Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

6. 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 Measurement

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

As of December 31, 2013 (in thousands)	Level 1		Level 2		Level 3
Assets:
Cash equivalents—money market funds	$	47,740	$	—	$	—
Cash equivalents—commercial paper		—		13,998		—
Investments—commercial paper		—		49,680		—
Investments—corporate debt securities		—		40,436		—

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

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 income (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 throughout the year ended December 31, 2013 was determined using a probability-weighted valuation model based on the likelihood of Silver Creek achieving a qualified financing. The significant unobservable input used in the fair value measurement of the Company’s derivative liability was 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. As discussed in Note 11, “Borrowings,” Silver Creek’s derivative liability was remeasured upon the maturation and conversion of the underlying note payable on December 31, 2013 to a zero percent probability of achieving the aggregate financings and converting at a discount, with the change in fair value recognized in other income.

The following table provides a roll-forward of the fair value of the liabilities categorized as Level 3 instruments, for the years ended December 31, 2013 and 2012:

(in thousands)	Convertible preferred stock warrants			Derivative Liability
Balance, December 31, 2011	$	1,516		$	—
Unrealized gain included in other income (expense)		(587	)		—
Reclassification to common stock warrants		(929	)		—
Portion of convertible note allocated to derivative		—			196
Balance, December 31, 2012	$	—		$	196
Portion of convertible note allocated to derivative		—			35
Remeasurement of derivative liability upon conversion of underlying note		—			(231	)
Balance, December 31, 2013	$	—		$	—

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 August 31, 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 $127.5 million and $125.0 million, respectively, as of December 31, 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.

The estimated fair value and carrying value of the Hercules loans payable was $39.5 million and $40.3 million, respectively, as of December 31, 2013. The Company estimated the fair value of the loans payable by using publically available information related to Hercules’ portfolio of debt investments based on unobservable inputs, which is classified as a Level 3 input.