Summary of the assets and liabilities measured at fair value on recurring basis |
The following table provides a summary of the carrying value of assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2016 (in thousands). There were no transfers between Level 1 and Level 2 securities during the three months ended March 31, 2016:
| | | | | | | | | | | | | | | | | 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: | | | | | | | | Cash equivalents (1) | $ | 5,316 |
| | $ | — |
| | $ | 5,316 |
| | $ | — |
| Short-term investments (2) | 81,908 |
| | 4,625 |
| | 77,283 |
| | — |
| Note receivable Viking (3) | 4,767 |
| | — |
| | — |
| | 4,767 |
| Total assets | $ | 91,991 |
| | $ | 4,625 |
| | $ | 82,599 |
| | $ | 4,767 |
| Liabilities: | | | | | | | | Current contingent liabilities-CyDex (4) | $ | 5,285 |
| | $ | — |
| | $ | — |
| | $ | 5,285 |
| Long-term contingent liabilities-CyDex (4) | 1,578 |
| | — |
| | — |
| | 1,578 |
| Long-term contingent liabilities-Metabasis (5) | 2,444 |
| | — |
| | 2,444 |
| | — |
| Liability for amounts owed to former licensees(6) | 534 |
| | 534 |
| | — |
| | — |
| Total liabilities | $ | 9,841 |
| | $ | 534 |
| | $ | 2,444 |
| | $ | 6,863 |
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The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2015 (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: | | | | | | | | Cash equivalents (1) | $ | 3,015 |
| | $ | — |
| | $ | 3,015 |
| | $ | — |
| Short-term investments (2) | 92,775 |
| | 6,786 |
| | 85,989 |
| | — |
| Viking note receivable (3) | 4,782 |
| | — |
| | — |
| | 4,782 |
| Total assets | $ | 100,572 |
| | $ | 6,786 |
| | $ | 89,004 |
| | $ | 4,782 |
| Liabilities: | | | | | | | | Current contingent liabilities-CyDex (4) | $ | 7,812 |
| | $ | — |
| | $ | — |
| | $ | 7,812 |
| Current contingent liabilities-Metabasis (5) | $ | 2,602 |
| | — |
| | 2,602 |
| | — |
| Long-term contingent liabilities-Metabasis (5) | 1,355 |
| | — |
| | 1,355 |
| | — |
| Long-term contingent liabilities-CyDex (4) | 1,678 |
| | — |
| | — |
| | 1,678 |
| Liability for amounts owed to former licensees (6) | 794 |
| | 794 |
| | — |
| | — |
| Total liabilities | $ | 14,241 |
| | $ | 794 |
| | $ | 3,957 |
| | $ | 9,490 |
|
| | (1) | Highly liquid investments with maturities less than 90 days from the purchase date are recorded as cash equivalents that are classified as Level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
| | (2) | Investments in equity securities, which the Company received as a result of event-based and upfront payments from licensees, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. Short-term investments in marketable securities with maturities greater than 90 days are classified as level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
| | (3) | The fair value of the convertible note receivable from Viking was determined using a probability weighted option pricing model using a lattice methodology. The fair value is subjective and is affected by certain significant input to the valuation model such as the estimated volatility of the common stock, which was estimated to be 50% at March 31, 2016. Changes in these assumptions may materially affect the fair value estimate. |
| | (4) | 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. |
| | (5) | The liability for CVRs for Metabasis are determined using quoted market prices in an inactive market for the underlying CVR. |
| | (6) | 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 licensees. |
| | (7) | The co-promote termination payments receivable represents a 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. The fair value is determined based on a valuation model using an income approach. |
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Reconciliation of level 3 financial instruments |
A reconciliation of the level 3 financial instruments as of March 31, 2016 is as follows (in thousands):
| | | | | Assets: | | Fair value of level 3 financial instrument assets as of December 31, 2015 | $ | 4,782 |
| Viking note receivable fair market value adjustment | (15 | ) | Fair value of level 3 financial instrument assets as of March 31, 2016 | $ | 4,767 |
| | | Liabilities: | | Fair value of level 3 financial instrument liabilities as of December 31, 2015 | $ | 9,490 |
| Payments to CVR and other former license holders | (2,828 | ) | Fair value adjustments to contingent liabilities | 201 |
| Fair value of level 3 financial instrument liabilities as of March 31, 2016 | $ | 6,863 |
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