Fair Value Measurements

FASB ASC 820 “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820 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 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 asset consists of money market investments. The Company does not have Level 1 liabilities as of September 30, 2015 or December 31, 2014.


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 does not have Level 2 assets or liabilities as of September 30, 2015 or December 31, 2014.

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 liabilities consist of the contingent purchase prices associated with the Company's business combinations. The fair value of certain development or regulatory milestone based contingent purchase prices was 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 September 30, 2015 and December 31, 2014 by level within the fair value hierarchy. As required by ASC 820, 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 September 30, 2015								As of December 31, 2014
Assets and Liabilities	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2015		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2014
	(in thousands)
Assets:
Money market	$	6,032	$	—	$	—	$	6,032	$	6,030	$	—	$	—	$	6,030
Total assets at fair value	$	6,032	$	—	$	—	$	6,032	$	6,030	$	—	$	—	$	6,030
Liabilities:
Contingent purchase price	$	—	$	—	$	204,307	$	204,307	$	—	$	—	$	351,134	$	351,134
Total liabilities at fair value	$	—	$	—	$	204,307	$	204,307	$	—	$	—	$	351,134	$	351,134

The Company measures 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 selling, general and administrative expenses in the accompanying consolidated statements of operations.

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.

Level 3 Disclosures

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



	Fair Value as of
	September 30, 2015		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in thousands)
Targanta:
Contingent purchase price	$	5,707	Probability-adjusted discounted cash flow	Probability of success	20%
				Period in which milestone is expected to be achieved	2020
				Discount rate	11%
Incline:
Contingent purchase price	$	78,000	Probability-adjusted discounted cash flow	Probabilities of success	64% -100% (86%)
				Periods in which milestones are expected to be achieved	2015 - 2018
				Discount Rate	18%
ProFibrix:
Contingent purchase price	$	2,400	Probability-adjusted discounted cash flow	Probabilities of success	5% - 15% (14%)
				Periods in which milestones are expected to be achieved	2019
				Discount rate	27% - 29%
Rempex:
Contingent purchase price: commercial milestone	$	65,200	Probability-adjusted discounted cash flow	Probabilities of success	11% - 95% (57%)
				Periods in which milestones are expected to be achieved	2015 - 2020
				Discount rate	2.6% - 5.6%
Contingent purchase price: sales milestone	$	11,300	Risk-adjusted revenue simulation	Probabilities of success	11% - 63% (30%)
				Periods in which milestone is expected to be achieved	2017 - 2022
				Discount rate	4.6% - 6.4%

Tenaxis:
Contingent purchase price	$	25,700	Probability-adjusted discounted cash flow	Probabilities of success	5% - 100% (89%)
				Periods in which milestones are expected to be achieved	2019 - 2029



				Discount rate	4.2% - 26%
Annovation:
Contingent purchase price	$	16,000	Probability-adjusted discounted cash flow	Probabilities of success	8% - 50% (31%)
				Periods in which milestones are expected to be achieved	2016 - 2030
				Discount rate	3.3% - 8.0%



	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	Probability of success	20%
				Period in which milestone is 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	Probabilities of success	5% - 95% (92%)
				Periods 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	Probabilities of success	11% - 95% (63%)
				Periods 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	Probabilities of success	9% - 49% (17%)
				Periods 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	Probabilities of success	5% - 100% (84%)
				Periods in which milestones are expected to be achieved	2015 - 2026
				Discount rate	1% - 20%

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

The changes in fair value of the Company's Level 3 contingent purchase price during the three and nine months ended September 30, 2015 and 2014 were as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
	(in thousands)
Balance at beginning of period	207,160			360,780		351,134			302,363
Fair value of contingent purchase price with respect to Tenaxis as of May 1, 2014	—			—		—			37,900
Fair value of contingent purchase price with respect to Annovation as of February 2, 2015	—			—		18,000			—
Settlements	(3,600		)	—		(179,250		)	—
Fair value adjustment to contingent purchase prices included in net loss	747			8,214		14,423			28,731
Balance at end of period	$	204,307		$	368,994	$	204,307		$	368,994

For the three months ended September 30, 2015, the changes in the carrying value of the contingent purchase price obligations resulted from changes in the fair value of the contingent consideration due to either the passage of time or changes in probabilities of success or discount rate and payments made for milestones achieved. For the nine months ended September 30, 2015, 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 acquisition of Annovation, subsequent changes in the fair value of the contingent consideration due to either the passage of time or changes in probabilities of success or discount rate and payments made for milestones achieved.

No other changes in valuation techniques or inputs occurred during the three and nine months ended September 30, 2015. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three and nine months ended September 30, 2015.