FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2013

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

4.     FAIR VALUE MEASUREMENTS

The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

The following tables present the Company’s fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

	June 30, 2013
	Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	29,881	$	29,881	$	0	$	0
Short-term investments	44,697		12,034		32,663		0
Total financial assets	$	74,578	$	41,915	$	32,663	$	0
Liabilities
Contingent consideration	$	112,392	$	0	$	0	$	112,392

	December 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	35,857	$	35,857	$	0	$	0
Short-term investments	121,573		31,459		90,114		0
Long-term investments:
Auction rate securities	1,442		0		0		1,442
Total financial assets	$	158,872	$	67,316	$	90,114	$	1,442
Liabilities
Contingent consideration	$	0	$	0	$	0	$	0

Financial assets

The Company considers its short-term investments to be “available for sale” and accordingly classifies them as current, as management can sell these investments at any time at their option. The cost basis of short-term investments held at June 30, 2013 approximated the fair value of these securities. Related unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss) in the equity section of the accompanying balance sheet. The amount of unrealized loss on short-term investments amounted to $225 as of June 30, 2013.

Fair value for Level 1 is based on quoted market prices. Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources including market participants, dealers and brokers. The securities classified as Level 3 are auction rate securities that are not actively traded.  The Company determined the fair value of these securities based on a discounted cash flow model which incorporated a discount period, coupon rate, liquidity discount and coupon history.  In determining the fair value, the Company also considered the rating of the securities by investment rating agencies and whether the securities were backed by the United States government.

There was no Level 3 financial asset activity during the three months ended June 30, 2013. The following table summarizes the changes in the financial assets measured at fair value using Level 3 inputs for the six months ended June 30, 2013:

Long -term Investments	Six months ended June 30, 2013
Beginning balance	$	1,442
Transfers into Level 3	0
Sales and redemptions of securities	(1,528		)
Unrealized gain- included in other comprehensive income	86
Ending balance	$	0
Total realized loss on sale of securities included in Investment income (loss), net for the period	$	(72	)

There were no transfers between Level 1 and 2 during the six months ended June 30, 2013.

Contingent consideration

The Level 3 liability is contingent consideration related to the acquisition of Actient described in Note 2. Fair value is determined based on assumptions and projections relevant to revenues and discounted cash flow model using a risk-adjusted discount rate of 14%. Assumptions include the expected value of royalties and milestone payments due on estimated settlement dates, volatility of product supply, demand and prices, and the Company’s cost of money. The Company assesses these assumptions on an ongoing basis as additional information impacting the assumptions is obtained. Changes in the fair value of contingent consideration related to the updated assumptions and estimates are recognized in the consolidated statements of operations.

The table below provides a rollforward of the fair value of contingent consideration since the Actient acquisition date:

	Contingent consideration
Fair value at date of Actient acquisition, April 26, 2013	$	113,858
Change in contingent consideration charged to operations	2,258
Payments of contingent consideration	(3,724		)
Fair value at June 30, 2013	$	112,392

Debt outstanding

Management estimates that the fair value of the Term Loan outstanding at June 30, 2013 approximates its principal value of $222,188 based upon market interest rates (a Level 2 fair value measurement). The fair value of the 2018 Convertible Notes at June 30, 2013 approximates its par value of $350,000 based on active trading activity in this security (a Level 1 fair value measurement).