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Fair Value Measurements

9 Months Ended

Sep. 30, 2020

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, other current assets, accounts payable and accrued liabilities, convertible debt, 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. See Note 4 for further information regarding the amortized cost of our financial assets.

The following tables summarize assets and liabilities recognized or disclosed at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
U.S. Treasuries	$	—	$	13,799	$	—	$	13,799
Money market funds	39,536		—		—		39,536
Certificate of deposits	—		3,008		—		3,008
Commercial paper	—		21,648		—		21,648
Marketable securities:
U.S. Treasuries	—		27,896		—		27,896
Commercial paper	—		101,951		—		101,951
U.S. Government-sponsored enterprises debt securities	—		6,219		—		6,219
Corporate debt securities	—		50,357		—		50,357
Certificate of deposits	—		41,284		—		41,284
Total assets(1)	$	39,536	$	266,162	$	—	$	305,698
Liabilities:
Common stock warrant liabilities	$	—	$	—	$	9	$	9
Contingent consideration liabilities	—		—		54,900		54,900
Total liabilities	$	—	$	—	$	54,909	$	54,909


	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
Certificate of deposits	—		41,302		—		41,302

Total assets(1)	$	11,527	$	196,570	$	—	$	208,097
Liabilities:
Common stock warrant liabilities	$	—	$	—	$	198	$	198
Contingent consideration liabilities	—		—		63,800		63,800
Total liabilities	$	—	$	—	$	63,998	$	63,998

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(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.

Contingent Consideration Liability

Pursuant to the terms of the Brabant purchase agreement in 2014 in which we acquired worldwide development and commercialization rights to Fintepla, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain regulatory and sales-based milestone events related to Fintepla. As of September 30, 2020, the potential amount of future payments that we may be required to make is between zero, if none of the remaining milestones are achieved, to a maximum of $60.0 million.

The following table provides a reconciliation of our contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Balance at beginning of period	$	53,100	$	70,500	$	63,800	$	78,200
Change in fair value	1,800		400		6,100		2,700
Settlements	—		—		(15,000)		(10,000)
Balance at end of period	$	54,900	$	70,900	$	54,900	$	70,900

For the nine months ended September 30, 2020, the $6.1 million increase to the estimated fair value of our contingent consideration liability was primarily due to updated assumptions used regarding the probability of success for achieving certain regulatory and sales-based milestone events in light of FDA approval of Fintepla in June 2020. The change in fair value for the three and nine months ended September 30, 2019 and the three months ended September 30, 2020 was attributable to immaterial adjustments to certain assumptions and estimates used in the remeasurement to fair value and changes in the discount rate used as a result of market interest rate changes.

The following table summarizes the significant unobservable inputs used in the fair value measurement of our contingent consideration liabilities as of September 30, 2020.


Fair Value as of September 30, 2020 (in thousands)	Valuation Technique	Unobservable Input	Range	Weighted Average(1)
$54,900	Discounted cash flow	Discount rate	3.6% — 10.1%	5.5%
		Probability of payment	0% — 94.3%	94.3%
		Projected year of payment	2021 — 2030	2022

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(1)Unobservable inputs were weighted by the relative fair value of the contingent consideration liability.

The weighted average discount rate was calculated based on the relative fair value of our contingent consideration obligations. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of September 30, 2020.

Convertible Senior Notes

As of September 30, 2020, the estimated fair value of our Convertible Senior Notes was approximately $199.7 million and was determined based on a binomial lattice model with Level 2 inputs.

- 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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