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, co-promote termination payments receivable and the related liability, and contingent liabilities.

The fair value of the Company’s investments which were classified as short-term investments as of June 30, 2014 and December 31, 2013 is determined using quoted market prices in active markets. These securities were received by the Company in December 2012 and June 2014 as a result of an event-based payment and an upfront license payment, respectively, under licensees. Additionally, the liability for CVRs for Metabasis are determined using quoted market prices in active markets. 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 are adjusted each reporting period for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales. 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 provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 (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	$	391	$	—	$	—	$	391
Available-for-sale securities	7,490		7,490		—		—
Restricted cash and investments	1,261		—		1,261		—
Long-term portion of co-promote termination payments receivable	413		—		—		413
Total assets	$	9,555	$	7,490	$	1,261	$	804
Liabilities:
Current portion of contingent liabilities-CyDex	$	2,877	$	—	$	—	$	2,877
Current portion of co-promote termination liability	391		—		—		391
Long-term portion of contingent liabilities-Metabasis	4,724		4,724		—		—
Long-term portion of contingent liabilities-CyDex	7,498		—		—		7,498
Liability for short-term investments owed to former licensees	1,078		1,078		—		—
Long-term portion of co-promote termination liability	413		—		—		413
Total liabilities	$	16,981	$	5,802	$	—	$	11,179

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
Available-for-sale securities	4,340		4,340		—		—
Restricted cash and investments	1,341		—		1,341		—
Long-term portion of co-promote termination payments receivable	7,417		—		—		7,417
Total assets	$	17,427	$	4,340	$	1,341	$	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 short-term 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 represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:



	June 30, 2014	December 31, 2013
Range of annual revenue subject to revenue sharing (1)	$13.1 million-$18.9 million	$4.2 million-$19.8 million
Revenue volatility	25%	25%
Average of probability of commercialization	79.3%	67.6%
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.

A reconciliation of the level 3 financial instruments as of June 30, 2014 is as follows (in thousands):



Assets:
Fair value of level 3 financial instrument assets as of December 31, 2013	$	11,746
Assumed payments made by Pfizer or assignee	(631		)
Fair value adjustments to co-promote termination liability	(10,311		)
Fair value of level 3 financial instrument assets as of June 30, 2014	$	804

Liabilities:
Fair value of level 3 financial instrument liabilities as of December 31, 2013	$	21,057
Assumed payments made by Pfizer or assignee	(631		)
Payments to CVR and other former license holders	(1,668		)
Fair value adjustments to contingent liabilities	2,732
Fair value adjustments to co-promote termination liability	(10,311		)
Fair value of level 3 financial instrument liabilities as of June 30, 2014	$	11,179