Fair Value Measurements

3 Months Ended

Mar. 31, 2019

Fair value is defined as the 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. A three-level valuation hierarchy has been established under GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined 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.

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, other current assets, accounts payable and accrued liabilities, contingent consideration liabilities and our outstanding common stock warrant liabilities. Certain cash equivalents, marketable securities, contingent consideration liabilities and common stock warrant liabilities are reported at their respective fair values on our condensed consolidated balance sheets. The remaining financial instruments are carried at cost which approximates their respective fair values because of the short-term nature of these financial instruments.

The following tables summarize assets and liabilities recognized or disclosed at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):


	Level 1		Level 2		Level 3		Total
March 31, 2019
Assets:
Cash equivalents:
Commercial paper	$	—	$	15,945	$	—	$	15,945
Money market funds	21,005		—		—		21,005
U.S. Treasury securities	—		9,985		—		9,985
Marketable securities:
Commercial paper	—		176,705		—		176,705
Corporate debt securities	—		84,116		—		84,116
Certificate of deposits	—		48,744		—		48,744
U.S. Treasury securities	—		112,842		—		112,842
Total assets⁽¹⁾	$	21,005	$	448,337	$	—	$	469,342
Liabilities:
Common stock warrant liabilities⁽²⁾	$	—	$	—	$	646	$	646
Contingent consideration liabilities⁽³⁾	—		—		71,200		71,200
Total liabilities	$	—	$	—	$	71,846	$	71,846



	Level 1		Level 2		Level 3		Total
December 31, 2018
Assets:
Cash equivalents:
Money market funds	$	63,232	$	—	$	—	$	63,232
Marketable securities:
Commercial paper	—		152,940		—		152,940
Corporate debt securities	—		60,605		—		60,605
Certificate of deposits	—		128,647		—		128,647
U.S. Treasury securities	—		103,541		—		103,541
Total assets⁽¹⁾	$	63,232	$	445,733	$	—	$	508,965
Liabilities:
Common stock warrant liabilities⁽²⁾	$	—	$	—	$	343	$	343
Contingent consideration liabilities⁽³⁾	—		—		78,200		78,200
Total liabilities	$	—	$	—	$	78,543	$	78,543

(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. We estimated the fair value of the warrant liabilities using the Black-Scholes valuation model. As of December 31, 2018 and March 31, 2019, 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 our common stock at an exercise price of $72.00 per share and expires in July 2021.

(3) In connection with a prior acquisition in 2014, we may be required to pay future contingent consideration upon the achievement of specified development, regulatory approval or sales-based milestone events. We 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 interest rates. Subsequent to the acquisition date, at each reporting period prior to settlement, we revalue 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 our 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 acquisition provides for aggregate contingent consideration of up to $95.0 million, of which $10.0 million was paid in March 2019. As of March 31, 2019, the estimated fair value of our contingent consideration liabilities was $71.2 million, of which $22.8 million has been classified as current liabilities. The classification was based upon our 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 months ended March 31, 2019 and 2018 (in thousands):


	December 31, 2018		Change in Fair Value		Settlements		March 31, 2019
Contingent consideration liabilities	$	78,200	$	3,000	$	(10,000)	$	71,200
Common stock warrant liabilities	343		303		—		646


	December 31, 2017		Change in Fair Value		Settlements		March 31, 2018
Contingent consideration liabilities	$	76,900	$	—	$	—	$	76,900
Common stock warrant liabilities	512		(17)		—		495

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 4 for further information regarding the amortized cost of our 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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