Fair Value Accounting | 9 Months Ended |
Sep. 30, 2013 |
Fair Value Disclosures [Abstract] | ' |
Fair Value Accounting | ' |
4. Fair Value Accounting |
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value. The three levels are: |
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| • | | Level 1 — Quoted prices in active markets for identical assets or liabilities. | | | | | | | | | | | | | |
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| • | | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; 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 and that are significant to the fair value of the assets or liabilities. | | | | | | | | | | | | | |
The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents, and marketable securities) by major security type and liability measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands): |
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September 30, 2013 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets | | | | | | | | | | | | | | | | |
Money market funds | | $ | 19,869 | | | $ | — | | | $ | — | | | $ | 19,869 | |
Corporate debt securities | | | — | | | | 11,304 | | | | — | | | | 11,304 | |
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Total assets | | $ | 19,869 | | | $ | 11,304 | | | $ | — | | | $ | 31,173 | |
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Liabilities | | | | | | | | | | | | | | | | |
Contingent consideration liability | | $ | — | | | $ | — | | | $ | 43,300 | | | $ | 43,300 | |
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Total liabilities | | $ | — | | | $ | — | | | $ | 43,300 | | | $ | 43,300 | |
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December 31, 2012 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets | | | | | | | | | | | | | | | | |
Money market funds | | $ | 17,307 | | | $ | — | | | $ | — | | | $ | 17,307 | |
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Total assets | | $ | 17,307 | | | $ | — | | | $ | — | | | $ | 17,307 | |
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Liabilities | | | | | | | | | | | | | | | | |
Contingent consideration liability | | $ | — | | | $ | — | | | $ | 9,600 | | | $ | 9,600 | |
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Total liabilities | | $ | — | | | $ | — | | | $ | 9,600 | | | $ | 9,600 | |
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Cash equivalents and marketable securities |
The following table outlines the amortized cost, fair value and unrealized gain/(loss) for the Company’s financial assets by major security type as of September 30, 2013 (in thousands): |
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September 30, 2013 | | Amortized | | | Fair Value | | | Unrealized | | | | | |
Cost | Gain/(Loss) | | | | |
Money market funds | | $ | 19,869 | | | $ | 19,869 | | | $ | — | | | | | |
Corporate debt securities | | | 11,302 | | | | 11,304 | | | | 2 | | | | | |
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Total | | | 31,171 | | | | 31,173 | | | | 2 | | | | | |
Less amounts classified as cash equivalents | | | (22,523 | ) | | | (22,523 | ) | | | — | | | | | |
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Total marketable securities | | $ | 8,648 | | | $ | 8,650 | | | $ | 2 | | | | | |
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The Company did not have any unrealized gains or losses at December 31, 2012. The Company had no sales of marketable securities during the three and nine months ended September 30, 2013 or 2012. As of September 30, 2013, all of the Company’s marketable securities had original maturity dates of less than one year. |
The Company’s available-for-sale debt securities are valued utilizing a multi-dimensional relational model. Inputs, listed in approximate order of priority for use when available, include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. |
Contingent Consideration Liability |
In connection with the exercise of the Company’s option to purchase all of the outstanding equity of Symphony Allegro, Inc. (“Allegro”) in 2009, the Company is obligated to make contingent cash payments to the former Allegro stockholders related to certain payments received by the Company from future collaboration agreements pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam). In order to estimate the fair value of the liability associated with the contingent cash payments, the Company prepared several cash flow scenarios for ADASUVE, AZ-104 and AZ-002, which are subject to the contingent payment obligation. Each potential cash flow scenario consisted of assumptions of the range of estimated milestone and license payments potentially receivable from such collaborations and assumed royalties received from future product sales. Based on these estimates, the Company computed the estimated payments to be made to the former Allegro stockholders. Payments were assumed to terminate upon the expiration of the related patents. |
The projected cash flow assumptions for ADASUVE in the United States are based on the Teva Agreement (see Note 10) and on internally and externally developed product sales forecasts. The timing and extent of the projected cash flows for ADASUVE for the territories licensed to Ferrer are based on the Ferrer Agreement (see Note 10). The timing and extent of the projected cash flows for the remaining territories for ADASUVE and worldwide territories for AZ-002 and AZ-104 were based on internal estimates for potential milestones and multiple product royalty scenarios and are also consistent in structure to the most recently negotiated collaboration agreements. |
The Company then assigned a probability to each of the cash flow scenarios based on several factors, including: the product candidate’s stage of development, preclinical and clinical results, technological risk related to the successful development of the different drug candidates, estimated market size, market risk and potential collaboration interest to determine a risk adjusted weighted average cash flow based on all of these scenarios. These probability and risk adjusted weighted average cash flows were then discounted utilizing the Company’s estimated weighted average cost of capital (“WACC”). The Company’s WACC considered the Company’s cash position, competition, risk of substitute products, and risk associated with the financing of the development projects. During the nine months ended September 30, 2013, the Company reduced the discount rate from 18.0% to 16.5% to reflect the Company’s current estimated WACC. The change in discount rate increased the net loss for the nine months ended September 30, 2013 by approximately $3,600,000 or $0.22 per share. |
This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 measurements are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s assumptions in measuring fair value. |
The Company records any changes in the fair value of the contingent consideration liability in earnings in the period of the change. Certain events including, but not limited to, the timing and terms of any collaboration agreement, clinical trial results, approval or non-approval of any future regulatory submissions and the commercial success of ADASUVE, AZ-104 or AZ-002 could have a material impact on the fair value of the contingent consideration liability, and as a result, the Company’s results of operations and financial position for the impacted period. |
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During the nine months ended September 30, 2013, the Company modified the assumptions regarding the timing and amount of certain cash flows primarily to reflect the increased probability that the Company would license the U.S. commercialization rights to ADASUVE to a third party in the first quarter of 2013 and the impact of the actual licensing and the terms of the Teva Agreement in the second quarter of 2013. These changes in assumptions, the change in the WACC in the nine months ended September 30, 2013 described above, the change in the projected U.S. ADASUVE launch date to the first quarter of 2014 and the effects of the passage of three and nine months, respectively, on the present value computation resulted in an increase to the net loss of $1,613,000 and $44,013,000, or $0.09 and $2.67 per share, for the three and nine months ended September 30, 2013, respectively. |
During the three and nine months ended September 30, 2012, the Company modified the assumptions regarding the timing and extent of certain cash flows primarily to reflect the three month extension of the review by the U.S. Food and Drug Administration (“FDA”) of the Company’s ADASUVE New Drug Application (“NDA”) from February 4, 2012 to May 4, 2012 and the receipt of the Complete Response Letter for the ADASUVE NDA in May 2012. This change in assumptions and the effects of the passage of time on the present value computation resulted in an increase to the net loss of $200,000, or $0.02 per share, for the three months ended September 30, 2012 and a decrease to the net loss of $1,000,000 or $0.09 per share for the nine months ended September 30, 2012. |
The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the three and nine months ended September 30, 2013 and 2012 (in thousands): |
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| | Three Months Ended | | | Nine Months Ended | |
September 30, | September 30, |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Beginning balance | | $ | 42,000 | | | $ | 10,300 | | | $ | 9,600 | | | $ | 16,500 | |
Payments made | | | (313 | ) | | | — | | | | (10,313 | ) | | | (5,000 | ) |
Adjustments to fair value measurement | | | 1,613 | | | | 200 | | | | 44,013 | | | | (1,000 | ) |
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Ending balance | | $ | 43,300 | | | $ | 10,500 | | | $ | 43,300 | | | $ | 10,500 | |
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Financing Obligations |
The Company has estimated the fair value of its financing obligations (see Note 8) using the net present value of the payments discounted at an interest rate that is consistent with its estimated current borrowing rate for similar long-term debt. The Company believes the estimates used to measure the fair value of the financing obligations constitute Level 3 inputs. |
At September 30, 2013 and December 31, 2012, the estimated fair value of the Company’s financing obligations was $6,127,000 and $6,254,000, respectively and had book values of $8,173,000 and $6,461,000, respectively. The Company’s payment commitments associated with these debt instruments are comprised of interest payments and principal payments. The fair value of the Company’s debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest, and declining in periods of increasing rates of interest. |