NOTE 4—FAIR VALUE MEASUREMENTS AND INVESTMENTS IN MARKETABLE SECURITIES

The Company follows authoritative accounting guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1:

Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2:

Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:

Unobservable inputs that reflect the reporting entity’s own assumptions.

The carrying amounts of the Company’s prepaid expenses, other current assets, accounts payable and accrued liabilities are generally considered to be representative of their fair value because of the short nature of these instruments. No transfers between levels have occurred during the periods presented.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 is as follows (in thousands):

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Balance as of		Markets for		Observable		Unobservable
	June 30,		Identical Assets		Inputs		Inputs
	2015		(Level 1)		(Level 2)		(Level 3)
Assets:
Restricted cash	$	1,540	$	1,540	$	—	$	—
Money market funds⁽¹⁾		28,868		28,868		—		—
Commercial paper⁽¹⁾		1,500		—		1,500		—
Corporate debt securities		67,763		—		67,763		—
Government sponsored entities		61,888		—		61,888		—
Total assets	$	161,559	$	30,408	$	131,151		—

Liabilities:
Contingent consideration	$	16,021	$	—	$	—	$	16,021

⁽¹⁾	Included within cash and cash equivalents on the Company’s condensed consolidated balance sheet.

The Company’s investments in money market funds are valued based on publicly available quoted market prices for identical securities as of June 30, 2015. The Company determines the fair value of corporate bonds and other government-sponsored enterprise related securities with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers.

Additionally, the Company has incurred contingent consideration obligations in connection with the acquisition of Kite Pharma EU. These contingent consideration obligations are recorded at their estimated fair value, and are revalued when an event takes place or information becomes available that would indicate that the value of these obligations has changed, until such time that the contingencies related to these obligations are resolved. The fair value measurements of these obligations are based on significant unobservable inputs related to sales and development milestones related to the Kite Pharma EU business combination and are reviewed periodically by management in our R&D organization. These inputs include the estimated probabilities and timing of achieving specified development and sales milestones, as well as the discount rate used to determine the present value of these milestones. Significant changes that would increase or decrease the probabilities or timing of achieving the development and sales milestones would result in a corresponding increase or decrease in the fair value of the contingent consideration obligations, which would be recognized in other income (expense) in the condensed consolidated statements of operations. A reduction to contingent consideration was recognized as other income in the condensed consolidated statements of operations during the three months ended June 30, 2015. See Note 13 – T-Cell Factory Acquisition for further discussion.

Investments classified as available-for-sale at June 30, 2015 consisted of the following (in thousands):

				Gross		Gross			Aggregate
		Amortized		Unrealized		Unrealized			Estimated
	Maturity (in years)	Cost		Gains		Losses			Fair Value
Marketable Securities:
Commercial paper⁽¹⁾	1 year or less	$	1,499	$	1	$	—		$	1,500
Corporate debt securities	1 year or less		51,326		4		(20	)		51,310
Corporate debt securities	1-2 years		13,460		2		(11	)		13,451
Corporate debt securities	More than 2 years		3,000		2		—			3,002
Government sponsored entities	1 year or less		51,178		12		—			51,190
Government sponsored entities	1-2 years		10,690		11		(3	)		10,698
Government sponsored entities	More than 2 years		—		—		—			—
Total available-for-sale securities		$	131,153	$	32	$	(34	)	$	131,151

⁽¹⁾	Included within cash and cash equivalents on the Company’s condensed consolidated balance sheet.

The Company recognizes realized gains or losses on sales or maturities of available-for-sale securities as net interest income. Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive income (loss). At June 30, 2015, the aggregate fair value of securities held by the Company in an unrealized loss position was $64.2 million, which consisted of 50 securities. These securities have not been in a continuous unrealized loss position for more than 12 months. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis which may be at maturity. The Company reviews its investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.