FAIR VALUE

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.


•	Level 1: Quoted prices in active markets for identical assets or liabilities.


•	Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•	Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:



(in thousands)	Financial Statement
March 31, 2019	Classification	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	Cash and cash equivalents	$	41	$	—	$	—	$	41
Commercial paper	Cash and cash equivalents	—		14,591		—		14,591
U.S. Treasury Securities	Cash and cash equivalents	—		748		—		748
Collegium warrants	Investments	—		7,155		—		7,155
Total		$	41	$	22,494	$	—	$	22,535
Liabilities:
Contingent consideration—Zipsor	Contingent consideration liability	$	—	$	—	$	545	$	545
Contingent consideration—CAMBIA	Contingent consideration liability	—		—		521		521
Total		$	—	$	—	$	1,066	$	1,066



(in thousands)	Financial Statement
December 31, 2018	Classification	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	Cash and cash equivalents	$	11	$	—	$	—	$	11
Agency bond	Cash and cash equivalents	—		1,250		—		1,250
Commercial paper	Cash and cash equivalents	—		14,028		—		14,028
Collegium warrants	Investments	—		8,784		—		8,784
Total		$	11	$	24,062	$	—	$	24,073
Liabilities:
Contingent consideration—Zipsor	Contingent consideration liability	$	—	$	—	$	531	$	531
Contingent consideration—CAMBIA	Contingent consideration liability	—		—		507		507
Total		$	—	$	—	$	1,038	$	1,038

The fair value measurement of the contingent consideration obligations arises from the Zipsor and CAMBIA acquisitions and relates to fair value of the potential future contingent milestone payments and royalties payable under the respective agreements which are determined using Level 3 inputs. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company re-measures the contingent consideration obligation arising from the above acquisitions to their estimated fair values. Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of the contingent consideration obligation resulting from the passage of time are recorded within interest expense until the contingent consideration is settled. The table below provides a summary of the changes in fair value recorded in interest expense and selling, general and administrative expenses for the three months ended March 31, 2019 and 2018:



	Three Months Ended March 31,
(in thousands)	2019		2018
Fair value, beginning of the period	$	1,038	$	1,613
Changes in fair value recorded in interest expense	28		40
Changes in fair value recorded in selling, general and administrative expenses	—		(242		)
Royalties and milestone paid	—		(162		)
Total	$	1,066	$	1,249

The estimated fair value of the 2.50% Convertible Senior Notes Due 2021, which the Company issued on September 9, 2014 is based on a market approach. The estimated fair value was approximately $277.1 million and $231.8 million (par value $345.0 million) as of March 31, 2019 and December 31, 2018, respectively, and represents a Level 2 valuation. The principal amount of the Senior Notes, as defined in Note 10, approximates their fair value as of March 31, 2019 and December 31, 2018, respectively and represents a Level 2 valuation. When determining the estimated fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three months ended March 31, 2019 and 2018.