Fair Value Measurement

6 Months Ended

Jun. 30, 2013

Fair Value Measurement

Fair Value Measurement

Note 13.  Fair Value Measurement

Valuation Hierarchy - GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2013:

	Total Carrying
	Value at		Fair Value Measurements at June 30, 2013
(in thousands)	June 30, 2013		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	191,398	$	191,398	$	—	$	—
Short term investments	$	67,335	$	67,335	$	—	$	—
Contingent consideration, long-term	$	25,346	$	—	$	—	$	25,346

The following table provides a rollforward of activity in Level 3:

(in thousands)
Balance December 31, 2012	$	26,077
Change in fair value from re-measurement	44
Impact of foreign currency translation	(775		)
Balance June 30, 2013	$	25,346

Valuation Techniques — Cash, cash equivalents and short-term investments are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.  There were no changes in valuation techniques during the three and six months ended June 30, 2013.

In the fourth quarter of 2011, we recognized contingent consideration liabilities related to our acquisition of DuoCort. The fair values of the contingent consideration is measured using significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent consideration payments are classified as liabilities and are subject to the recognition of subsequent changes in fair value through our results of operations in other operating expenses.

The fair value of the contingent consideration payments related to regulatory approvals, is estimated by applying risk adjusted discount rates, 13% and 20.3%, to the probability adjusted contingent payments and the expected approval dates. The fair value of the contingent consideration payment related to the attainment of future revenue targets is estimated by applying a risk adjusted discount rate, 16%, to the potential payments resulting from probability weighted revenue projections and expected revenue target attainment dates. These fair value estimates are most sensitive to changes in the probability of regulatory approvals or the probability of the achievement of the revenue targets.

There were no changes in the valuation techniques during the period and there were no transfers into or out of Levels 1 and 2.

Our 2% senior convertible notes due March 2017 are measured at amortized cost in our consolidated balance sheets and not fair value. The principal balance outstanding at June 30, 2013 is $205.0 million with a carrying value of $166.2 million and a fair value of approximately $340.6 million, based on the Level 2 valuation hierarchy of the fair value measurements standard.

We believe that the fair values of our other financial instruments approximate their reported carrying amounts.