Fair Value Measurements

9 Months Ended

Sep. 30, 2016

3. Fair Value Measurements

The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value, and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s cash equivalents, which include money market funds, are classified as Level 1 because they are valued using quoted market prices. The Company’s marketable securities consist of available-for-sale securities and are generally classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data.

In certain cases where there is limited activity or less transparency around the inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of the contingent consideration liability.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

	September 30, 2016
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	57,500	$	—	$	—	$	57,500
U.S. government and agency securities		—		186,948		—		186,948
Corporate debt securities		—		68,191		—		68,191
Commercial paper		—		59,521		—		59,521
Total	$	57,500	$	314,660	$	—	$	372,160
Financial Liabilities:
Contingent consideration related to acquisition	$	—	$	—	$	3,542	$	3,542
Total	$	—	$	—	$	3,542	$	3,542

	December 31, 2015
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	104,602	$	—	$	—	$	104,602
U.S. government and agency securities		—		194,055		—		194,055
Corporate debt securities		—		74,918		—		74,918
Commercial paper		—		42,295		—		42,295
Total	$	104,602	$	311,268	$	—	$	415,870
Financial Liabilities:
Contingent consideration related to acquisition	$	—	$	—	$	3,750	$	3,750
Total	$	—	$	—	$	3,750	$	3,750

The acquisition-date fair value of the contingent consideration liability represents the future consideration that is contingent upon the achievement of specified development milestones for a product candidate. The fair value of the contingent consideration is based on the Company’s probability-weighted discounted cash flow assessment that considers probability and timing of future payments. The fair value measurement is based on significant Level 3 inputs such as anticipated timelines and probability of achieving development milestones. Changes in the fair value of the liability for contingent consideration, except for the impact of foreign currency, will be recognized in the condensed consolidated statements of operations until settlement.

The Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2016 and December 31, 2015. There were no transfers between the fair value measurement category levels during any of the periods presented.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities (in thousands):

	Contingent Consideration
Balance at December 31, 2015	$	3,750
Net decrease in fair value upon remeasurement		(313	)
Foreign currency impact on contingent consideration		105
Balance at September 30, 2016	$	3,542

The following tables summarize the estimated value of the Company’s cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands):

	September 30, 2016
	Amortized cost		Unrealized gains		Unrealized losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	14,987	$	—	$	—		$	14,987
Money market funds		57,500		—		—			57,500
U.S. government and agency securities		4,700		—		—			4,700
Commercial paper		20,796		—		—			20,796
Total cash and cash equivalents	$	97,983	$	—	$	—		$	97,983
Marketable securities:
U.S. government and agency securities	$	182,206	$	65	$	(23	)	$	182,248
Corporate debt securities		68,209		6		(24	)		68,191
Commercial paper		38,725		—		—			38,725
Total marketable securities	$	289,140	$	71	$	(47	)	$	289,164

	December 31, 2015
	Amortized cost		Unrealized gains		Unrealized losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	15,175	$	—	$	—		$	15,175
Money market funds		104,602		—		—			104,602
Commercial paper		7,899		—		—			7,899
U.S. government and agency securities		22,780		—		—			22,780
Total cash and cash equivalents	$	150,456	$	—	$	—		$	150,456
Marketable securities:
U.S. government and agency securities	$	171,416	$	3	$	(144	)	$	171,275
Corporate debt securities		74,958		38		(78	)		74,918
Commercial paper		34,396		—		—			34,396
Total marketable securities	$	280,770	$	41	$	(222	)	$	280,589

The amortized cost and estimated fair value of the Company’s available-for-sale marketable securities by contractual maturity are summarized below as of September 30, 2016 (in thousands):

	Amortized cost		Estimated Fair Value
Mature in one year or less	$	271,960	$	271,985
Mature after one year through two years		17,180		17,179
Total available-for-sale marketable securities	$	289,140	$	289,164

- 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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