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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2014
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements The Company measures certain financial assets and liabilities at fair value on a recurring basis, including equity securities, co-promote termination payments receivable and the related liability, contingent liabilities, and the Company's convertible senior notes. Level 1 The fair value of the Company’s investments which are classified as short-term investments 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. Level 2 The fair value of the Company's convertible senior notes is estimated by using the quoted market rate in an inactive market, which is classified as a Level 2 input. Level 3 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 carrying value of assets and liabilities that are measured at fair value on a recurring basis as of September 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 co-promote termination payments receivable | $ | 523 |  |  | $ | — |  |  | $ | — |  |  | $ | 523 |
Available-for-sale securities | 5,925 |  |  | 5,925 |  |  | — |  |  | — |
Total assets | $ | 6,448 |  |  | $ | 5,925 |  |  | $ | — |  |  | $ | 523 |
Liabilities: |  |  |  |  |  |  |
Current contingent liabilities-CyDex | $ | 4,184 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,184 |
Current co-promote termination liability | 523 |  |  | — |  |  | — |  |  | 523 |
Long-term contingent liabilities-Metabasis | 3,511 |  |  | 3,511 |  |  | — |  |  | — |
Long-term contingent liabilities-CyDex | 8,755 |  |  | — |  |  | — |  |  | 8,755 |
Liability for short-term investments owed to former licensees | 917 |  |  | 917 |  |  | — |  |  | — |
Total liabilities | $ | 17,890 |  |  | $ | 4,428 |  |  | $ | — |  |  | $ | 13,462 |
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 |  |  | — |  |  | — |
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 short-term investments owed to licensors | 651 |  |  | 651 |  |  | — |  |  | — |
Long-term portion of co-promote termination liability | 7,417 |  |  | — |  |  | — |  |  | 7,417 |
Total liabilities | $ | 25,904 |  |  | $ | 4,847 |  |  | $ | — |  |  | $ | 21,057 |
Other Fair Value Measurements-2019 Convertible Senior Notes In August 2014, the Company issued $245.0 million aggregate principal amount of convertible senior unsecured notes due 2019 (the "2019 Convertible Senior Notes"). The Company uses a quoted market rate in an inactive market, which is classified as a Level 2 input, to estimate the current fair value of its 2019 Convertible Senior Notes. The estimated fair value of the 2019 Senior Convertible Notes was $229.8 million as of September 30, 2014. The carrying value of the notes does not reflect the market rate. See Note 7 Financing Arrangements for additional information. The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:
| September 30, 2014 |  | December 31, 2013
Range of annual revenue subject to revenue sharing (1) | $17.9 million-$20.5 million |  | $4.2 million-$19.8 million
Revenue volatility | 25% |  | 25%
Average of probability of commercialization | 83.8% |  | 67.6%
Sales beta | 0.60 |  | 0.60
Credit rating | B |  | 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 September 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 | (1,002 | )
Fair value adjustments to co-promote termination liability | (10,221 | )
Fair value of level 3 financial instrument assets as of September 30, 2014 | $ | 523 |
Liabilities: |
Fair value of level 3 financial instrument liabilities as of December 31, 2013 | $ | 21,057 |
Assumed payments made by Pfizer or assignee | (1,002 | )
Payments to CVR and other former license holders | (1,936 | )
Fair value adjustments to contingent liabilities | 5,564 |
Fair value adjustments to co-promote termination liability | (10,221 | )
Fair value of level 3 financial instrument liabilities as of September 30, 2014 | $ | 13,462 |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 + Details
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