Fair Value Measurements

12 Months Ended

Dec. 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.

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


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	11,527	$	—	$	—	$	11,527
Commercial paper			7,485				7,485


Marketable securities:
Commercial paper	—		$	73,366	—		73,366
Corporate debt securities	—		74,417		—		74,417
Certificates of deposit	—		41,302		—		41,302

Total assets⁽¹⁾	$	11,527	$	196,570	$	—	$	208,097

Liabilities:
Common stock warrant liabilities⁽²⁾	$	—	$	—	$	198	$	198
Contingent consideration liabilities⁽³⁾	—		—		63,800		63,800
Total liabilities	$	—	$	—	$	63,998	$	63,998

	December 31, 2018
	Level 1		Level 2		Level 3		Total
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
Certificates of deposit	—		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. As of December 31, 2019 and 2018, common stock warrant liabilities consists of 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 and expires in July 2021.

(3) In connection with the acquisition of Brabant in 2014 (See Note 5), we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. We estimate the fair value of contingent purchase consideration liabilities 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, we remeasure these liabilities by performing a review of the assumptions discussed above and record an adjustment to reflect any changes in the estimated fair value of our contingent consideration liabilities. In the absence of any significant changes in key assumptions during a reporting period, the fair value of the contingent consideration liability is expected to increase each period with the recognition of change in fair value of contingent consideration resulting from the passage of time at the applicable discount rate as we approach the payment dates of the contingent consideration. Significant judgment is used in determining Level 3 inputs and fair value measurements as of a reporting date. Updates to assumptions could have a significant impact on our results of operations in a reporting period and actual results may differ from estimates. For example, significant increases in the estimated 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. Through December 31, 2019, we have made milestone payments of $20.0 million. The potential amount of future payments that we may be required to make related to the remaining contingent consideration is between zero, if none of the remaining milestones are achieved, to a maximum of $75.0 million (undiscounted). As of December 31, 2019, we classified $25.6 million of the total contingent consideration liabilities of $38.2 million as current liabilities. The balance sheet classification between current and non-current liabilities was based upon our reasonable expectation as to the timing of settlement of certain specified milestones.

There have been no transfers between fair value measurement levels for all periods presented. See Note 6 for further information regarding the carrying value of our financial instruments.

The following table provides a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019 and 2018 (in thousands):


	Contingent Consideration		Common Stock Warrant Liabilities
Balance at December 31, 2017	$	76,900	$	512

Settlements	—		—
Changes in fair value	1,300		(169)
Balance at December 31, 2018	78,200		343


Settlements	(20,000)		—
Changes in fair value	5,600		(145)
Balance at December 31, 2019	$	63,800	$	198

Changes in the estimated fair value of contingent consideration are reflected as operating expenses in the consolidated statements of operations. Changes in the estimated fair value of common stock warrant liabilities are included as a component of other income (expense) in the consolidated statements of operations.

- 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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