6. Fair Value Measurements

We record auction rate securities at fair value in the accompanying Consolidated Balance Sheets in accordance with ASC 320 Investments – Debt and Equity Securities. The change in the fair value of these investments is recorded as a component of other comprehensive income (loss) (see Note 3. Summary of Significant Accounting Policies - Fair Value Measurements in the notes to consolidated financial statements included in our 2013 Annual Report on Form 10-K). We also record the contingent consideration liability resulting from the MIP acquisition at fair value in accordance with ASC 820-10-50.

The following tables present our money market funds and auction rate securities and contingent consideration liability measured at fair value on a recurring basis as of the dates indicated, classified by valuation hierarchy:

			Fair Value Measurements at September 30, 2014
	Balance at September 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	70,397	$	70,397	$	-	$	-
Auction rate securities		2,208		-		-		2,208
Total Assets	$	72,605	$	70,397	$	-	$	2,208

Liability:
Contingent consideration	$	17,100	$	-	$	-	$	17,100
Total Liability	$	17,100	$	-	$	-	$	17,100

			Fair Value Measurements at December 31, 2013
	Balance at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	60,364	$	60,364	$	-	$	-
Auction rate securities		2,208		-		-		2,208
Total Assets	$	62,572	$	60,364	$	-	$	2,208

Liability:
Contingent consideration	$	15,700	$	-	$	-	$	15,700
Total Liability	$	15,700	$	-	$	-	$	15,700

At September 30, 2014 we held $2,208 in auction rate securities which are classified as Level 3 and in current assets as noted below. The fair value of these securities includes U.S. government subsidized securities collateralized by student loan obligations, with maturities greater than 10 years. Under the securities' terms we would not realize cash in respect of the principal amount of these securities until the issuer calls or restructures the security, the security reaches any scheduled maturity and is paid, or a buyer outside the auction process emerges. We have to date received all scheduled interest payments on these securities, which, in the event of auction failure, are reset according to contractual terms in the governing instruments.

The valuation of auction rate securities we held at September 30, 2014 is based on Level 3 unobservable inputs which consist of our internal analysis of (i) timing of expected future successful auctions or issuer calls of the securities, (ii) collateralization of underlying assets of the security and (iii) credit quality of the security. Significant increases or decreases in the redemption period or discount rates would result in a significantly lower or higher, respectively, fair value measurement. The temporary impairment amount associated with these securities, the duration of which is greater than 12 months, remained unchanged from year-end 2013 at $192, which is reflected as part of accumulated other comprehensive loss on our accompanying Consolidated Balance Sheets. Based on our re-evaluation for this quarter, we continue to believe that we have the ability to hold these securities until recovery of fair value. Due to the uncertainty related to the liquidity in the auction rate security market and therefore when individual positions may be liquidated, we classified these auction rate securities as long-term assets on our accompanying Consolidated Balance Sheet as of December 31, 2013. We continue to monitor markets for our investments and consider the impact, if any, of market conditions on the fair market value of our investments. We do not believe the carrying values of our investments are other than temporarily impaired and therefore expect the positions will eventually be liquidated without significant loss. Due to redemption of the auction rate securities after third quarter-end, these securities have been classified as current assets as of September 30, 2014 (see Note 11. Subsequent Event).

The estimated fair value of the contingent consideration liability of $17.1 million as of September 30, 2014, represents future potential milestone payments to former MIP stockholders. The Company considers this liability a Level 3 instrument (one with significant unobservable inputs) in the fair value hierarchy. The estimated fair value was determined based on probability adjusted discounted cash flow and Monte Carlo simulation models that included significant estimates and assumptions pertaining to commercialization events and sales targets. The most significant unobservable inputs were the probabilities of achieving regulatory approval of the development projects and subsequent commercial success, and discount rates.

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 Company records the contingent consideration liability at fair value with changes in estimated fair values recorded in the Consolidated Statements of Operations.

The following table presents quantitative information pertaining to the September 30, 2014 fair value measurement of the Level 3 inputs. The assumptions remained unchanged since December 31, 2013:

	Fair Value as of September 30, 2014		Fair Value as of December 31, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)

Asset:
Auction rate securities	$	2,208	$	2,208	Discounted cash flow model	Redemption period	5 to 15 years (6 years)
						Discount rate		0.25% - 3.00% (1.55%)
Contingent consideration liability:
Azedra commercialization	$	2,400	$	2,300	Probability adjusted discounted cash flow model	Probability of success		40%
						Period of milestone expected achievement		2017
						Discount rate		10%

1404 commercialization	$	2,200	$	2,000	Probability adjusted discounted cash flow model	Probability of success		31%
						Period of milestone expected achievement		2018
						Discount rate		10%

MIP-1095 commercialization	$	500	$	500	Probability adjusted discounted cash flow model	Probability of success		19%
						Period of milestone expected achievement		2021
						Discount rate		10%

Net sales targets	$	12,000	$	10,900	Monte-Carlo simulation	Probability of success		19% - 40% (32.8%)
						Period of milestone expected achievement		2018 - 2022
						Discount rate		12.5%

For those financial instruments with significant Level 3 inputs, the following table summarizes the activities for the periods indicated:

	Asset – Auction Rate Securities Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Three Months Ended September 30,
	2014		2013
Description
Balance at beginning of period	$	2,208	$	2,208
Transfers into Level 3		-		-
Total realized/unrealized gains (losses)
Included in net income (loss)		-		-
Included in other comprehensive income (loss)		-		-
Settlements		-		-
Balance at end of period	$	2,208	$	2,208
Total amount of unrealized gains (losses) for the period included in other comprehensive income (loss) attributable to the change in fair market value of related assets still held at the reporting date	$	-	$	-

	Asset – Auction Rate Securities Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Nine Months Ended September 30,
	2014		2013
Description
Balance at beginning of period	$	2,208	$	3,240
Transfers into Level 3		-		-
Total realized/unrealized gains (losses)
Included in net income (loss)		-		-
Included in other comprehensive income (loss)		-		68
Settlements		-		(1,100	)
Balance at end of period	$	2,208	$	2,208
Total amount of unrealized gains (losses) for the period included in other comprehensive income (loss) attributable to the change in fair market value of related assets still held at the reporting date	$	-	$	-

	Liability – Contingent Consideration Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Three Months Ended September 30,
	2014		2013
Description
Balance at beginning of period	$	16,600	$	15,900
Fair value change to contingent consideration included in net income (loss)		500		-
Balance at end of period	$	17,100	$	15,900
Changes in unrealized gains or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period	$	500	$	-

	Liability – Contingent Consideration Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Nine Months Ended September 30,
	2014		2013
Description
Balance at beginning of period	$	15,700	$	-
Fair value of contingent consideration – acquisition of Molecular Insight		-		15,900
Fair value change to contingent consideration included in net income (loss)		1,400		-
Balance at end of period	$	17,100	$	15,900
Changes in unrealized gains or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period	$	1,400	$	-