FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2012

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 4. FAIR VALUE MEASUREMENTS

        Fair value is defined as the exchange price that would be received to sell 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. The following three levels of inputs may be used to measure fair value under the fair value hierarchy:

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  Level 1—Quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.

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  Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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  Level 3—Unobservable inputs that are supported by little or no market activity.

        If the inputs used to measure the financial assets and liabilities fall within more than one of the different levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

        As of September 30, 2012, we held $124,985,000 of cash equivalents and marketable securities consisting of equity securities, high quality marketable debt instruments of the U.S. government and U.S. government agencies, commercial paper, and a money market fund. We have adopted an investment policy and established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. All investment securities are issued by or guaranteed by the U.S. government and its federal agencies or have a credit rating of at least long-term of A or short-term of A1/P1 as determined by Moody's Investors Service and/or Standard & Poor's. We do not have any direct investments in auction-rate securities or securities that are collateralized by assets that include mortgages or subprime debt.

        The fair value measurements of our financial assets and liabilities are identified at the following levels within the fair value hierarchy (in thousands):

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
At September 30, 2012
Financial assets carried at fair value:
Money market funds	$	—	$	1,041		—	$	1,041
Commercial paper		—		26,747		—		26,747
Corporate notes		—		7,921		—		7,921
U.S. government and U.S government agency notes		—		89,245		—		89,245
Equity securities		31		—		—		31
Total	$	31	$	124,954		—	$	124,985
Financial liabilities carried at fair value:
Deferred acquisition consideration		—		—	$	16,911	$	16,911
Warrant liability		—		—		316		316
Total		—		—	$	17,227	$	17,227
At December 31, 2011
Financial assets carried at fair value:
Money market funds	$	—	$	4,469		—	$	4,469
Commercial paper		—		31,394		—		31,394
Corporate notes		—		1,435		—		1,435
U.S. government and U.S government agency notes		—		72,913		—		72,913
Equity securities		1,819		—		—		1,819
Total	$	1,819	$	110,211		—	$	112,030
Financial liabilities carried at fair value:
Deferred acquisition consideration		—		—	$	28,977	$	28,977
Warrant liability		—		—		187		187
Total		—		—	$	29,164	$	29,164

        The Company's securities consisting of money market funds, commercial paper, corporate notes, and U.S. government and U.S. government agency notes are classified as Level 2 as they are valued using multi-dimensional relational pricing models that use observable market inputs from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data. Not all inputs listed are available for use in the evaluation process on any given day for each security evaluation. In addition, market indicators, industry, and other economic events are monitored and may serve as a trigger to acquire further corroborating market data. There were no transfers between Level 1 and Level 2 categories during the nine months ended September 30, 2012 and 2011, respectively.

        The following table provides reconciliations of financial liabilities measured at fair value using significant unobservable inputs (Level 3)(in thousands):

	Deferred Acquisition Consideration			Warrant Liability
Balances at December 31, 2011	$	28,977		$	187
Installments payment of deferred consideration		(12,272	)		—
Change in fair value		206			129
Balances at September 30, 2012	$	16,911		$	316

        Significant inputs and assumptions used to estimate the fair values of the deferred acquisition consideration are discussed in Note 5. The change in fair value of the deferred acquisition consideration is included in general and administrative expenses on the accompanying statement of operations for the nine months ended September 30, 2012.

        The fair value of warrants is estimated using the Black-Scholes option-pricing model based on the assumptions noted in the following table:

	Fair Value
	September 30, 2012			December 31, 2011
Risk-free interest rate		1.21	%		1.32	%
Dividend yield		—			—
Expected volatility		63.48	%		69.18	%
Expected life (in years)		5.00			5.75

        We compute expected volatility using historical volatility of our common stock based on the period of time corresponding to the expected life of the warrants. The expected life of the warrants is estimated to equal their remaining contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement that is commensurate with the expected life assumption. The dividend yield is zero as we do not expect to pay any dividends in the foreseeable future. The change in fair value of the warrant liability is included in other expense on the accompanying statement of operations for the nine months ended September 30, 2012.