3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amounts of certain of our financial instruments, including cash and cash equivalents, restricted cash, short-term investments, receivables from collaborations, prepaid research and development, prepaid expenses and other current assets accounts payable, accrued research and development, accrued compensation and employee benefits, accrued and other liabilities and deferred revenue, approximate their fair value due to their short maturities. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. 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 an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

	Level 1 –	Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
	Level 2 –	Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
	Level 3 –	Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. Our embedded derivative liabilities are measured at fair value using a Monte Carlo simulation model and are included as a component of other long-term liabilities on the condensed consolidated balance sheets. The embedded derivative liabilities are subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of interest and other income (expense), net, in our condensed consolidated statements of operations. The assumptions used in the Monte Carlo simulation model include: 1) our estimates of both the probability and timing of regulatory approval of andexanet alfa by geographical region and other related events; 2) probability weighted net sales of andexanet alfa; 3) our risk adjusted discount rate that includes a company specific risk premium; 4) cost of debt; 5) volatility; 6) the probability of a change in control occurring during the term of the note; and 7) probability of an event of default. The valuation of our embedded derivative liabilities is most sensitive to the probability of andexanet alfa achieving regulatory approval given the binary nature of such an approval event and the correlation to other assumptions included in the model.

In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Our noncontrolling interest includes the fair value of the contingent milestone and royalty payments, which is valued based on Level 3 inputs. See Note 7, "Asset Acquisition and License Agreements," to these condensed consolidated financial statements for further information.

The following table sets forth the fair value of our financial assets and liabilities, allocated into Level 1, Level 2 and Level 3, that were measured on a recurring basis (in thousands):

	September 30, 2017
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	107,888	$	—	$	—	$	107,888
Corporate notes and commercial paper	—			273,888		—		273,888
U.S. government agency securities		—		180,652		—		180,652
Total financial assets	$	107,888	$	454,540	$	—	$	562,428
Financial Liabilities:
Embedded derivatives liabilities	$	—	$	—	$	1,512	$	1,512

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	6,254	$	—	$	—	$	6,254
Corporate notes and commercial paper		—		133,099		—		133,099
U.S. government agency securities		—		55,936		—		55,936
Total financial assets	$	6,254	$	189,035	$	—	$	195,289
Financial Liabilities:
Embedded derivatives liabilities	$	—	$	—	$	246	$	246

Level 3 liabilities are comprised of embedded derivatives liabilities as described in Note 8. The following table sets forth a summary of the changes in the estimated fair value of the Company’s embedded derivatives liabilities, which were measured at fair value on a recurring basis (in thousands):

Balance as of December 31, 2016	$	246
Issuance of embedded derivatives		609
Net increase in fair value included in other income (expense)		657
Balance as of September 30, 2017	$	1,512

We estimate the fair values of our corporate notes and commercial paper and U.S government agency securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, 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, prepayment/default projections based on historical data, and other observable inputs.

There were no transfers between any of the levels of the fair value hierarchy during the periods presented.