Fair Value Measurements

12 Months Ended

Dec. 31, 2021

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, 2021 and 2020:


	December 31, 2021
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	29,991	$	—	$	—	$	29,991
Commercial paper	—		35,337		—		35,337
Certificates of deposit	—		3,000		—		3,000
Marketable securities:
Commercial paper	—		141,718		—		141,718
Certificates of deposit	—		32,253		—		32,253
U.S. Government-sponsored enterprises debt securities	—		6,200		—		6,200
Corporate debt securities	—		20,364		—		20,364
Total assets	$	29,991	$	238,872	$	—	$	268,863

Liabilities:
Contingent consideration	—		—		$	35,285	$	35,285
Total liabilities	$	—	$	—	$	35,285	$	35,285


	December 31, 2020
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	80,986	$	—	$	—	$	80,986
Commercial paper	—		61,043		—		61,043
Certificates of deposit	—		1,000		—		1,000
Marketable securities:
U.S. Treasuries	—		43,050		—		43,050
Commercial paper	—		210,986		—		210,986
Certificates of deposit	—		44,480		—		44,480
U.S. Government-sponsored enterprises debt securities	—		6,217		—		6,217
Corporate debt securities	—		33,460		—		33,460
Total assets	$	80,986	$	400,236	$	—	$	481,222

Liabilities:
Contingent consideration	—		—		$	42,400	$	42,400
Total liabilities	$	—	$	—	$	42,400	$	42,400

Level 1 and Level 2 Valuation Inputs

Level 1 and Level 2 financial instruments are comprised of investments in money market funds and fixed-income securities. We estimate the fair value of our Level 2 financial instruments 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.

Level 3 Valuation Inputs

Contingent Consideration

Our financial liabilities valued based upon Level 3 inputs are comprised of the contingent consideration arrangement related to the business acquisition of Brabant in October 2014 which included the intellectual property rights for our product, Fintepla (fenfluramine). Under the arrangement, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval and sales-based milestone events for Fintepla. Prior to regulatory approval, we estimate the fair value of contingent consideration liabilities using a probability-weighted discounted cash flow analysis, which reflects the probability and timing of future payments and a risk-adjusted discount rate. This fair value measurement is based on Level 3 inputs such as the probability and anticipated timelines of achieving milestones related to development, regulatory approvals and product sales goals. The resulting probability-weighted cash flows are discounted at risk-adjusted rates. Following the achievements of regulatory approval milestones and upon commencement of product sales, the fair value measurement is based on projected product sales (based on internal operational budgets and long-range strategic plans), discount rates and projected payment dates.

The following table provides a reconciliation of contingent consideration liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the years ended December 31, 2021 and 2020:


(In thousands)	Contingent Consideration
Balance at December 31, 2019	63,800
Settlements(1)	(30,000)
Changes in fair value	8,600
Balance at December 31, 2020	42,400
Settlements(1)	(9,000)
Changes in fair value	1,885
Balance at December 31, 2021	$	35,285

————————————

(1)As of December 31, 2021 and 2020, outstanding obligations related to achieved milestones of $4.5 million and $15.0 million, respectively, were no longer contingent. As a result, the amounts have been reclassified from contingent consideration to accounts payable at December 31, 2021 and accrued and other current liabilities at December 31 2020 on the consolidated balance sheets.

Payments of acquisition-related contingent consideration, to the extent they relate to estimated liabilities as of the date of acquisition, are reflected within financing activities in the consolidated statements of cash flows. Payments in excess of acquisition date liabilities are classified within operating activities.

Payments of contingent consideration totaled $15.0 million for the year ended December 31, 2020 were reflected within financing activities. Payments of contingent consideration totaled $19.5 million for the year ended December 31, 2021 and consisted of $18.0 million reflected within financing activities and $1.5 million reflected in operating activities.

As of December 31, 2021, the contingent consideration liabilities was $35.3 million and consisted of Fintepla sales-based milestones with a maximum payout of $36.0 million (undiscounted). Each additional $36.0 million in Fintepla sales triggers a $4.5 million payout for a maximum of 8 remaining sales-based milestone payments.

The following table summarizes the unobservable inputs used in the fair value measurement of our contingent consideration liability as of December 31, 2021.


Fair Value as of December 31, 2021 (in thousands)	Valuation Technique	Unobservable Input	Range	Weighted Average(1)
		Discount rate	0.0% — 2.0%	1.0%
$35,285	Discounted cash flow	Probability of payment	100%	100%
		Projected year of payment	2022 — 2023	2022

————————————

(1)Unobservable inputs were weighted by the relative fair value of each sales-based milestone payment.

As of December 31, 2021, we classified $13.5 million of the total contingent consideration liabilities of $35.3 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 the remaining sales-based milestones.

Convertible Senior Notes

As of December 31, 2021 and 2020, the estimated fair value of our senior convertible notes was approximately $231.2 million and $260.5 million, respectively. When determining the estimated fair value of our senior convertible notes, we utilize a binomial lattice model which incorporates the terms and conditions of the senior convertible notes and market-based risk measurement that are indirectly observable, such as credit risk, which represent Level 2 inputs. The lattice model produces an estimated fair value based on changes in the price of the underlying common stock price over successive periods of time. An estimated yield based on comparable non-convertible debt instruments in the market is used to discount the cash flows

- 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.

+ References + Details