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Fair Value of Financial Instruments | 12 Months Ended
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Dec. 31, 2014
Fair Value of Financial Instruments | 10. Fair Value of Financial Instruments The carrying amounts of financial instruments, which include cash equivalents and accounts payable, approximate their fair values due to their relatively short maturities. The fair value of the note payable to our principal stockholder cannot be reasonably estimated as the Company would not be able to obtain a similar credit arrangement in the current economic environment. As of December 31, 2014 and 2013, the Company held $120.8 million and $70.8 million, respectively of cash and cash equivalents, consisting of money market funds of $118.5 million and $67.7 million, respectively, and the remaining funds in non-interest bearing checking accounts. The fair value of these money market funds was determined by using quoted prices for identical investments in an active market (Level 1 in the fair value hierarchy). The following is a summary of the carrying values and estimated fair values of the 2015 notes and the facility financing obligation (i.e., the 2019 notes and Trance B notes) (in millions):
|  | December 31, 2014 |  |  | December 31, 2013 |
|  | Carrying value |  |  | Estimated fair value |  |  | Carrying value |  |  | Estimated fair value |
2015 notes |  | $ | 99.4 |  |  | $ | 102.9 |  |  | $ | 98.4 |  |  | $ | 102.2 |
Facility financing obligation |  | $ | 73.0 |  |  | $ | 75.1 |  |  | $ | 102.3 |  |  | $ | 107.0 |
Senior convertible notes The estimated fair value of the 2015 notes was calculated based on model derived valuations whose inputs were observable, such as the Company’s stock price, and non-observable, such as the Company’s long-term historical volatility, which was estimated to be 55% (Level 3 in the fair value hierarchy) in 2014 compared to the 65% in 2013. As there is no current observable market for the 2015 notes, the Company determined the estimated fair value using a convertible bond valuation model within a lattice framework. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent price quotes and trading information regarding Company issued debt instruments and shares of common stock into which the 2015 notes are convertible. Facility financing agreement As discussed in Note 17 — Facility Agreement, in connection with the Facility Agreement, the Company issued 2019 notes and Milestone Rights and recorded the Commitment Asset on July 1, 2013. In addition, on February 28, 2014, the Company entered into the First Amendment, and recorded the Tranche B Commitment Asset, which represented the increase in borrowing capacity that the Company received as consideration for the modifications made to the Facility Agreement and the Tranche 1 notes and Tranche 3 notes. As there is no current observable market for the 2019 notes or Tranche B notes, the Company determined the estimated fair value using a bond valuation model based on a discounted cash flow methodology. The bond valuation model combined expected cash flows associated with principal repayment and interest based on the contractual terms of the debt agreement discounted to present value using a selected market discount rate of 12.4% at December 31, 2014 for the 2019 notes and a selected market discount rate of 11.9% at the inception of the Tranche B notes (Level 3 in the fair value hierarchy). On December 31, 2014, the market discount rate was recalculated at 12.3%, 12.2%, and 11.8% for the Tranche 1 notes, the Tranche 4 notes and the Tranche B notes, respectively. The Tranche 2 and Tranche 3 notes were fully converted by the end of the first quarter of 2014. On December 31, 2013, the market discount rate for Tranche 1 notes was 12.7%. The estimated fair value of the Milestone Rights was calculated using the income approach in which the cash flows associated with the specified contractual payments were adjusted for both the expected timing and the probability of achieving the milestones discounted to present value using a selected market discount rate (Level 3 in the fair value hierarchy). The expected timing and probability of achieving the milestones, starting in 2014, was developed with consideration given to both internal data, such as progress made to date and assessment of criteria required for achievement, and external data, such as market research studies. The discount rate (15.0%) was selected based on an estimation of required rate of returns for similar investment opportunities using available market data. As of December 31, 2014, the carrying value of the Milestone Rights is $13.1 million with an estimated fair value of $27.9 million. The fair value of the Commitment Asset was estimated using the income approach by estimating the fair value of the future tranches using a market debt rate (12.0%) commensurate with the risk of the future tranches and the fair value of the cash expected to be received by the Company and assessing the probability of the commitments being funded in the future based on the operational hurdles required for funding being met (Level 3 in the fair value hierarchy). The fair value of the Tranche B Commitment Asset was estimated using a discounted cash flow analysis under the income approach. Specifically, the fair value was determined by estimating the fair value of the future tranche using a market yield (11.8%) commensurate with the risk of the future tranche and the fair value of the cash expected to be received by the Company and assessing the probability of the commitment being funded in the future based on the operational hurdles required for funding being met as well as consideration of alternative funding options (Level 3 in the fair value hierarchy). As of the date it was recorded, the Tranche B Commitment Asset was valued at $2.9 million. On May 6, 2014, Deerfield purchased $20.0 million aggregate principal amount of Tranche B notes in accordance with the provisions of the Facility Agreement, as amended. Accordingly, the $1.2 million portion of the Commitment Asset associated with the $20.0 million purchased was derecognized and recorded as debt discount on the Tranche B notes. At December 31, 2014, as Deerfield had purchased all four tranches of 2019 notes in the aggregate principal amount of $160.0 million, purchased $20.0 million aggregate principal amount of Tranche B notes in accordance with the provisions of the Facility Agreement, and wrote off the remaining portion of the Tranche B Commitment Asset. As such, at December 31, 2014 the carrying value of the Commitment Assets was zero. There were no material re-measurements to fair value during the twelve months ended December 31, 2014 and 2013 of financial assets and liabilities that are not measured at fair value on a recurring basis. There were no transfers of assets or liabilities between the fair value measurement levels during the twelve months ended December 31, 2014, 2013, and 2012. Derivatives Four embedded features that required bifurcation and separate accounting were identified in the facility financing obligation and the Company determined should be bundled together as a single, compound embedded derivative, bifurcated from the host contract, and accounted for at fair value, with changes in fair value being recorded in the Statement of Operations. The four embedded derivatives contained in the facility financing obligation were the Conversion Option, Major Transaction Put Option, Acceleration upon a Legal Judgment against the Company in Excess of $100,000, and Tax Gross-Up. The four embedded features were evaluated together as a single compound derivative to determine the fair value of the derivative. The estimated fair value of the embedded derivative was calculated using Level 3 inputs and by applying a cumulative probability percentage to the values derived from a Black-Karasinski lattice model for the major transaction put option (0.8%), the conversion option feature (0.0%), and the acceleration upon a legal judgment against the Company in excess of $100,000 feature (0.1%). The Tax Gross-Up feature was evaluated using a Level 2 analysis based on the withholding requirements (i.e., the tax laws) on interest payments between the US and the British Virgin Islands and was determined to be de minimus. As of December 31, 2014 and 2013, management determined the impact of the valuation of the embedded derivative was immaterial (see Note 17). The Company’s derivative financial instruments are not designated as hedging instruments, and gains or losses resulting from changes in the fair value are reported in other income (expense), in the consolidated statements of operations. Derivative financial instruments are recognized as other assets or other current liabilities in the financial statements and measured at fair value. The estimated fair values in connection with the February 2012 The Mann Group Common Stock Purchase Agreement (“The February 2012 Forward Purchase Contract”) and the October 2012 The Mann Group Common Stock and Warrant Purchase Agreement (“The October 2012 Forward Purchase Contract”) was based on forward purchase contract valuations (Level 3 in the fair value hierarchy) (see Note 11). The following roll-forward provides a summary of the changes in fair value of the Company’s Level 3 forward purchase contracts during the year ended December 31, 2012 (in thousands):
|  | The February 2012 Forward Purchase Contract |  |  | The October 2012 Forward Purchase Contract |  |  | Total |
Beginning Balance |  | $ | — |  |  | $ | — |  |  | $ | — |
Issuance |  |  | 1,080 |  |  |  | 28,237 |  |  |  | 29,317 |
Adjustments to fair value included in other income (expense) |  |  | 12,011 |  |  |  | (13,248 | ) |  |  | (1,237 | )
Transfers to additional paid-in-capital |  |  | (13,091 | ) |  |  | (14,989 | ) |  |  | (28,080 | )
Ending Balance |  | $ | — |  |  | $ | — |  |  | $ | — |

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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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