Fair Value Measurements

FASB ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value 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. ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:



Level 1		Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities consist of money market investments and U.S. treasury notes.
Level 2		Observable inputs other than Level 1 prices, 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. The Company’s Level 2 assets and liabilities consist of U.S. government agency notes and corporate debt securities. Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates and yield curves.
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 Company’s Level 3 assets and liabilities consist of the contingent purchase price associated with the Company's business combinations. The fair value of the certain development or regulatory milestone based contingent purchase prices were determined in a discounted cash flow framework by probability weighting the future contractual payment with management's assessment of the likelihood of achieving these milestones and present valuing them using a risk adjusted discount rate. Certain sales milestone based payments were determined in a discounted cash flow framework where risk-adjusted revenue scenarios were estimated using Monte Carlo simulation models to compute contractual payments which were present valued using a risk adjusted discount rate.

The following table sets forth the Company’s assets and liabilities that were measured at fair value on a recurring basis at December 31, 2014 and 2013 by level within the fair value hierarchy. As required by ASC 820-10, assets and liabilities measured at fair value are classified in their entirety 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 in its entirety requires judgment and considers factors specific to the asset or liability:



	As of December 31, 2014								As of December 31, 2013
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance at December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance at December 31,
Assets and Liabilities	(Level 1)		(Level 2)		(Level 3)		2014		(Level 1)		(Level 2)		(Level 3)		2013
	(In thousands)
Assets:
Money market	$	6,030	$	—	$	—	$	6,030	$	45,950	$	—	$	—	$	45,950
Total assets at fair value	$	6,030	$	—	$	—	$	6,030	$	45,950	$	—	$	—	$	45,950
Liabilities:
Contingent purchase price	$	—	$	—	$	351,134	$	351,134	$	—	$	—	$	302,363	$	302,363
Total liabilities at fair value	$	—	$	—	$	351,134	$	351,134	$	—	$	—	$	302,363	$	302,363

Level 3 Disclosures

The Company measures its contingent purchase price at fair value based on significant inputs not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of contingent purchase price uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of contingent purchase price related to updated assumptions and estimates are recognized within the consolidated statements of income.

Contingent purchase price may change significantly as additional data is obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs:



	Fair Value as of
	December 31, 2014		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in thousands)
Targanta:
Contingent purchase price	$	6,334	Probability-adjusted discounted cash flow	Probabilities of success	20%
				Periods in which milestones are expected to be achieved	2019
				Discount rate	11%
Incline:
Contingent purchase price	$	123,800	Probability-adjusted discounted cash flow	Probabilities of success	64% - 100% (83%)
				Periods in which milestones are expected to be achieved	2015-2018
				Discount Rate	18%
ProFibrix:
Contingent purchase price	$	88,600	Probability-adjusted discounted cash flow	Probability of success	5% - 95% (92%)
				Period in which milestones are expected to be achieved	2015 - 2017
				Discount rate	2.5% - 24.1%
Rempex:
Contingent purchase price: commercial milestone	$	80,800	Probability-adjusted discounted cash flow	Probability of success	11% -95% (63%)
				Period in which milestones are expected to be achieved	2015 - 2019
				Discount rate	1.5% - 3.7%
Contingent purchase price: sales milestone	$	10,900	Risk adjusted revenue simulation	Probability of success	9% - 49% (17%)
				Period in which milestones are expected to be achieved	2016 - 2022
				Discount rate	1.5% - 4.5%

Tenaxis:
Contingent purchase price	$	40,700	Probability-adjusted discounted cash flow	Probability of success	5% - 100% (84%)
				Periods in which milestones are expected to be achieved	2015 - 2026
				Discount rate	1% - 20%



	Fair Value as of
	December 31, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in thousands)
Targanta:
Contingent purchase price	$	5,573	Probability-adjusted discounted cash flow	Probabilities of success	20%
				Periods in which milestones are expected to be achieved	2019
				Discount rate	11%
Incline:
Contingent purchase price	$	115,890	Probability-adjusted discounted cash flow	Probabilities of success	60% - 85% (79%)
				Periods in which milestones are expected to be achieved	2013-2017
				Discount Rate	18%
ProFibrix:
Contingent purchase price	$	84,000	Probability-adjusted discounted cash flow	Probability of success	5% - 95% (91%)
				Period in which milestones are expected to be achieved	2015 - 2017
				Discount rate	4.9% - 17.5%
Rempex:
Contingent purchase price: commercial milestone	$	87,900	Probability-adjusted discounted cash flow	Probability of success	11% -95% (63%)
				Period in which milestones are expected to be achieved	2014 - 2019
				Discount rate	1.5% - 4.38%
Contingent purchase price: sales milestone	$	9,000	Risk adjusted revenue simulation	Probability of success	9% - 49% (18%)
				Period in which milestones are expected to be achieved	2016 - 2022
				Discount rate	2% - 5.4%

The fair value of the contingent purchase price represents the fair value of the Company's liability for all potential payments under the Company's agreement with Targanta, Incline, ProFibrix, Rempex and Tenaxis. The significant unobservable inputs used in the fair value measurement of the Company's contingent purchase price are the probabilities of successful achievement of development, regulatory and sales milestones, which would trigger payments under the Targanta, Incline, ProFibrix, Rempex and Tenaxis agreements, probabilities as to the periods in which the milestones are expected to be achieved and a discount rate. Significant changes in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant changes in the probabilities as to the periods in which milestones will be achieved would result in a significantly lower or higher fair value measurement, respectively.

The changes in fair value of the Company’s Level 3 contingent purchase price during the year ended December 31, 2014 and 2013 were as follows:



	December 31,
	2014		2013
	(in thousands)
Balance at beginning of period	$	302,363	$	18,971
Fair value of contingent purchase price with respect to Incline as of January 4, 2013	—		87,200
Fair value of contingent purchase price with respect to ProFibrix as of August 5, 2013	—		82,550
Fair value of contingent purchase price with respect to Rempex as of December 3, 2013	—		96,700
Fair value of contingent purchase price with respect to Tenaxis as of May1, 2014	37,900		—
Fair value adjustment to contingent purchase price included in net income (loss)	10,871		16,942
Balance at end of period	$	351,134	$	302,363

For the year ended December 31, 2014, the changes in the carrying value of the contingent purchase price obligations resulted from the initial estimate of the fair value of the contingent consideration related to the Company's purchase of Tenaxis and subsequent changes in the fair value of the contingent consideration due to either the passage of time, changes in discount rates or changes in probabilities of success, milestones payments and a settlement and amendment to the merger agreement relating to Incline. In December 2014, the Incline merger agreement was amended to revise to certain milestone triggers, reduce the total potential milestone payments and release the escrow fund to the Company.

No other changes in valuation techniques or inputs occurred during the year ended December 31, 2014.

No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the year ended December 31, 2014.