Fair Value Measurements |
5. Fair Value Measurements
We record the contingent consideration liability resulting from the Molecular Insight Pharmaceuticals, Inc. (MIP) acquisition at fair value in accordance with ASC 820-10-50.
The following tables present our money market funds 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 June 30, 2015 | | | Balance at June 30, 2015 | | | 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 | | $ | 92,829 | | | $ | 92,829 | | | $ | - | | | $ | - | Total Assets | | $ | 92,829 | | | $ | 92,829 | | | $ | - | | | $ | - | | | | | | | | | | | | | | | | | Liability: | | | | | | | | | | | | | | | | Contingent consideration | | $ | 18,300 | | | $ | - | | | $ | - | | | $ | 18,300 | Total Liability | | $ | 18,300 | | | $ | - | | | $ | - | | | $ | 18,300 |
| | | | | 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 |
The estimated fair value of the contingent consideration liability of $18,300 as of June 30, 2015, 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.
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 table presents quantitative information pertaining to the June 30, 2015 fair value measurement of the Level 3 inputs. The assumptions remained unchanged since December 31, 2014:
| | Fair Value as of June 30, 2015 | | | Fair Value as of December 31, 2014 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | | | | | | | | | | | | | | | Contingent consideration liability: | | | | | | | | | | | | | Azedra commercialization | | $ | 2,400 | | | $ | 2,300 | | Probability adjusted discounted cash flow model | | Probability of success | | | 40% | | | | | | | | | | | | | Period of milestone expected achievement | | | 2018 | | | | | | | | | | | | | Discount rate | | | 10% | | | | | | | | | | | | | | | | | | 1404 commercialization | | $ | 4,000 | | | $ | 3,800 | | Probability adjusted discounted cash flow model | | Probability of success | | | 59% | | | | | | | | | | | | | Period of milestone expected achievement | | | 2019 | | | | | | | | | | | | | Discount rate | | | 10% | | | | | | | | | | | | | | | | | | MIP-1095 commercialization | | $ | 500 | | | $ | 400 | | Probability adjusted discounted cash flow model | | Probability of success | | | 19% | | | | | | | | | | | | | Period of milestone expected achievement | | | 2023 | | | | | | | | | | | | | Discount rate | | | 10% | | | | | | | | | | | | | | | | | | Net sales targets | | $ | 11,400 | | | $ | 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% | |
(1) | At June 30, 2015 and 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. |
For those financial instruments with significant Level 3 inputs, the following table summarizes the activities for the periods indicated:
| | Liability – Contingent Consideration Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Three Months Ended June 30, | | | 2015 | | | 2014 | Description | | | | | | Balance at beginning of period | | $ | 17,500 | | | $ | 16,200 | Fair value change to contingent consideration included in net loss | | | 800 | | | | 400 | Balance at end of period | | $ | 18,300 | | | $ | 16,600 | 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 | | $ | 800 | | | $ | 400 |
| | Liability – Contingent Consideration Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Six Months Ended June 30, | | | 2015 | | | 2014 | Description | | | | | | Balance at beginning of period | | $ | 17,200 | | | $ | 15,700 | Fair value change to contingent consideration included in net loss | | | 1,100 | | | | 900 | Balance at end of period | | $ | 18,300 | | | $ | 16,600 | 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 | | $ | 1,100 | | | $ | 900 |
|