Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Measurements

Fair Value Measurements

Note 7. Fair Value Measurements

In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company measures certain assets and liabilities at fair value on a recurring basis using the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers include:

· Level 1, defined as observable inputs such as quoted prices for identical assets in active markets;

· Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

· Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring management to develop its own assumptions based on best estimates of what market participants would use in pricing an asset or liability at the reporting date.

The Company’s financial assets and liabilities (cash equivalents, current and non-current marketable securities, derivative instruments, convertible senior notes and current and non-current liabilities for contingent consideration), which require fair value measurement on a recurring basis are classified within the fair value hierarchy as follows:

	As of March 31, 2013
	(In thousands)
	As reflected on the balance sheet		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	11,496	$	11,496	$	—	$	—	$	11,496
Corporate and financial institutions debt	249,127		—		249,127		—		$	249,127
Auction rate securities	8,178		—		—		8,178		$	8,178
U.S. government agencies	71,100		—		71,100		—		$	71,100
U.S. treasury bills	34,314		34,314		—		—		$	34,314
Total	$	374,215	$	45,810	$	320,227	$	8,178	$	374,215
Liabilities:
Liability for contingent consideration, current and non-current	$	152,093	$	—	$	—	$	152,093	$	152,093
Convertible senior notes due 2016 (face value $230,000)	177,503		—		537,038		—		537,038
Total	$	329,596	$	—	$	537,038	$	152,093	$	689,131

	As of December 31, 2012
	(In thousands)
	As reflected on the balance sheet		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	19,297	$	19,297	$	—	$	—	$	19,297
Corporate and financial institutions debt	229,053		—		229,053		—		229,053
Auction rate securities	8,323		—		—		8,323		8,323
U.S. government agencies	88,514		—		88,514		—		88,514
U.S. treasury bills	29,222		29,222		—		—		29,222
Total	$	374,409	$	48,519	$	317,567	$	8,323	$	374,409
Liabilities:
Liability for contingent consideration, current and non-current	$	149,163	$	—	$	—	$	149,163	$	149,163
Convertible senior notes due 2016 (face value $230,000)	174,404		—		468,533		—		468,533
Total	$	323,567	$	—	$	468,533	$	149,163	$	617,696

Marketable Securities

Level 2 assets consist of debt securities issued by corporate and financial institutions and U.S. government and municipal agencies. The fair value of these securities is estimated using a weighted average price based on market prices from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources. There were no transfers between level 1 and level 2 assets during the periods presented.

Level 3 assets include securities with an auction reset feature (“auction rate securities”), which are classified as available-for-sale securities and reflected at estimated fair value. In February 2008, auctions began to fail for these securities and each auction for the majority of these securities since then has failed. As of March 31, 2013, the fair value of each of these securities is estimated utilizing a discounted cash flow analysis that considers interest rates, the timing and amount of cash flows, credit and liquidity premiums, and the expected holding periods of these securities. The unobservable inputs for these securities are the liquidity premium and expected holding period. The discount rates used in the cash flow analysis that includes the liquidity premium was 1.87%. An increase or decrease of 1% in the discount rate would have a $0.4 million change in the auction rate securities valuation. The expected holding period was 5.0 years. An increase or decrease of 1 year in the expected holding period would have a less than $0.1 million change in the auction rate securities valuation. The following table provides a summary of changes in fair value of the Company’s auction rate securities:

	Auction Rate Securities
	Three Months Ended March 31,
	2013			2012
	(In thousands)
Fair value at beginning of period	$	8,323		$	22,102
Redemptions	(200		)	—
Change in valuation	55			282
Fair value at end of period	$	8,178		$	22,384

As of March 31, 2013, as a result of the decline in fair value of the Company’s auction rate securities, which the Company believes is temporary and attributes to liquidity rather than credit issues, the Company has recorded an unrealized loss of $0.2 million included in the accumulated other comprehensive income, or OCI, line of stockholders’ equity. All of the auction rate securities held by the Company as March 31, 2013 consist of securities collateralized by student loan portfolios, which are substantially guaranteed by the United States government. Any future fluctuation in fair value related to the auction rate securities that the Company deems to be temporary, including any recoveries of previous write-downs, will be recorded in accumulated other comprehensive income (loss). If the Company determines that any decline in fair value is other than temporary, it will record a charge to earnings as appropriate. The Company does not intend to sell these securities and management believes it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost bases. The securities redeemed during the three months ended March 31, 2013 were all redeemed at par. Refer to Note 8 “Marketable Securities” for further details.

Liability for Contingent Consideration

Level 3 liabilities include the acquisition-related liability for contingent consideration the Company recorded representing the amounts payable to former Proteolix stockholders upon the achievement of specified regulatory approvals for Kyprolis in the U.S. and Europe within pre-specified timeframes. The range of the undiscounted amounts we could be required to pay for the remaining earn-out payments is between zero and $365.0 million. The fair value of this Level 3 liability is estimated using a probability-weighted discounted cash flow analysis and a discount rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption. Subsequent changes in the fair value of this liability are recorded to the “Contingent consideration” expense line item in the Condensed Consolidated Statements of Operations under operating expenses. The unobservable input for this liability is the probability of occurrence by the contractual milestone dates primarily based on PTRS. The range in PTRS is consistent with industry standards of other oncology compounds. A 1% change in the probability of occurrence of each milestone would have a $2.4 million change in the contingent consideration liability. During the three months ended March 31, 2013, the Company recognized contingent consideration expense of $2.9 million compared to $3.2 million for the same period last year.

The following table provides a summary of the changes in the fair value of the liability for contingent consideration:

	Liability for Contingent Consideration
	Three Months Ended March 31,
	2013		2012
	(In thousands)
Fair value at beginning of period	$	149,163	$	159,990
Change in valuation	2,930		3,178
Fair value at end of period	$	152,093	$	163,168

Convertible Senior Notes due 2016

Level 2 liabilities consist of the Company’s convertible senior notes due 2016. The fair value of these convertible senior notes is estimated based on directly and indirectly observable inputs. In accordance with ASC 825-10, Financial Instruments, the estimated market value of the Company’s convertible senior notes as of March 31, 2013 was $537.0 million. The Company’s convertible senior notes due 2016 are not marked-to-market and are carried at face value less the unamortized portion of the original issued discount, which resulted from issuance costs and the bifurcation of the fair value of the conversion feature. The portion of the value allocated to the conversion option is included in stockholders’ equity in the accompanying unaudited Condensed Consolidated Balance Sheet March 31, 2013.