Fair value of financial instruments

3 Months Ended

Mar. 31, 2020

Fair value of financial instruments.

Fair value of financial instruments

4.     Fair value of financial instruments

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

Recurring Fair Value Measurements

Our marketable securities consist of investments in U.S. government debt securities that are classified as available-for-sale.

At March 31, 2020 and December 31, 2019, our Level 2 U.S. government debt securities were valued using readily available pricing sources which utilize market observable inputs, including the current interest rate and other characteristics for similar types of investments. Our long term investments classified as Level 1 were valued using their respective closing stock prices on The Nasdaq Stock Market.  We did not experience any transfers of financial instruments between the fair value hierarchy levels during the three months ended March 31, 2020.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		March 31, 2020
Cash and cash equivalents	$	1,043,241	$	—	$	—	$	1,043,241
Debt securities (government)		—		259,351		—		259,351
Long term investments (Note 9)		180,993		—		—		180,993
Total assets	$	1,224,234	$	259,351	$	—	$	1,483,585

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		December 31, 2019
Cash and cash equivalents	$	1,832,684	$	—	$	—	$	1,832,684
Debt securities (government)		—		284,870		—		284,870
Long term investments (Note 9)		133,657		—		—		133,657
Total assets	$	1,966,341	$	284,870	$	—	$	2,251,211

The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Liabilities		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		March 31, 2020
Acquisition-related contingent consideration	$	—	$	—	$	275,000	$	275,000
Total liabilities	$	—	$	—	$	275,000	$	275,000

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Liabilities		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		December 31, 2019
Acquisition-related contingent consideration	$	—	$	—	$	277,000	$	277,000
Total liabilities	$	—	$	—	$	277,000	$	277,000

The following is a rollforward of our Level 3 liabilities (in thousands):

	2020
Balance at January 1,	$	277,000
Contingent consideration earned during the period but not yet paid		(8,627)
Change in fair value of contingent consideration		6,627
Balance at March 31,	$	275,000

The fair value of the contingent consideration was determined on the date of acquisition, June 1, 2016, using an income approach based on estimated ICLUSIG revenues in the European Union and other countries for the approved third line treatment over 18 years, and discounted to present value at a rate of 10%. The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statements of operations. The valuation inputs utilized to estimate the fair value of the contingent consideration as of March 31, 2020 included a weighted average cost of capital of 10% and updated projections of future ICLUSIG revenues in the European Union and other

countries for the approved third line treatment. The change in fair value of the contingent consideration during the three months ended March 31, 2020 was due primarily to the passage of time as there were no other significant changes in the key assumptions during the period.

We make payments to Takeda quarterly based on the royalties or any additional milestone payments earned in the previous quarter. At March 31, 2020 and December 31, 2019, contingent consideration earned but not yet paid was $8.6 million and $23.0 million, respectively, and was included in accrued and other current liabilities.

The following is a summary of our marketable security portfolio for the periods presented (in thousands):

			Net		Net
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
March 31, 2020
Debt securities (government)	$	258,622	$	729	$	—	$	259,351
December 31, 2019
Debt securities (government)	$	284,795	$	75	$	—	$	284,870

Our available-for-sale debt securities generally have contractual maturity dates of between 12 to 18 months. Debt security assets were assessed for risk of expected credit losses per our accounting policy as described in Note 2. As of March 31, 2020 and December 31, 2019, the available-for-sale debt securities were held in US-government backed funds and Treasury assets and were assessed on an individual security basis to have a de minimis risk of credit loss.