Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2013

Fair Value of Financial Instruments

Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

The carrying value of financial instruments, including cash and cash equivalents, restricted cash, available-for-sale securities, prepaid expenses, accounts receivable, accounts payable and accrued expenses, and other short-term assets and liabilities, approximate their respective fair values due to the short-term maturities of these instruments and debts. The derivative liability is also carried at fair value.

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Recurring Fair Value Measurements

The following tables show assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and September 30, 2013 and the input categories associated with those assets and liabilities:

As of December 31, 2012 (in thousands)	Level 1		Level 2		Level 3
Assets:
Cash equivalents — money market funds	$	25,668	$	—	$	—
Cash equivalents — certificates of deposit	—		480		—
Cash equivalents — corporate debt securities	—		5,017		—
Investments — certificates of deposit	—		240		—
Investments — commercial paper	—		12,465		—
Investments — corporate debt securities	—		59,533		—
Liabilities:
Derivative liability	$	—	$	—	$	196

As of September 30, 2013 (in thousands)	Level 1		Level 2		Level 3
Assets:
Cash equivalents — money market funds	$	94,962	$	—	$	—
Investments — certificates of deposit	—		960		—
Investments — commercial paper	—		34,487		—
Investments — corporate debt securities	—		41,587		—
Liabilities:
Derivative liability	$	—	$	—	$	231

The Company’s investment portfolio consists of investments classified as cash equivalents and available-for-sale securities. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. The Company’s cash and cash equivalents are invested in U.S. treasury and various corporate debt securities that approximate their face value. All marketable securities with an original maturity when purchased of greater than three months are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive loss. The amortized cost of securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. The fair value of the derivative liability as of December 31, 2012 and September 30, 2013 was determined using a probability-weighted valuation model based on the likelihood of Silver Creek achieving a qualified financing.

The following table provides quantitative information associated with the fair value measurement of the Company’s recurring Level 3 inputs:

	Fair Value as of September 30, 2013		Valuation Technique	Unobservable Input	Point Estimate
	(in thousands)
Derivative Liability	$	231	Probability-weighted	Estimated probability of Silver Creek qualified financing(s) prior to December 31, 2013	50	%

The significant unobservable input used in the fair value measurement of the Company’s derivative liability is the probability of Silver Creek’s successful achievement of aggregate financings of at least $4.0 million of gross proceeds prior to December 31, 2013.

The following table provides a roll-forward of the fair value of the derivative liability categorized as Level 3 instruments, for the nine months ended September 30, 2013:

(in thousands)	Derivative Liability
Balance, December 31, 2012	$	196
Portion of convertible notes issued in February 2013 allocated to derivative	35
Balance, September 30, 2013	$	231

Non-Recurring Fair Value Measurements

Certain assets, including IPR&D, may be measured at fair value on a non-recurring basis in periods subsequent to initial recognition. During the third quarter of 2013, the Company made a decision to deprioritize and delay efforts to further develop an early-stage preclinical program. As a result of this decision, in connection with the Company’s annual impairment test performed in the third quarter of 2013, the fair value estimate for the IPR&D asset related to the early-stage preclinical program incorporated the assumptions of significantly lower estimated cash flows from future revenues and a delay in when those cash flows would occur. The fair value was derived from assumptions that are representative of those a market participant would use in estimating fair value. The impairment analysis resulted in the Company recognizing a $0.8 million impairment charge related to the early-stage preclinical program, which was charged to research and development expense.

The following table provides quantitative information associated with the fair value measurement of the Company’s non-recurring Level 3 inputs:

	Fair Value as of September 30, 2013		Valuation Technique	Unobservable Input	Percentage
	(in thousands)
IPR&D asset	$	—	Income approach — Probability weighted discounted cash flow analysis	Discount rate	25.7	%

Other Fair Value Measurements

The estimated fair value and carrying value of the $125.0 million aggregate principal amount of the Notes was $118.5 million and $125.0 million, respectively, as of September 30, 2013. The Company estimated the fair value of the Notes by using a quoted market rate in an inactive market, which is classified as a Level 2 input.