FINANCIAL INSTRUMENTS

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the FASB established a three-level hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of fair value measurements are:


•	Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.


•	Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.


•	Level 3—Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. The fair value of the Notes at March 31, 2016 is calculated utilizing market quotations from an over-the-counter trading market for these Notes (Level 2). The carrying amount and fair value of the Notes are as follows (in thousands):



Financial Liabilities Carried at Historical Cost	Carrying Value		Fair Value Measurements Using
March 31, 2016	Carrying Value		Level 1		Level 2		Level 3
3.25% convertible senior notes *	$	105,215	$	—	$	262,551	$	—

* The fair value of the Notes was based on the closing price of the Company’s common stock of $52.98 per share at March 31, 2016 compared to a conversion price of $24.82 per share which, if converted, would result in an approximate conversion premium of 2.5 million shares or $134.5 million of cash. The maximum conversion premium that can be due on the Notes is 4.8 million shares, which assumes no increases in the conversion rate for certain corporate events.

Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporate bonds with maturities less than one year. Long-term investments consist of corporate bonds with maturities greater than one year. The net unrealized gains and losses from the Company’s short-term and long-term investments are reported in other comprehensive income. At March 31, 2016, all of the Company’s short-term and long-term investments are classified as available for sale investments and are determined to be Level 2 instruments, which are measured at fair value using standard industry models with observable inputs. The fair value of the commercial paper is measured based on a standard industry model that uses the three-month Treasury bill rate as an observable input. The fair value of the asset-backed securities and corporate bonds is principally measured or corroborated by trade data for identical issues in which related trading activity is not sufficiently frequent to be considered a Level 1 input or that of comparable securities. At March 31, 2016, the Company’s short-term and long-term investments were rated A or better by Standard & Poor’s.

The following summarizes the Company’s investments at March 31, 2016 and December 31, 2015 (in thousands):



March 31, 2016	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value (Level 2)
Debt securities:
Short-term:
Asset-backed securities	$	26,164	$	6	$	(4	)	$	26,166
Commercial paper	36,650		64		—			36,714
Corporate bonds	52,098		22		(8		)	52,112
Subtotal	114,912		92		(12		)	114,992
Long-term:
Corporate bonds	13,501		—		(31		)	13,470
Total	$	128,413	$	92	$	(43	)	$	128,462



December 31, 2015	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value (Level 2)
Debt securities:
Short-term:
Asset-backed securities	$	27,484	$	—	$	(15	)	$	27,469
Commercial paper	35,191		31		—			35,222
Corporate bonds	39,319		2		(31		)	39,290
Subtotal	101,994		33		(46		)	101,981
Long-term:
Corporate bonds	13,501		—		(39		)	13,462
Total	$	115,495	$	33	$	(85	)	$	115,443

The fair value in these instances would be determined using Level 3 inputs. At March 31, 2016, the Company had no financial instruments which were measured using Level 3 inputs.

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, long-term investments and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed federally-insured limits. The Company performs ongoing credit evaluations of its customers as warranted and generally does not require collateral.

As of March 31, 2016, three customers each accounted for over 10% of the Company’s accounts receivable, at 30%, 30% and 28%, respectively. At December 31, 2015, three customers each accounted for over 10% of the Company’s accounts receivable, at 34%, 28% and 27%, respectively (for additional information regarding the Company’s customers, see Note 2, Summary of Significant Accounting Policies). Revenues are primarily derived from major wholesalers and pharmaceutical companies which generally have significant cash resources. Allowances for doubtful accounts receivable are maintained based on historical payment patterns, aging of accounts receivable and the Company’s actual write-off history. As of March 31, 2016 and December 31, 2015, no allowances for doubtful accounts were deemed necessary by the Company on its accounts receivable.