Fair Value Measurements

9 Months Ended

Sep. 30, 2018

The carrying amount of the Company’s financial instruments, including cash and cash equivalents, other current assets, accounts payable, accrued and other current liabilities approximate their fair value due to their short maturities.

Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


Level 1:			Observable inputs such as quoted prices in active markets;
Level 2:			Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:			Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following tables summarize assets and liabilities recognized or disclosed at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 (in thousands):


	Level 1		Level 2		Level 3		Total
September 30, 2018
Assets:
Cash equivalents:
Commercial paper	$	—	$	58,127	$	—	$	58,127
Corporate debt securities	—		1,624		—		1,624
Money market funds	97,686		—		—		97,686
Certificate of deposits	—		854		—		854
Marketable securities
Commercial paper	—		174,769		—		174,769
Corporate debt securities	—		47,386		—		47,386
Certificate of deposits	—		118,775		—		118,775
U.S. Treasuries	—		35,157		—		35,157
Total assets(1)	$	97,686	$	436,692	$	—	$	534,378

Liabilities:
Common stock warrant liabilities(2)	$	—	$	—	$	607	$	607
Contingent consideration liabilities(3)	—		—		80,100		80,100
Total liabilities	$	—	$	—	$	80,707	$	80,707


	Level 1		Level 2		Level 3		Total
December 31, 2017
Assets:
Cash equivalents consisting of money market funds(1)	$	289,782	$	—	$	—	$	289,782
Total assets	$	289,782	$	—	$	—	$	289,782
Liabilities:
Common stock warrant liabilities(2)	$	—	$	—	$	512	$	512
Contingent consideration liabilities(3)	—		—		76,900		76,900
Total liabilities	$	—	$	—	$	77,412	$	77,412

(1) Fair value is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.

(2) Represents the fair value of common stock warrants outstanding that may require cash settlement under certain circumstances. The Company estimated the fair value of the warrant liabilities using the Black-Scholes valuation model. As of December 31, 2017 and September 30, 2018, common stock warrant liabilities relate to warrants issued in July 2011 in connection with a debt financing arrangement. The warrants entitle the holder to purchase up to 28,125 shares of common stock at an exercise price of $72.00 per share. The warrants will expire in July 2021.

(3) In connection with a prior acquisition, the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. The Company estimated the fair value of the contingent consideration liabilities on the acquisition date using a probability-weighted income approach, which reflects the probability and timing of future payments. This fair value measurement is based on significant Level 3 inputs such as the anticipated timelines and probability of achieving development, regulatory approval or sales-based milestone events and projected revenues. The resulting probability-weighted cash flows are discounted at risk-adjusted rates. Subsequent to the acquisition date, at each reporting period prior to settlement, the Company revalues these liabilities by performing a review of the assumptions listed above and record increases or decreases in the fair value of these contingent consideration liabilities. In the absence of any significant changes in key assumptions, the quarterly determination of fair values of these contingent consideration liabilities would primarily reflect the passage of time and

risk-adjusted interest rates. Significant judgment is used in determining Level 3 inputs and fair value measurements as of the acquisition date and for each subsequent reporting period. Updates to assumptions could have a significant impact on the Company’s results of operations in any given period and actual results may differ from estimates. For example, significant increases in the probability of achieving a milestone or projected revenues would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone or projected revenues would result in a significantly lower fair value measurement. Significant increases in the discount rate or in the anticipated timelines would result in a significantly lower fair value measurement while significant decreases in the discount rate or anticipated timelines would result in a significantly higher fair value measurement. The potential contingent consideration payments required upon achievement of development, regulatory approval and sales-based milestones related to the Company’s acquisition of ZX008 range from zero if none of the milestones are achieved to a maximum of $95.0 million (undiscounted). As of September 30, 2018, the Company has classified $32.5 million of the total contingent consideration liabilities of $80.1 million as current liabilities. The classification was based upon the Company’s reasonable expectation as to the timing of settlement of certain specified milestones.

The following table provides a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2018 and 2017 (in thousands):


	June 30, 2018		Change in Fair Value		September 30, 2018		June 30, 2017		Change in Fair Value		September 30, 2017
Contingent consideration liabilities	$	74,400	$	5,700	$	80,100	$	53,900	$	10,500	$	64,400
Common stock warrant liabilities	543		64		607		69		380		449


	December 31, 2017	Change in Fair Value		September 30, 2018		December 31, 2016		Change in Fair Value		September 30, 2017
Contingent consideration liabilities	76,900	$	3,200	$	80,100	$	52,800	$	11,600	$	64,400
Common stock warrant liabilities	512	95		607		809		(360)		449

The changes in fair value of the liabilities shown in the table above are recorded through change in fair value of contingent consideration liabilities within operating expense and the change in fair value of common stock warrant liabilities within other income (expense) in the condensed consolidated statements of operations.

There were no transfers between levels during the periods presented. See Note 3 for further information regarding the amortized cost of the Company's financial instruments.

- 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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