Fair Value Measurements

9 Months Ended

Sep. 30, 2015

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 September 30, 2015
	Balance at September 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	$	84,838	$	84,838	$	-	$	-
Total Assets	$	84,838	$	84,838	$	-	$	-

Liability:
Contingent consideration	$	18,100	$	-	$	-	$	18,100
Total Liability	$	18,100	$	-	$	-	$	18,100

			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 $18,100 as of September 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 September 30, 2015 fair value measurement of the Level 3 inputs. The first nine months of 2015 resulted in a $900 increase in the contingent consideration liability, from $17,200 to $18,100 resulting primarily from a nine month decrease in the discount period, a 0.1% increase in the risk-free rate and a 5% increase in asset volatility which affects the probability adjusted cash flow. The following additional assumptions remained unchanged since December 31, 2014:

	Fair Value as of September 30, 2015		Fair Value as of December 31, 2014		Valuation Technique	Unobservable Input	Range (Weighted Average)

Contingent consideration liability:
Azedra commercialization	$	2,500	$	2,300	Probability adjusted discounted cash flow model	Probability of success		40	%
						Period of milestone expected achievement		2018
						Discount rate		10	%

1404 commercialization	$	4,100	$	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	$	11,000	$	10,700	Monte-Carlo simulation	Probability of success		19% - 59% (37.4	%)
						Period of milestone expected achievement		2019 - 2025
						Discount rates ⁽¹⁾		12%/3.5	%

⁽¹⁾	At September 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 September 30,
	2015			2014
Description
Balance at beginning of period	$	18,300		$	16,600
Fair value change to contingent consideration included in net (loss) income		(200	)		500
Balance at end of period	$	18,100		$	17,100
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	$	(200	)	$	500

	Liability – Contingent Consideration Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Nine Months Ended September 30,
	2015		2014
Description
Balance at beginning of period	$	17,200	$	15,700
Fair value change to contingent consideration included in net (loss) income		900		1,400
Balance at end of period	$	18,100	$	17,100
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	$	900	$	1,400

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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