Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2016

Summary of the assets and liabilities measured at fair value on recurring basis

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, 2016 (in thousands). There were no transfers between Level 1 and Level 2 securities during the nine months ended September 30, 2016:



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:
Short-term investments⁽²⁾	$	37,535	$	4,539	$	32,996	$	—
Note receivable Viking ⁽³⁾	3,207		—		—		3,207
Investment in warrants⁽⁴⁾	684		684		—		—
Total assets	$	41,426	$	5,223	$	32,996	$	3,207
Liabilities:
Current contingent liabilities-CyDex⁽⁵⁾	$	5,079	$	—	$	—	$	5,079
Long-term contingent liabilities-CyDex ⁽⁵⁾	1,634		—		—		1,634
Long-term contingent liabilities-Metabasis⁽⁶⁾	2,299		—		2,299		—
Liability for amounts owed to former licensees⁽⁷⁾	536		536		—		—
Total liabilities	$	9,548	$	536	$	2,299	$	6,713

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, 2015 (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:
Cash equivalents ⁽¹⁾	$	3,015	$	—	$	3,015	$	—
Short-term investments ⁽²⁾	92,775		6,786		85,989		—
Viking note receivable ⁽³⁾	4,782		—		—		4,782
Total assets	$	100,572	$	6,786	$	89,004	$	4,782
Liabilities:
Current contingent liabilities-CyDex⁽⁵⁾	$	7,812	$	—	$	—	$	7,812
Current contingent liabilities-Metabasis ⁽⁶⁾	2,602		—		2,602		—
Long-term contingent liabilities-Metabasis⁽⁶⁾	1,355		—		1,355		—
Long-term contingent liabilities-CyDex ⁽⁵⁾	1,678		—		—		1,678
Liability for amounts owed to former licensees⁽⁷⁾	794		794		—		—
Total liabilities	$	14,241	$	794	$	3,957	$	9,490

(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, which the Company received as a result of event-based and upfront payments from licensees, 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 75% at September 30, 2016. Changes in these assumptions may materially affect the fair value estimate.


(4)	Investment in warrants, which the Company received as a result of Viking’s partial repayment of the Viking note receivable and the Company’s purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities.

(5)

The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach. To the extent the estimated future income may vary significantly given the long-term nature of the estimate, the Company utilizes a Monte Carlo model. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s 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.


(6)	The liability for CVRs for Metabasis are determined using quoted prices in an market that is not active for the underlying CVR.


(7)	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.

CyDex Acquisition

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



	September 30, 2016	December 31, 2015
Annual revenue subject to revenue sharing ⁽¹⁾	$28.0 million	$22.5 million
Revenue volatility	25%	25%
Average probability	92%	73%
Sales beta	0.30	0.40
Credit rating	BB	BB
Equity risk premium	6%	6%


(1)	Revenue subject to revenue sharing represent management’s estimate of the 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.

Reconciliation of level 3 financial instruments

A reconciliation of the level 3 financial instruments as of September 30, 2016 is as follows (in thousands):



Assets:
Fair value of level 3 financial instrument assets as of December 31, 2015	$	4,782
Viking note receivable fair market value adjustment	(215		)
Cash payment received as partial repayment of note receivable	(300		)
Fair market value of stock received as partial repayment of note receivable	(1,060		)
Fair value of level 3 financial instrument assets as of September 30, 2016	$	3,207

Liabilities:
Fair value of level 3 financial instrument liabilities as of December 31, 2015	$	9,490
Payments to CVR and other former license holders	(4,413		)
Fair value adjustments to contingent liabilities	1,636
Fair value of level 3 financial instrument liabilities as of September 30, 2016	$	6,713

- Definition

Tabular disclosure of financial instruments measured at fair value, including those classified in shareholders' equity measured on a recurring or nonrecurring basis. Disclosures include, but are not limited to, fair value measurements recorded and the reasons for the measurements, level within the fair value hierarchy in which the fair value measurements are categorized and transfers between levels 1 and 2. Nonrecurring fair value measurements are those that are required or permitted in the statement of financial position in particular circumstances.

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