Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Financial assets and liabilities are recorded at fair value. The carrying amounts of our receivables from collaborations, prepaid and other current assets, accounts payable, accrued research and development and accrued and other liabilities 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 in the sale of 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 or a

discounted cash flow 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 (expense) income, net, in our Condensed Consolidated Statements of Operations, and as remeasurement gain or loss on embedded derivatives liabilities in our Condensed Consolidated Statements of Cash Flows. The assumptions used in the Monte Carlo simulation model or the discounted cash flow model include: (1) our estimates of both the probability and timing of regulatory approval of Andexxa and other related events; (2) the probability-weighted net sales of Andexxa; (3) our risk-adjusted discount rate that includes a company-specific risk premium; (4) our cost of debt; (5) volatility; and (6) the probability of a change in control occurring during the term of the note.

There was no transfer into and out of Level 3 of the fair value hierarchy during the periods presented.

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



		March 31, 2020									December 31, 2019
	Fair Value Hierarchy	Amortized Cost		Unrealized Gain		Unrealized (Loss)			Estimated Fair Value		Amortized Cost		Unrealized Gain		Unrealized (Loss)			Estimated Fair Value
Money market funds	Level 1	$	54,735	$	—	$	—		$	54,735	$	23,826	$	—	$	—		$	23,826
Corporate notes and commercial paper	Level 2	207,206		64		(76		)	207,194		284,410		9		(20		)	284,399
U.S. Treasury bills and government agency securities	Level 2	84,250		608		—			84,858		96,196		48		(1		)	96,243
		$	346,191	$	672	$	(76	)	$	346,787	$	404,432	$	57	$	(21	)	$	404,468

		March 31, 2020									December 31, 2019
Classified as:		Amortized Cost		Unrealized Gain		Unrealized (Loss)			Estimated Fair Value		Amortized Cost		Unrealized Gain		Unrealized (Loss)			Estimated Fair Value
Cash equivalents		$	148,944	$	18	$	—		$	148,962	$	153,453	$	—	$	—		$	153,453
Short-term investments		166,314		407		(60		)	166,661		214,029		35		(10		)	214,054
Long-term investments		30,933		247		(16		)	31,164		36,950		22		(11		)	36,961
		$	346,191	$	672	$	(76	)	$	346,787	$	404,432	$	57	$	(21	)	$	404,468

At March 31, 2020, the remaining contractual maturities of available-for-sale securities classified as short-term investments were less than one year. At March 31, 2020, the remaining contractual maturities of available-for-sale securities classified as long-term investments were more than one year, but less than two years.

Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of March 31, 2020 and December 31, 2019 were not material. We have not recorded an allowance for credit losses, as we believe any such losses would be immaterial based on the high-grade credit rating for each of our available-for-sale securities as of the end of each period. We do not intend to sell our available-for-sale securities before their cost bases are recovered.

Level 3 liabilities are comprised of embedded derivative liabilities, the Notes, long term royalty-based debt and long term debt as described in Note 7, Long Term Obligations, to these Condensed Consolidated Financial Statements. The following table summarizes the changes in the estimated fair value of our embedded derivative liabilities during the three-month period ended March 31, 2020 (in thousands):



	Embedded derivative liabilities
Balance as of December 31, 2019	$	3,866
Net change in the fair value	3,169
Balance as of March 31, 2020	$	7,035

The following table summarizes the significant unobservable inputs in the fair value measurement of our Level 3 liabilities as of March 31, 2020 (in thousands):



Level 3 Liabilities	Fair value as of March 31, 2020		Valuation Technique	Unobservable Input	Range	Weighted Average
Notes payable and Long-term royalty based debt	$	151,000	Monte Carlo	Discount rate	13.99% to 14.58%	14.15%
Long-term debt	113,708		Discounted Cash Flow	Discount rate	13.46% to 13.84%	13.74%
Embedded derivative liabilities	7,035		Monte Carlo and Discounted Cash Flow	Discount rate	13.46% to 14.58%	14.04%

The weighted-average discount rate was calculated based on the relative fair value of our debts or derivative liabilities.

- 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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