Financial Instruments

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 table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 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	$	4,329	$	—	$	—	$	4,329
Short-term investments	4,340		4,340		—		—
Long-term portion of co-promote termination payments receivable	7,417		—		—		7,417
Total assets	$	16,086	$	4,340	$	—	$	11,746
Liabilities:
Current portion of contingent liabilities - CyDex	$	1,712	$	—	$	—	$	1,712
Current portion of co-promote termination liability	4,329		—		—		4,329
Long-term portion of contingent liabilities - Metabasis	4,196		4,196		—		—
Long-term portion of contingent liabilities - CyDex	7,599		—		—		7,599
Liability for restricted investments owed to former licensees	651		651		—		—
Long-term portion of co-promote termination liability	7,417		—		—		7,417
Total liabilities	$	25,904	$	4,847	$	—	$	21,057

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, 2012 (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	$	4,327	$	—	$	—	$	4,327
Available-for-sale securities	1,426		—		—		1,426
Long-term portion of co-promote termination payments receivable	8,207		—		—		8,207
Total assets	$	13,960	$	—	$	—	$	13,960
Liabilities:
Current portion of contingent liabilities - CyDex	$	356	$	—	$	—	$	356
Current portion of co-promote termination liability	4,327		—		—		4,327
Long-term portion of contingent liabilities - CyDex	10,543		—		—		10,543
Liability for restricted investments owed to former licensees	214		—		—		214
Long-term portion of co-promote termination liability	8,207		—		—		8,207
Total liabilities	$	23,647	$	—	$	—	$	23,647

The fair value of the Company’s investments which were classifed as short-term investments for the year ended December 31, 2013 is determined using quoted market prices in active markets. These investments were classified as level 3 for the year ended December 31, 2012 due to a discount based on trading restrictions. These restrictions were removed during the year ended December 31, 2013 and the Company transferred the available-for-sale investments and corresponding liability for amounts owed to former licensees from level 3 to level 1. The liability for CVRs for Metabasis are determined using quoted market prices in active markets. 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.

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



	December 31,
	2013	2012
Range of annual revenue subject to revenue sharing (1)	$4.2 million-$19.8 million	$3.6 million-$28.3 million
Revenue volatility	25%	25%
Average of probability of commercialization	67.6%	68.4%
Sales beta	0.60	0.60
Credit rating	BBB	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.

There are no remaining CVR obligations under the agreement with the former Neurogen shareholders. The co-promote termination payments receivable represents a non-interest bearing receivable for future payments to be made by Pfizer and is recorded at its fair value. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding future Avinza product sales. The receivable and liability will remain equal and adjusted each quarter for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales.

A reconciliation of the level 3 financial instruments as of December 31, 2013 is as follows (in thousands):



Assets:
Fair value of level 3 financial instruments as of December 31, 2012	$	13,960
Assumed payments made by Pfizer or assignee	(3,310		)
Fair value adjustments recorded as unrealized gain on available-for-sale securities	2,914
Fair value adjustments to co-promote termination liability	2,522
Transfer of available-for-sale investments from level 3 to level 1	(4,340		)
Fair value of level 3 financial instrument assets as of December 31, 2013	$	11,746

Liabilities
Fair value of level 3 financial instruments as of December 31, 2012	$	23,647
Assumed payments made by Pfizer or assignee	(3,310		)
Fair value adjustments for amounts owed related to restricted investments and recorded as other expense	437
Payments to CVR and other former license holders	(989		)
Fair value adjustments to contingent liabilities	(599		)
Fair value adjustments to co-promote termination liability	2,522
Transfer of liability for restricted investments owed to former licensees from level 3 to level 1	(651		)
Fair value of level 3 financial instruments as of December 31, 2013	$	21,057