Fair Value Disclosures

3 Months Ended

Mar. 31, 2016

NOTE 12. FAIR VALUE DISCLOSURES

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis:

			Fair Value Measurements Using:
	Fair Value		Level 1		Level 2		Level 3
March 31, 2016:
Current liabilities:
Foreign currency derivative contracts	$	431		—	$	431		—
Contingent consideration	$	4,924		—		—	$	4,924
Non-current liabilities:
Foreign currency derivative contracts	$	61		—	$	61		—
Contingent consideration	$	268,303		—		—	$	268,303
December 31, 2015:
Current liabilities:
Contingent consideration	$	4,900		—		—	$	4,900
Non-current liabilities:
Contingent consideration	$	262,368		—		—	$	262,368

The Company estimates the fair values of Level 2 assets or liabilities, including foreign currency derivative contracts, by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly, or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar assets, issuer credit spreads, benchmark yields, foreign currency rates, London Interbank Offered Rates (LIBOR), and other observable inputs. The Company validates the prices provided by its third-party pricing sources by understanding the models used, obtaining market values from other pricing sources, and/or analyzing pricing data in certain instances. For additional information regarding the Company’s foreign currency derivative transactions, see Note 4, “Derivative Financial Instruments.”

In connection with the acquisitions of MDV3800 and MDV9300, the Company recorded contingent consideration liabilities pertaining to amounts potentially payable to BioMarin and CureTech, respectively. The fair value of contingent consideration is considered a Level 3 liability and was estimated utilizing a model with key assumptions that included estimated revenues or completion of certain development, regulatory and sales milestone targets during the earn-out period, volatility, and estimated discount rates corresponding to the periods of expected payments. The estimated fair value of the contingent consideration liability is measured at each reporting date based on significant inputs not observable in the market. The Company assesses these estimates on an ongoing basis as additional data impacting the assumptions is obtained. Changes in the estimated fair value of contingent consideration are reflected as non-cash adjustments to operating expenses in the unaudited condensed consolidated statements of operations.

During the three months ended March 31, 2016, the Company recorded fair value adjustments of $0.5 million and $2.5 million as increases to R&D and SG&A expenses, respectively, related to the BioMarin contingent consideration liability. During the three months ended March 31, 2016, the Company also recorded fair value adjustments of $0.6 million and $2.3 million as increases to R&D and SG&A expenses, respectively, related to the CureTech contingent consideration liability. During the three months ended March 31, 2015, the Company recorded fair value adjustments of $1.0 million and $3.0 million as increases to R&D and SG&A expenses, respectively, related to the CureTech contingent consideration liability. All of these adjustments were primarily due to the time value of money.

BioMarin is entitled to contingent payments totaling up to $160.0 million upon the achievement of defined regulatory and sales-based milestones, and mid-single digit royalties on net sales of products that contain MDV3800 during the royalty term specified in the related purchase agreement. CureTech is entitled to contingent payments totaling up to $85.0 million upon attainment of certain development and regulatory milestones, up to $245.0 million upon the achievement of certain annual worldwide net sales thresholds, and tiered royalties ranging from 5% to 11% on annual worldwide net sales. CureTech is also entitled to a $5.0 million milestone payment upon completion of the Manufacturing Technology Transfer as described in Note 13, “Commitments and Contingencies.”

Contingent consideration may change significantly as development progresses and additional data is obtained that will affect the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. Updates to these assumptions could have a significant impact on our results of operations. For example, a significant increase in the probability of achieving a milestone would result in a significantly higher fair value measurement, while a significant increase in the expected timing of achieving a milestone would result in a significantly lower fair value measurement. Considerable judgment is required to interpret the market data used to develop the assumptions. The estimates of fair value may not be indicative of amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates.

There were no transfers between Level 1 and Level 2 financial instruments during the three months ended March 31, 2016. The following table includes a roll-forward of the fair value of Level 3 financial instruments for the period presented:

	Three Months Ended March 31, 2016
Contingent consideration (current and non-current):
Balance at beginning of period	$	267,268
Amounts acquired or issued		—
Net change in fair value		5,959
Settlements		—
Transfers in and/or out of Level 3		—
Balance at end of period	$	273,227

The following table presents the total balance of the Company’s other financial instruments that are not measured at fair value on a recurring basis:

			Fair Value Measurements Using:
	Total Balance		Level 1		Level 2		Level 3
March 31, 2016:
Assets:
Bank deposits (included in “Cash and cash equivalents”)	$	317,361	$	317,361		—		—
December 31, 2015:
Assets:
Bank deposits (included in “Cash and cash equivalents”)	$	225,853	$	225,853		—		—
Liabilities:
Borrowings under Revolving Credit Facility	$	75,000	$	75,000		—		—

Due to their short-term maturities, the Company believes that the fair value of its bank deposits, receivable from collaboration partner, accounts payable and accrued expenses, short-term borrowings under the Revolving Credit Facility, and other current assets and liabilities approximate their carrying value.

- 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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