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Fair Value Measurements
 3 Months Ended
Mar. 31, 2012
Fair Value Measurements

Note 7 – Fair Value Measurements

 

Fair value of financial assets and liabilities that are being measured and reported are defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). The Company is required to classify fair value measurements in one of the following categories:

 

Level 1 inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

 

Level 3 inputs are defined as unobservable inputs for the assets or liabilities. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

The Company determined the fair value of funds invested in short term investments, which are considered trading securities, to be level 1 inputs measured by quoted prices of the securities in active markets. The short term investments are included within prepaids and other current assets on the balance sheet. The Company determined the fair value of funds invested in money market funds to be level 1. The Company determined the fair value of the embedded derivative liabilities and warrant derivative liabilities to be level 3 inputs. These inputs require material subjectivity because value is derived through the use of a lattice model that values the derivatives based on probability weighted discounted cash flows. The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012, and December 31, 2011 (in thousands):

 

    March 31, 2012  
    Fair Value Measurements Using Fair Value Hierarchy  
    Level 1     Level 2     Level 3  
Money market investments   $ 2,497.6     $ -     $ -  
Short term investments     0.6       -       -  
Embedded derivative liabilities     -       -       315.3  
Warrant derivative liabilities     -       -       71.9  
Contingent consideration     -       -       3,130.0  

 

    December 31, 2011  
    Fair Value Measurements Using Fair Value Hierarchy  
    Level 1     Level 2     Level 3  
Money market investments   $ 2,497.4     $ -     $ -  
Short term investments     0.6       -       -  
Embedded derivative liabilities     -       -       391.7  
Warrant derivative liabilities     -       -       82.7  
Contingent consideration     -       -       3,130.0  

 

The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. The measurement is based upon unobservable inputs supported by little or no market activity based on our own assumptions and experience. The value of our contingent consideration is valued using a discount rate of 30%. We base the timing to complete the development and approval of this product on the current development stage of the product and the inherent difficulties and uncertainties in developing a product candidate, such as obtaining U.S. Food and Drug Administration (FDA) and other regulatory approvals. In determining the probability of regulatory approval and commercial success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense we record in any given period. Changes in the fair value of the contingent consideration obligations are recorded in our consolidated statement of operations. Contingent consideration was recognized on October 17, 2011 in connection with the Amorcyte merger (see Note 3). There were no changes in contingent consideration fair value as of March 31, 2012.

  

For those financial instruments with significant Level 3 inputs, the following table summarizes the activity for the three months ended March 31, 2012 by type of instrument (in thousands):

 

    Three Months Ended  
    March 31, 2012  
    Embedded Derivatives     Warrants  
Beginning liability balance   $ 391.7     $ 82.7  
Change in fair value recorded in earnings     (76.4 )     (10.8 )
Ending liability balance   $ 315.3     $ 71.9  

 

Some of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, restricted cash, accounts receivable, accounts payable, notes payable and bank loans.