Fair Value Measurements

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements. Our financial assets carried at fair value measured on a recurring basis as of September 30, 2014 and December 31, 2013, consisted of the following (in thousands):

			Fair Value Measurements Using
	Total Fair		Quoted prices in		Significant other		Significant
	Value at		active markets		observable inputs		unobservable inputs
Description	September 30, 2014		(Level 1)		(Level 2)		(Level 3)
Interest rate swap (1)	$	1,137	$	—	$	1,137	$	—
			Fair Value Measurements Using
	Total Fair		Quoted prices in		Significant other		Significant
	Value at		active markets		observable inputs		unobservable inputs
Description	December 31, 2013		(Level 1)		(Level 2)		(Level 3)
Interest rate swap (1)	$	1,203	$	—	$	1,203	$	—

(1)    The fair value of the interest rate swap is determined based on forward yield curves.

Certain of our business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue milestones. The contingent consideration liability is re-measured at the estimated fair value at each reporting period with the change in fair value recognized as contingent consideration benefit in the accompanying consolidated statements of income. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent consideration liability during the three and nine-month periods ended September 30, 2014 and 2013, were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Beginning balance	$	2,507		$	6,692		$	2,526		$	6,697
Fair value adjustments recorded to expense during the period	(773		)	(4,108		)	(754		)	(4,075		)
Contingent payments made	(17		)	(22		)	(55		)	(60		)
Ending balance	$	1,717		$	2,562		$	1,717		$	2,562

The recurring Level 3 measurement of our contingent consideration liability includes the following significant unobservable inputs at September 30, 2014 (in thousands):

Contingent consideration liability	Fair value at September 30, 2014		Valuation technique	Unobservable inputs	Range
Revenue-based payments	$	1,462	Discounted cash flow	Discount rate	1% - 14%
				Probability of milestone payment	90%
				Projected year of payments	2014-2028
Other payments	$	255	Discounted cash flow	Discount rate	5%
				Probability of milestone payment	100%
				Projected year of payments	2015-2016

The contingent consideration liability is re-measured to fair value each reporting period using projected revenues, discount rates, probabilities of payment, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. A decrease in the probability of any milestone payment may result in lower fair value measurements. An increase (decrease) in either the discount rate or the time to payment, in isolation, may result in a significantly lower (higher) fair value measurement.

Our determination of the fair value of the contingent consideration liability could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to selling, general, and administrative expenses in our consolidated statements of income. As of September 30, 2014, approximately $1.4 million was included in other long-term obligations and $365,000 was included in accrued expenses in our consolidated balance sheet. As of December 31, 2013, approximately $2.3 million was included in other long-term obligations and $274,000 was included in accrued expenses in our consolidated balance sheet. The cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows. See Note 12 for further information regarding the $874,000 of fair value reductions to the contingent consideration liability we incurred in connection with our acquisition of the Ostial assets and the associated intangible asset impairment charge.

During the three and nine-month periods ended September 30, 2014, we had losses of approximately $1.2 million and $1.4 million, respectively, compared to $8.1 million and $8.2 million for the corresponding three and nine-month periods ended September 30, 2013, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition. 

Of the loss amount noted in the preceding paragraph for the three and nine-month periods ended September 30, 2014, approximately $1.1 million related to the impairment of our intangible assets related to our Ostial acquisition (see Note 12). The non-recurring fair values of the Ostial intangible assets as of September 30, 2014 were approximately $447,000 for developed technology. Determining the fair value is judgmental in nature and requires the use of significant estimates and assumptions, which are considered to be Level 3 inputs. These values were determined using a discounted cash flow valuation technique. We did not have other intangible assets measured at fair value on a non-recurring basis as of September 30, 2014.

The carrying amount of cash and cash equivalents, receivables, and trade payables approximates fair value because of the immediate, short-term maturity of these financial instruments. The carrying amount of long-term debt approximates fair value, as determined by borrowing rates estimated to be available to us for debt with similar terms and conditions. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents, which are valued using Level 1 inputs.