Fair Value Measurement

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The Company establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:

Level 1 - Observable inputs such as quoted prices in active markets

Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly

Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions

The following table provide a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2015 and 2014 (in thousands):



Fair Value Measurements at Reporting Date Using
December 31, 2015			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		—
Note receivable Viking ⁽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



Fair Value Measurements at Reporting Date Using
December 31, 2014			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⁾	$	—
Current co-promote termination payments receivable ⁽⁷⁾	$	322	$	—	$	—	$	322
Short-term investments ⁽²⁾	7,133		7,133		—		—
Total assets	$	7,455	$	7,133	$	—	$	322
Liabilities:
Current contingent liabilities - CyDex (4)	$	6,796	$	—	$	—	$	6,796
Current co-promote termination liability ⁽⁷⁾	322		—		—		322
Long-term contingent liabilities - Metabasis⁽⁵⁾	3,652		—		3,652		—
Long-term contingent liabilities - CyDex (4)	4,701		—		—		4,701
Liability for amounts owed to former licensees ⁽⁶⁾	773		773		—		—
Total liabilities	$	16,244	$	773	$	3,652	$	11,819

*Adjusted to correct an error in disclosure that was deemed immaterial to the financial statements taken as a whole. Contingent liabilities related to Metabasis were reclassified from Level 1 to Level 2 as market is deemed inactive. Additionally, certain certificates of deposit with maturities less than 90 days were not previously disclosed in the table above.

(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, 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 65% at December 31, 2015. Changes in these assumptions may materially affect the fair value estimate. For the year ended December 31, 2015, the Company reported a decrease in the fair value of the Viking convertible notes of $0.8 million in "Other, net" of the consolidated statement of operations.

(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.

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



	December 31,
	2015	2014
Range of annual revenue subject to revenue sharing (1)	$22.5 million	$17.2 million-$17.3 million
Revenue volatility	25%	25%
Average of probability of commercialization	73%	81%
Sales beta	0.40	0.60
Credit rating	BB	B
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 December 31, 2015 is as follows (in thousands):



Assets:
Fair value of level 3 financial instruments as of December 31, 2014	$	322
Assumed payments made by Pfizer or assignee	(390		)
Fair value adjustments to co-promote termination liability	68
Note receivable Viking	4,782
Fair value of level 3 financial instrument assets as of December 31, 2015	$	4,782

Liabilities
Fair value of level 3 financial instruments as of December 31, 2014	$	11,819
Assumed payments made by Pfizer or assignee	(390		)
Payments to CVR holders and other contingency payments	(5,848		)
Fair value adjustments to contingent liabilities	3,841
Fair value adjustments to co-promote termination liability	68
Fair value of level 3 financial instruments as of December 31, 2015	$	9,490

Other Fair Value Measurements-2019 Convertible Senior Notes

In August 2014, the Company issued 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 $377.9 million as of December 31, 2015. The carrying value of the notes does not reflect the market rate. See Note 7 Financing Arrangements for additional information.

Viking

The Company records its investment in Viking under the equity method of accounting. The investment is subsequently adjusted for the Company’s share of Viking's operating results, and if applicable, cash contributions and distributions. See Note 2 Investment in Viking for additional information. The market value of the Company's investment in Viking was $16.3 million as of December 31, 2015. The carrying value of the investment in Viking does not reflect the market value.