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Fair Value Measurements (Tables)
3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
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


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.
CyDex Acquisition
The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:

 
March 31, 2016
 
December 31, 2015
Range of annual revenue subject to revenue sharing (1)
$23.5 million
 
$22.5 million
Revenue volatility
25%
 
25%
Average probability of commercialization
78%
 
73%
Sales beta
0.30
 
0.40
Credit rating
BB
 
BB
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.

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