Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

We record certain financial assets and liabilities at fair value in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 820 on fair value measurements. As defined in the guidance, fair value, defined as an exit price, represents the amount that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering these assumptions, the guidance defines a three-tier valuation hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.

Level 1: Unadjusted quoted prices in active, accessible markets for identical assets or liabilities.

Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. We consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

	March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash and money market funds	$	68,209	$	—	$	—	$	68,209
Commercial paper		—		30,285		—		30,285
U.S. government and agency securities		—		5,006				5,006
Total cash and cash equivalents		68,209		35,291		—		103,500
Marketable securities:
Commercial paper		—		33,524		—		33,524
U.S. government and agency securities		—		127,214		—		127,214
Corporate debt securities		—		65,794		—		65,794
Total marketable securities		—		226,532		—		226,532
Total fair value of assets	$	68,209	$	261,823	$	—	$	330,032
Liabilities:
Contingent value rights liability	$	—	$	—	$	33,963	$	33,963
Contingent consideration liability		—		—		4,750		4,750
Total fair value of liabilities	$	—	$	—	$	38,713	$	38,713

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash and money market funds	$	161,522	$	—	$	—	$	161,522
Commercial paper		—		16,897		—		16,897
Corporate debt securities		—		3,305		—		3,305
Total cash and cash equivalents		161,522		20,202		—		181,724
Marketable securities:
Commercial paper		—		34,968		—		34,968
U.S. government and agency securities		—		85,222		—		85,222
Corporate debt securities		—		53,138		—		53,138
Total marketable securities		—		173,328		—		173,328
Total fair value of assets	$	161,522	$	193,530	$	—	$	355,052
Liabilities:
Contingent value rights liability	$	—	$	—	$	34,591	$	34,591
Contingent consideration liability		—		—		5,160		5,160
Total fair value of liabilities	$	—	$	—	$	39,751	$	39,751

Money market funds are included within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Other cash equivalents and marketable securities, such as commercial paper, U.S. government and agency securities, and corporate debt securities are classified within Level 2 of the fair value hierarchy as the valuation is obtained from third-party pricing services, which utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate the fair value. These inputs include reported trades of and

broker/dealer quotes on the same or similar securities, estimated interest rates based on the issuer credit rating and term, and other observable inputs.  

The following table presents a summary of the changes in the fair value of our Level 3 financial instruments (in thousands):

	Contingent Value Rights Liability			Contingent Consideration Liability
Balance at December 31, 2021	$	34,591		$	5,160
Net change in fair value upon remeasurement		(628	)		(410	)
Balance at March 31, 2022	$	33,963		$	4,750

The fair values of the CVR and contingent consideration liabilities are based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the CVR and the contingent consideration liabilities, we used the income approach, primarily discounted cash flow models. The discounted cash flow models require the use of significant judgment, estimates and assumptions, including estimated revenues and costs, the probability of technical and regulatory success, and discount rates. For the three months ended March 31, 2022 and 2021, the aggregate change in fair value of the CVR and the contingent consideration liabilities was a decrease of $1.0 million and an increase $1.8 million, respectively, and was recorded in the consolidated statement of operations and comprehensive loss. The change in the fair value during the periods resulted from a change in estimate of the potential future proceeds derived from Aduro’s license agreement with Merck.