| Fair Value Measurement |
Fair Value Measurement
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income, equity securities, and contingent liabilities. The following tables provide a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2014 and 2013 (in thousands):
| | | | | | | | | | | | | | | | | Fair Value Measurements at Reporting Date Using | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | Total | | (Level 1) | | (Level 2) | | (Level 3) | Assets: | | | | | | | | Current portion of co-promote termination payments receivable (1) | $ | 322 |
| | $ | — |
| | $ | — |
| | $ | 322 |
| Short-term investments (2) | 7,133 |
| | 7,133 |
| | — |
| | — |
| Total assets | $ | 7,455 |
| | $ | 7,133 |
| | $ | — |
| | $ | 322 |
| Liabilities: | | | | | | | | Current portion of contingent liabilities - CyDex (3) | $ | 6,796 |
| | $ | — |
| | $ | — |
| | $ | 6,796 |
| Current portion of co-promote termination liability (1) | 322 |
| | — |
| | — |
| | 322 |
| Long-term portion of contingent liabilities - Metabasis (4) | 3,652 |
| | 3,652 |
| | — |
| | — |
| Long-term portion of contingent liabilities - CyDex (3) | 4,701 |
| | — |
| | — |
| | 4,701 |
| Liability for amounts owed to former licensees (5) | 773 |
| | 773 |
| | — |
| | — |
| Total liabilities | $ | 16,244 |
| | $ | 4,425 |
| | $ | — |
| | $ | 11,819 |
|
| | | | | | | | | | | | | | | | | Fair Value Measurements at Reporting Date Using | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | Total | | (Level 1) | | (Level 2) | | (Level 3) | Assets: | | | | | | | | Current portion of co-promote termination payments receivable (1) | $ | 4,329 |
| | $ | — |
| | $ | — |
| | $ | 4,329 |
| Short-term investments (2) | 4,340 |
| | 4,340 |
| | — |
| | — |
| Long-term portion of co-promote termination payments receivable (1) | 7,417 |
| | — |
| | — |
| | 7,417 |
| Total assets | $ | 16,086 |
| | $ | 4,340 |
| | $ | — |
| | $ | 11,746 |
| Liabilities: | | | | | | | | Current portion of contingent liabilities - CyDex (3) | $ | 1,712 |
| | $ | — |
| | $ | — |
| | $ | 1,712 |
| Current portion of co-promote termination liability (1) | 4,329 |
| | — |
| | — |
| | 4,329 |
| Long-term portion of contingent liabilities - Metabasis (4) | 4,196 |
| | 4,196 |
| | — |
| | — |
| Long-term portion of contingent liabilities - CyDex (3) | 7,599 |
| | — |
| | — |
| | 7,599 |
| Liability for amounts owed to former licensees (5) | 651 |
| | 651 |
| | — |
| | — |
| Long-term portion of co-promote termination liability (1) | 7,417 |
| | — |
| | — |
| | 7,417 |
| Total liabilities | $ | 25,904 |
| | $ | 4,847 |
|
| $ | — |
|
| $ | 21,057 |
|
| | (1) | The co-promote termination payments receivable represents a non-interest-bearing receivable for future payments to be made by Pfizer related to product sales and is recorded at its fair value. The receivable and liability will remain equal, and are adjusted each quarter for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales. The fair value is determined based on a valuation model using an income approach. For additional information, see Note 4 Avinza Co-Promotion. |
| | (2) | The Company’s short-term investments include investments in equity securities which the Company received as a result of event-based and upfront payments from licensees. The fair value is determined using quoted market prices in active markets for the same securities. |
| | (3) | The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach using a Monte Carlo analysis. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding revenue volatility, probability of commercialization of products, estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones which may be achieved and affect amounts owed to former license holders and CVR holders. Changes in these assumptions can materially affect the fair value estimate. |
| | (4) | The liability for CVRs for Metabasis are determined using quoted market prices in active markets for the underlying CVR. |
| | (5) | The liability for amounts owed to former licensees are determined using quoted market prices in active markets for the underlying investment received from a partner, a portion of which is owed to former licensors. |
The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:
| | | | | | | | December 31, | | | 2014 | | 2013 | Range of annual revenue subject to revenue sharing (1) | | $17.2 million-$17.3 million | | $4.2 million-$19.8 million | Revenue volatility | | 25% | | 25% | Average of probability of commercialization | | 81% | | 68% | Sales beta | | 0.60 | | 0.60 | Credit rating | | B | | BBB | Equity risk premium | | 6% | | 6% |
| | (1) | Revenue subject to revenue sharing represent management’s estimate of the range of total annual revenue subject to revenue sharing (i.e. annual revenues in excess of $15 million) through December 31, 2016, which is the term of the CVR agreement. |
A reconciliation of the level 3 financial instruments as of December 31, 2014 is as follows (in thousands):
| | | | | Assets: | | Fair value of level 3 financial instruments as of December 31, 2013 | $ | 11,746 |
| Assumed payments made by Pfizer or assignee | (1,243 | ) | Fair value adjustments to co-promote termination liability | (10,181 | ) | Fair value of level 3 financial instrument assets as of December 31, 2014 | $ | 322 |
| | | Liabilities | | Fair value of level 3 financial instruments as of December 31, 2013 | $ | 21,057 |
| Assumed payments made by Pfizer or assignee | (1,243 | ) | Payments to CVR holders and other contingency payments | (3,493 | ) | Fair value adjustments to contingent liabilities | 5,679 |
| Fair value adjustments to co-promote termination liability | (10,181 | ) | Fair value of level 3 financial instruments as of December 31, 2014 | $ | 11,819 |
|
Other Fair Value Measurements-2019 Convertible Senior Notes
In August 2014, the Company issued $245.0 million aggregate principal amount of convertible senior unsecured notes due 2019 (the "2019 Convertible Senior Notes"). The Company uses a quoted market rate in an inactive market, which is classified as a Level 2 input, to estimate the current fair value of its 2019 Convertible Senior Notes. The estimated fair value of the 2019 Senior Convertible Notes was $239.2 million as of December 31, 2014. The carrying value of the notes does not reflect the market rate. See Note 7 Financing Arrangements for additional information. |