Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2016

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value. The Company determines the fair value of the common stock warrants and contingent consideration using Level 3 inputs.

The following table summarizes the assets measured at fair value on a recurring basis at September 30, 2016 (in thousands):



Description	Total		Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	30,716	$	30,716	$	—	$	—
Total	$	30,716	$	30,716	$	—	$	—



Description	Total		Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Liabilities:
Warrant liability	$	77	$	—	$	—	$	77
Contingent consideration	21,900		—		—		21,900
Total	$	21,977	$	—	$	—	$	21,977

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at December 31, 2015 (in thousands):



Description	Total		Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	36,079	$	36,079	$	—	$	—
Total	$	36,079	$	36,079	$	—	$	—



Description	Total		Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Liabilities:
Warrant liability	$	115	$	—	$	—	$	115
Total	$	115	$	—	$	—	$	115

Warrant Liability

The Company measures the fair value of the warrants classified as a liability at each reporting date using the Black-Scholes option pricing model using the following assumptions:



	September 30, 2016		December 31, 2015
Risk-free interest rate	0.59	%	1.06	%
Expected dividend yield	—	%	—	%
Expected term (in years)	1.17		1.92
Expected volatility	87.59	%	70.67	%

The following table sets forth a summary of changes in the fair value of the Company’s common stock warrant liability, which represented a recurring measurement classified within Level 3 of the fair value hierarchy, wherein fair value was estimated using significant unobservable inputs (in thousands):



Beginning balance, January 1, 2016	$	115
Change in fair value	(38		)
Ending balance, September 30, 2016	$	77

The change in the fair value of the warrant liability is primarily influenced by the price of the underlying common stock.

Contingent consideration

On September 20, 2014, the Company acquired Viventia. The Company may be required to make certain post closing contingent cash payments upon the achievement of certain specified milestones and based upon net sales in future contingent cash payments to the Selling Shareholders of Viventia, including: (i) a one-time milestone payment of $12.5 million payable upon the first sale of the Purchased Product in the United States; (ii) a one-time milestone payment of $7.0 million payable upon the first sale of the Purchased Product in any one of certain specified European countries; (iii) a one-time milestone payment of $3.0 million payable upon the first sale of the Purchased Product in Japan; and (iv) and quarterly earn-out payments equal to two percent (2%) of net sales of the Purchased Product during specified earn-out periods. Such earn-out payments are payable with respect to net sales in a country beginning on the date of the first sale in such country and ending on the earlier of (i) December 31, 2033 and (ii) fifteen years after the date of such sale, subject to early termination in certain circumstances if a biosimilar product is on the market in the applicable country. Certain of these payments are payable to individuals or affiliates of individuals that became employees or members of the Board.

In connection with the Acquisition, the Company recorded contingent consideration pertaining to the amounts potentially payable to Viventia's selling shareholders pursuant to the Stock Purchase Agreement. Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained. Future changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the condensed consolidated statements of operations and comprehensive income (loss).

Contingent consideration may change significantly as development progresses and additional data are obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates.

The significant unobservable inputs used in the measurement of fair value of the Company’s contingent consideration are probabilities of successful achievement of clinical and commercial milestones, the period in which these milestones are expected to be achieved ranging from 2019 to 2033 and discount rates ranging from 4.4% to 9.8%. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant increases or decreases in these other inputs would result in a significantly lower or higher fair value measurement, respectively.

The following table sets forth a summary of changes in the fair value of the Company’s contingent consideration obligations, which include Level 3 inputs (in thousands):



Beginning balance, September 20, 2016	$	21,900
Change in fair value	—
Ending balance, September 30, 2016	$	21,900

There have been no changes to the valuation methods utilized during the three and nine months ended September 30, 2016. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of assets or liabilities between levels during the three and nine months ended September 30, 2016.

- 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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