Fair Value of financial instruments

9 Months Ended

Sep. 30, 2016

Fair value of financial instruments.

Fair value of financial instruments

4.     Fair value of financial instruments

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value we use quoted prices and observable inputs. 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. The fair value hierarchy is broken down 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.

Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

Recurring Fair Value Measurements

Our marketable securities consist of investments in corporate debt securities that are classified as available-for-sale.

At September 30, 2016 and December 31, 2015, our Level 2 corporate debt securities were valued using readily available pricing sources which utilize market observable inputs, including the current interest rate and other characteristics for similar types of investments.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis as of September 30, 2016 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		September 30, 2016
Cash and cash equivalents	$	580,099	$	—	$	—	$	580,099
Corporate debt securities		—		136,486		—		136,486
Long term investment (Note 9)		55,745		—		—		55,745
Total assets	$	635,844	$	136,486	$	—	$	772,330

The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as of September 30, 2016 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		September 30, 2016
Contingent consideration (Note 3)	$	—	$	—	$	298,000	$	298,000
Total liabilities	$	—	$	—	$	298,000	$	298,000

The following is a rollforward of our Level 3 liabilities (in thousands):

	Level 3
Balance at January 1, 2016	$	—
Initial recognition of contingent consideration		293,000
Contingent consideration earned during the period but not yet paid		(4,012)
Payments made during the period		(1,271)
Change in fair value of contingent consideration		10,283
Balance at September 30, 2016	$	298,000

The fair value of the contingent consideration was determined using an income approach based on estimated ICLUSIG revenues in the Territory for both the approved third line treatment, as well as the second line treatment that is currently under development and is therefore contingent on future clinical results and EMA approval.  The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the condensed consolidated statements of operations. The change in fair value of the contingent consideration during the period ending September 30, 2016 is due primarily to the passage of time, as there have been no significant changes to date in the key assumptions used in the fair value calculation at the date of acquisition as described in Note 3.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis as of December 31, 2015 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		December 31, 2015
Cash and cash equivalents	$	521,439	$	—	$	—	$	521,439
Corporate debt securities		—		186,344		—		186,344
Long term investment (Note 9)		35,248		—		—		35,248
Total assets	$	556,687	$	186,344	$	—	$	743,031

The following is a summary of our marketable security portfolio as of September 30, 2016 and December 31, 2015, respectively.

			Net		Net
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(in thousands)
September 30, 2016
Corporate debt securities	$	136,082	$	404	$	—	$	136,486
December 31, 2015
Corporate debt securities	$	187,153	$	—	$	(809)	$	186,344

Our corporate debt securities generally have contractual maturity dates of between 12 to 18 months.

Non-Recurring Fair Value Measurements

Non-recurring fair value measurements during the three and nine month periods ended September 30, 2016 relate to the fair value of intangible assets and inventory acquired in the Acquisition which are discussed in further detail in Note 3.