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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2016
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. 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 below with level 1 having the highest level input that is significant to the measurement and level 3 having the lowest: Level 1 - Quoted prices in active markets; Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly; and 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 provides a summary of the carrying value of assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2016 (in thousands). There were no transfers between Level 1 and Level 2 securities during the three months ended March 31, 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: |  |  |  |  |  |  |
Cash equivalents (1) | $ | 5,316 |  |  | $ | — |  |  | $ | 5,316 |  |  | $ | — |
Short-term investments (2) | 81,908 |  |  | 4,625 |  |  | 77,283 |  |  | — |
Note receivable Viking (3) | 4,767 |  |  | — |  |  | — |  |  | 4,767 |
Total assets | $ | 91,991 |  |  | $ | 4,625 |  |  | $ | 82,599 |  |  | $ | 4,767 |
Liabilities: |  |  |  |  |  |  |
Current contingent liabilities-CyDex (4) | $ | 5,285 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,285 |
Long-term contingent liabilities-CyDex (4) | 1,578 |  |  | — |  |  | — |  |  | 1,578 |
Long-term contingent liabilities-Metabasis (5) | 2,444 |  |  | — |  |  | 2,444 |  |  | — |
Liability for amounts owed to former licensees(6) | 534 |  |  | 534 |  |  | — |  |  | — |
Total liabilities | $ | 9,841 |  |  | $ | 534 |  |  | $ | 2,444 |  |  | $ | 6,863 |
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 (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 |
(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 50% at March 31, 2016. Changes in these assumptions may materially affect the fair value estimate.
(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:
| March 31, 2016 |  | December 31, 2015
Range of annual revenue subject to revenue sharing (1) | $23.5 million |  | $22.5 million
Revenue volatility | 25% |  | 25%
Average probability of commercialization | 78% |  | 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 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 March 31, 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 | (15 | )
Fair value of level 3 financial instrument assets as of March 31, 2016 | $ | 4,767 |
Liabilities: |
Fair value of level 3 financial instrument liabilities as of December 31, 2015 | $ | 9,490 |
Payments to CVR and other former license holders | (2,828 | )
Fair value adjustments to contingent liabilities | 201 |
Fair value of level 3 financial instrument liabilities as of March 31, 2016 | $ | 6,863 |
Other Fair Value Measurements 2019 Convertible Senior Notes In August 2014, the Company issued $245.0 million aggregate principal amount of its 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 $373.5 million as of March 31, 2016. The carrying value of the notes does not reflect the market rate. See Note 7 Financing Arrangements for additional information. Viking Therapeutics 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 3 Investment in Viking Therapeutics for additional information. The market value of the Company's investment in Viking was $6.8 million as of March 31, 2016. The carrying value of the investment in Viking does not reflect the market value.

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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 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=66048111&loc=d3e19207-110258 Reference 2: 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 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 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13537-108611 Reference 5: 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=73719730&loc=d3e13504-108611 Reference 6: 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=73719730&loc=d3e13433-108611 + Details
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