FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2015

Financial Instruments and Fair Value

The Company accounts for financial instruments in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In estimating the fair value of the Company’s derivative liabilities, the Company used the Monte Carlo Simulation as of December 31, 2015 and the Binomial Lattice options pricing model as of December 31, 2014. Based on the fair value hierarchy, the Company classified the derivative liability within Level 3.

In estimating the fair value of the Company’s contingent consideration, the Company used the comparable uncontrolled transaction (“CUT”) method for royalty payments based on projected revenues. Based on the fair value hierarchy, the Company classified contingent consideration within Level 3 because valuation inputs are based on projected revenues discounted to a present value.

Financial instruments with carrying values approximating fair value include cash and cash equivalents, accounts receivable, notes receivable, deposits on license agreements, and accounts payable, due to their short term nature.

The following table presents the Company’s asset and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2015 (in thousands):



	As of December, 2015		Fair Value Hierarchy at December 31, 2015
	Total carrying and estimated fair value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Asset:
Marketable securities, available-for-sale	$	191,799	$	—	$	191,799	$	—
Liabilities:
Derivative liability related to warrants	$	38,810	$	—	$	—	$	38,810
Business combination-related contingent consideration	$	59,021	$	—	$	—	$	59,021



	As of December, 2014		Fair Value Hierarchy at December 31, 2014
	Total carrying and estimated fair value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Asset:
Marketable securities, available-for-sale	$	9,556	$	9,556	$	—	$	—
Liabilities:
Derivative liability related to warrants	$	27,990	$	—	$	—	$	27,990
Business combination-related contingent consideration	$	11,637	$	—	$	—	$	11,637

The following table sets forth a summary of changes in the estimated fair value of the Company’s Level 3 derivative liability for the period from January 1, 2015 through December 31, 2015:



	Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)
Balance at January 1, 2015	$	27,990
Issuance of common stock warrants	1,050
Reclassification of derivative liability to equity upon exercise of warrants	(23,537		)
Change in estimated fair value of liability classified warrants	33,307
Balance at December 31, 2015	$	38,810

The following table sets forth a summary of changes in the estimated fair value of the Company’s Level 3 derivative liability for the period from January 1, 2014 through December 31, 2014:



	Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)
Balance at January 1, 2014	$	25,037
Issuance of common stock warrants	2,531
Reclassification of derivative liability to equity upon exercise of warrants	(23,364		)
Change in estimated fair value of liability classified warrants	23,786
Balance at December 31, 2014	$	27,990

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820.

The following table sets forth a summary of changes in the estimated business combination-related contingent consideration for the period from January 1, 2015 through December 31, 2015:



	Fair Value Measurements of Acquisition-Related Contingent Consideration (Level 3)
Balance at January 1, 2015	$	11,637
Present value of contingent consideration related to Cholbam acquisition, upon acquisition	39,107
Increase from revaluation of contingent consideration	13,778
Decrease of contingent consideration, asset divestiture	(604		)
Contractual Payments	(3,938		)
Contractual Payments accrued at December 31, 2015	(959		)
Balance at December 31, 2015	$	59,021

The following table sets forth a summary of changes in the estimated acquisition-related contingent consideration for the period from January 1, 2014 through December 31, 2014:



	Fair Value Measurements of Acquisition-Related Contingent Consideration
Balance at January 1, 2014	$	—
Present value of contingent consideration related to Manchester acquisition, upon acquisition	12,800
Contractual Payments	(1,163		)
Balance at December 31, 2014	$	11,637

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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