow model	Probability of success		40%
				Period of milestone expected achievement		2018
				Discount rate		10%

1404 commercialization	$	3,800	Probability adjusted discounted cash flow model	Probability of success		59%
				Period of milestone expected achievement		2019
				Discount rate		10%

MIP-1095 commercialization	$	400	Probability adjusted discounted cash flow model	Probability of success		19%
				Period of milestone expected achievement		2023
				Discount rate		10%

Net sales targets	$	10,700	Monte-Carlo simulation	Probability of success		19% - 59% (37.4%)
				Period of milestone expected achievement		2019 - 2026
				Discount rates⁽¹⁾		12%/3.5%

	Fair Value as of December 31, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
Asset:
Auction Rate Securities	$	2,208	Discounted cash flow model	Redemption period	5 to 15 years (6 years)
				Discount rate		0.25% - 3.00% (1.55%)
Contingent consideration liability:

Azedra commercialization	$	2,300	Probability adjusted discounted cash flow model	Probability of success		40%
				Period of milestone expected achievement		2017
				Discount rate		10%

1404 commercialization	$	2,000	Probability adjusted discounted cash flow model	Probability of success		31%
				Period of milestone expected achievement		2018
				Discount rate		10%

MIP-1095 commercialization	$	500	Probability adjusted discounted cash flow model	Probability of success		19%
				Period of milestone expected achievement		2021
				Discount rate		10%

Net sales targets	$	10,900	Monte-Carlo simulation	Probability of success		19% - 40% (32.8%)
				Period of milestone expected achievement		2018 - 2022
				Discount rate⁽¹⁾		12.5%

⁽¹⁾ At December 31, 2014, net sales targets contingent consideration liability was derived from a model under a risk neutral framework resulting in the application of 12% and 3.5% discount rates to estimated cash flows.

PROGENICS PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

(amounts in thousands, except per share amounts or as otherwise noted)

For those financial instruments with significant Level 3 inputs, the following table summarizes the activities for the periods indicated:

	Asset – Auction Rate Securities Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Description	2014			2013
Balance at beginning of period	$	2,208		$	3,240
Transfers into Level 3		-			-
Total realized/unrealized gains (losses)
Included in net income (loss)		-			-
Included in comprehensive income (loss)		192			68
Settlements		(2,400	)		(1,100	)
Balance at end of period	$	-		$	2,208
Total amount of unrealized gains (losses) for the period included in other comprehensive income (loss) attributable to the change in fair market value of related assets still held at the reporting date	$	-		$	-

	Liability – Contingent Consideration Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Description	2014		2013
Balance at beginning of period	$	15,700	$	-
Fair value of contingent consideration – acquisition of Molecular Insight		-		15,900
Fair value adjustment to contingent consideration included in net income (loss)		1,500		(200	)
Balance at end of period	$	17,200	$	15,700
Changes in unrealized gains or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period	$	1,500	$	(200	)

The following tables summarize the amortized cost basis, the aggregate fair value and gross unrealized holding gains and losses at December 31, 2013:

	Amortized		Fair		Unrealized Holding
2013:	Cost Basis		Value		Gains		(Losses)			Net
Maturities greater than ten years:
Auction rate securities	$	2,400	$	2,208	$	-	$	(192	)	$	(192	)
	$	2,400	$	2,208	$	-	$	(192	)	$	(192	)

PROGENICS PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

(amounts in thousands, except per share amounts or as otherwise noted)

We compute the cost of its investments on a specific identification basis. Such cost includes the direct costs to acquire the securities, adjusted for the amortization of any discount or premium.

The following table shows the gross unrealized losses and fair value of our auction rate securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013.

2013:	Less than 12 Months				12 Months or Greater					Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Auction rate securities	$	-	$	-	$	2,208	$	(192	)	$	2,208	$	(192	)
Total	$	-	$	-	$	2,208	$	(192	)	$	2,208	$	(192	)

Other-than-temporary impairment analysis on auction rate securities. The unrealized losses on our auction rate securities resulted from an internal analysis of timing of expected future successful auctions, collateralization of underlying assets of the security and credit quality of the security. At December 31, 2013 there was one security with a gross unrealized loss position of $192 ($2,208 of the total fair value).

The severity of the unrealized losses for auction rate securities at December 31, 2013 was 8 percent below amortized cost, and the weighted average duration of the unrealized losses for these securities was 70 months.

We have evaluated our individual auction rate securities holdings for other-than-temporary impairment and determined that the unrealized losses as of December 31, 2013 were attributable to uncertainty in the liquidity of the auction rate security market. We did not consider these securities to be other-than-temporarily impaired at December 31, 2013.