Fair Value Measurements

6 Months Ended

Jun. 30, 2016

Note 5. Fair Value Measurements

To estimate the fair values of our financial assets and liabilities, we use valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:

·	Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access

·	Level 2 – Valuations for which all significant inputs are observable, either directly or indirectly, other than Level 1 inputs

·	Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.

We believe the carrying amounts of our cash equivalents, accounts receivable, other current assets, other assets, accounts payable and accrued expenses approximated their fair values as of June 30, 2016 and December 31, 2015.

We record the contingent consideration liability resulting from our acquisition of Molecular Insight Pharmaceuticals, Inc. ("MIP") at fair value in accordance with Accounting Standards Codification ("ASC") 820 (Topic 820, Fair Value Measurement).

The following tables summarize each major class of our financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated, classified by valuation hierarchy (in thousands):

			Fair Value Measurements at June 30, 2016
	Balance at June 30, 2016		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	$	58,587	$	58,587	$	-	$	-
Total assets	$	58,587	$	58,587	$	-	$	-

Liabilities:
Contingent consideration liability	$	19,600	$	-	$	-	$	19,600
Total liabilities	$	19,600	$	-	$	-	$	19,600

			Fair Value Measurements at December 31, 2015
	Balance at December 31, 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	$	68,140	$	68,140	$	-	$	-
Total assets	$	68,140	$	68,140	$	-	$	-

Liabilities:
Contingent consideration liability	$	18,800	$	-	$	-	$	18,800
Total liabilities	$	18,800	$	-	$	-	$	18,800

The estimated fair value of the contingent consideration liability of $19.6 million as of June 30, 2016, represents future potential milestone payments to former MIP stockholders. We consider 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 are 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. We record the contingent consideration liability at fair value with changes in estimated fair values recorded in change in contingent consideration liability in our condensed consolidated statements of operations.

The following table summarizes quantitative information and assumptions pertaining to the fair value measurement of the Level 3 inputs at June 30, 2016 and December 31, 2015 (in thousands). The increase in the contingent consideration liability of $800 thousand during the six months ended June 30, 2016 was primarily attributable to a decrease in the discount period.

	Fair Value at
	June 30, 2016		December 31, 2015		Valuation Technique	Unobservable Input	Range (Weighted-Average)
Contingent Consideration Liability:
AZEDRA commercialization	$	2,600	$	2,500	Probability adjusted discounted cash flow model	Probability of success	40%
						Period of expected milestone achievement	2018
						Discount rate	10%

1404 commercialization		4,400		4,200	Probability adjusted discounted cash flow model	Probability of success	59%
						Period of expected milestone achievement	2019
						Discount rate	10%

1095 commercialization		500		500	Probability adjusted discounted cash flow model	Probability of success	19%
						Period of expected milestone achievement	2023
						Discount rate	10%

Net sales targets		12,100		11,600	Monte-Carlo simulation	Probability of success	19%- 59% (37%)
						Period of expected milestone achievement	2019-2022 at June 30, 2016 2019-2025 at December 31, 2015
						Discount rate ⁽¹⁾	11%/4.3% at June 30, 2016 12%/3.5% at December 31, 2015
Total	$	19,600	$	18,800

(1) The contingent consideration liability related to the net sales targets was derived from a model under a risk neutral framework resulting in the application of 11 % and 4.3 % at June 30, 2016 and 12 % and 3.5 % at December 31, 2015, discount rates to estimated cash flows.

For those financial instruments with significant Level 3 inputs, the following tables summarize 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,
	2016		2015
Balance at beginning of period	$	19,000	$	17,500
Fair value change included in net loss		600		800
Balance at end of period	$	19,600	$	18,300
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	$	600	$	800

	Liability – Contingent Consideration Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Six Months Ended June 30,
	2016		2015

Balance at beginning of period	$	18,800	$	17,200
Fair value change included in net loss		800		1,100
Balance at end of period	$	19,600	$	18,300
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	$	1,100

Note 6. Accounts Receivable

- 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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