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Fair value measurements

6 Months Ended

Jun. 30, 2019

4. Fair value measurements

The following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 (in thousands):

Description	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
June 30, 2019
Assets:
Cash and cash equivalents	$	280,995	$	280,995	$	—	$	—
Marketable securities:
U.S. government agency securities and treasuries		1,063,171		—		1,063,171		—
Certificates of deposit		4,520		—		4,520		—
Commercial paper		62,692		—		62,692		—
Corporate bonds		114,441		—		114,441		—
Equity securities		15,983		15,983		—		—
Total assets	$	1,541,802	$	296,978	$	1,244,824	$	—
Liabilities:
Contingent consideration	$	5,740	$	—	$	—	$	5,740
Total liabilities	$	5,740	$	—	$	—	$	5,740
December 31, 2018
Assets:
Cash and cash equivalents	$	402,579	$	348,638	$	53,941	$	—
Marketable securities:
U.S. government agency securities and treasuries		1,457,601		—		1,457,601		—
Certificates of deposit		9,080		—		9,080		—
Equity securities		22,167		22,167		—		—
Total assets	$	1,891,427	$	370,805	$	1,520,622	$	—
Liabilities:
Contingent consideration	$	5,230	$	—	$	—	$	5,230
Total liabilities	$	5,230	$	—	$	—	$	5,230

Cash and cash equivalents

The Company considers all highly liquid securities with original final maturities of 90 days or less from the date of purchase to be cash equivalents. As of June 30, 2019, cash and cash equivalents comprise funds in cash and money market accounts. As of December 31, 2018, cash and cash equivalents comprise funds in cash, U.S. treasury securities, U.S. government agency securities, and money market accounts.

Marketable securities

Marketable securities classified as Level 2 within the valuation hierarchy generally consist of certificates of deposit, U.S. treasury securities and government agency securities, corporate bonds, and commercial paper. The Company estimates the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources 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 market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. The Company validates the prices provided by its third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

The amortized cost of available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to the earliest call date for premiums or to maturity for discounts. At June 30, 2019 and December 31, 2018, the balance in the Company’s accumulated other comprehensive loss was composed primarily of activity related to the Company’s available-for-sale debt securities. There were no material realized gains or losses recognized on the sale or maturity of available-for-sale securities during the three and six months ended June 30, 2019 or 2018, and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive loss for the same periods.

The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of June 30, 2019 and December 31, 2018 was $52.4 million and $787.5 million, respectively. As of June 30, 2019 and December 31, 2018, there were $229.2 million and $315.3 million in securities held by the Company in an unrealized loss position for more than twelve months, respectively. The aggregate unrealized loss on securities held by the Company for less than twelve months as of June 30, 2019 and December 31, 2018 was $0.1 million and $0.9 million, respectively. The aggregate unrealized loss on securities held by the Company for more than twelve months as of June 30, 2019 and December 31, 2018 was $0.5 million and $2.1 million, respectively. The Company has the intent and ability to hold such securities until recovery. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with any other-than-temporary impairment as of June 30, 2019 and December 31, 2018.

The Company holds equity securities with an aggregate fair value of $16.0 million and $22.2 million as of June 30, 2019 and December 31, 2018, respectively, within short-term marketable securities on its condensed consolidated balance sheet. The Company has recorded a $3.1 million and $6.2 million unrealized loss during the three and six months ended June 30, 2019, respectively, related to its equity securities, which is included in other (expense) income, net on the condensed consolidated statements of operations and comprehensive loss.

Contingent consideration

In connection with its prior acquisition of Precision Genome Engineering, Inc. (“Pregenen”), the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained. Future changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the condensed consolidated statements of operations and comprehensive loss. In the absence of new information, changes in fair value will reflect changing discount rates and the passage of time.

The significant unobservable inputs used in the measurement of fair value of the Company’s contingent consideration are probabilities of successful achievement of clinical and commercial milestones, the period in which these milestones are expected to be achieved ranging from 2021 to 2028, and discount rates ranging from 14.2% to 15.0%. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant increases or decreases in the other inputs would result in a significantly lower or higher fair value measurement, respectively.

The table below provides a roll-forward of fair value of the Company’s contingent consideration obligations, which include Level 3 inputs (in thousands):

	For the six months ended
	June 30, 2019
Beginning balance	$	5,230
Additions		—
Changes in fair value		510
Payments		—
Ending balance	$	5,740

Please refer to Note 8, “Commitments and contingencies” for further information.

- 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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