Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

The Company utilizes a portfolio management company for the valuation of the majority of its investments. This company is an independent, third-party vendor recognized to be an industry leader with access to market information that obtains or computes fair market values from quoted market prices, pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models. For valuations obtained from the pricing service, the Company performs due diligence to understand how the valuation was calculated or derived, focusing on the valuation technique used and the nature of the inputs.

Based on the fair value hierarchy, the Company classifies its cash equivalents and available for sale securities within Level 1 or Level 2. This is because the Company values its cash equivalents and available for sale securities using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

Assets measured or disclosed at fair value on a recurring basis as of December 31, 2020 and 2019 are summarized below:


	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2020
Assets:
Cash and cash equivalents	$	228,698	—		—		$	228,698
U.S. government debt securities	—		39,992		—		39,992
	$	228,698	$	39,992	$	—	$	268,690

Liabilities:
Derivative liability	—		—		$	2,420	$	2,420
	$	—	$	—	$	2,420	$	2,420


	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2019
Assets:
Cash and cash equivalents	$	147,449	—		—		$	147,449
Certificates of deposit	—		245		—		245
	$	147,449	$	245	$	—	$	147,694

Liabilities:
Derivative liability	—		—		$	1,650	$	1,650
	$	—	$	—	$	1,650	$	1,650

The Company’s Loan Agreement with Pharmakon (see Note 11) contains certain provisions that change the underlying cash flows of the debt instrument, including a potential extension to the interest-only period dependent on both no event of default having occurred and continuing and on the Company achieving certain regulatory and revenue conditions. The Company also assessed the acceleration of the obligations under the Loan Agreement under an event of default. In addition, under certain circumstances, a default interest rate will apply on all outstanding obligations during the occurrence and continuance of an event of default. In accordance with ASC 815, the Company concluded that these features are not clearly and closely related to the host instrument, and represent a single compound derivative that is required to be re-measured at fair value on a quarterly basis.

The events of default include maintaining, on an annual basis, a minimum liquidity threshold starting in 2021, and on a quarterly basis, a minimum net sales threshold for Auryxia which started in the fourth quarter of 2020. The Company recorded a derivative liability related to the Company’s Loan Agreement with Pharmakon of $2.4 million and $1.7 million as of December 31, 2020 and 2019, respectively. The Company classified the derivative liability as a non-current liability on the balance sheet at December 31, 2020 and 2019. The estimated fair value of the derivative liability on both December 31, 2020 and 2019 was determined using a scenario-based approach and discounted cash flow model that includes principal and interest payments under various scenarios involving clinical development success for vadadustat and various cash flow assumptions. Probabilities surrounding clinical development success were derived using industry benchmarks. Should the Company’s assessment of the probabilities around these scenarios change, including for changes in market conditions, there could be a change to the fair value of the derivative liability.

The following table provides a roll-forward of the fair value of the derivative liability (in thousands):


Balance at December 31, 2019	$	1,650
Initial fair value of derivative liability for Tranche B, recorded as debt discount	484
Change in fair value of derivative liability, recorded as other expense	286
Balance at December 31, 2020	$	2,420

The Company had no other assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2020 and 2019.

Investment securities are exposed to various risks such as interest rate, market and credit risks. When the Company holds investment securities, due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, the Company considers if changes in risks in the near term would result in material changes in the fair value of investments.

- 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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