Fair Value Measurements

6 Months Ended

Jun. 30, 2023

3. Fair Value Measurements

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:


	Fair Value Measurements as of June 30, 2023:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	113,936	$	—	$	—	$	113,936
U.S. treasury bills		—		9,979		—		9,979
Total cash equivalents		113,936		9,979		—		123,915
Investments:
U.S. treasury bills		—		378,391		—		378,391
U.S. agency securities		—		347,280		—		347,280
Total investments		—		725,671		—		725,671
Total assets	$	113,936	$	735,650	$	—	$	849,586
Liabilities
Contingent Milestone Payments	$	—	$	—	$	24,223	$	24,223
Total liabilities	$	—	$	—	$	24,223	$	24,223


	Fair Value Measurements as of December 31, 2022:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	118,446	$	—	$	—	$	118,446
U.S. treasury bills		—		9,950		—		9,950
Total cash equivalents		118,446		9,950		—		128,396
Investments:
U.S. treasury bills		—		466,603		—		466,603
U.S. agency securities		—		380,520		—		380,520
Total investments		—		847,123		—		847,123
Total assets	$	118,446	$	857,073	$	—	$	975,519
Liabilities
Contingent Milestone Payments	$	—	$	—	$	27,378	$	27,378
Total liabilities	$	—	$	—	$	27,378	$	27,378

In determining the fair value of its investments at each date presented above, the Company relied on quoted prices for similar securities in active markets or using other inputs that are observable or can be corroborated by observable market data.

Fair Value of Contingent Consideration

In April 2021, the Company acquired ZebiAI.

The Company’s Level 3 contingent consideration liability is related to $85.0 million of platform and program milestones (“Contingent Milestone Payments”) payable to ZebiAI’s former equity holders upon achievement. The contingent consideration liability for the Contingent Milestone Payments is measured at fair value at each reporting date pursuant to FASB ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). The Company determines the fair value of the Contingent Milestone Payments based on the probability of achieving the milestones, the related timing, and, to a lesser extent, an appropriate discount rate. Significant judgment is used in determining the underlying assumptions. Due to the uncertainties associated with the development of platforms and drug candidates in the pharmaceutical industry and the effects of changes in assumptions, including probability of success and related timing, the Company expects its estimates regarding the fair value of Contingent Milestone Payments to continue to change in the future, resulting in adjustments to the fair value of the Company’s Contingent Milestone Payments. The effect of any such adjustments could be material.

The Company also has a contingent consideration liability related to the fair value of $100.0 million in earnout payments (“Contingent Earnout Payments”). Because the Contingent Earnout Payments were not accounted for as derivatives under FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”), they were only measured at fair value as of the acquisition date and are not re-assessed at fair value at each reporting period. The Contingent Earnout Payments will be adjusted when the contingency is resolved and the consideration is paid or becomes payable.

The following table reconciles the change in the contingent consideration liability:


	Three Months Ended June 30,					Six Months Ended June 30,
	2023			2022		2023			2022
	(in thousands)
Balance at beginning of period	$	31,375		$	45,663	$	32,378		$	50,258
Change in fair value of Contingent Milestone Payments		(2,152	)		200		(3,155	)		(4,395	)
	$	29,223		$	45,863	$	29,223		$	45,863

The “Change in fair value of Contingent Milestone Payments” in the table above was attributable to changes in the assumptions noted above during the periods specified.

The outstanding Contingent Milestone Payments are payable in shares of common stock based on a fixed amount assigned to each milestone and the average closing price of the Company’s common stock for the 5-day period prior to the milestone achievement. Accordingly, the number of shares of common stock to be issued upon a milestone achievement varies dependent on the Company’s common stock price. If the outstanding milestones were achieved in full on June 30, 2023, the number of shares of common stock to be issued would have been 5,718,696 based on an average closing price of the Company's common stock of $12.63 for the 5-day period prior to June 30, 2023.

- 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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