Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2020

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability of fair value measurements, financial instruments are categorized based on a hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

•Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

•Level 3 — Unobservable inputs that reflect a Company’s estimates about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.

The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of money market funds, interest rate swaps, a contingent receivable and contingent consideration liabilities. The Company invests excess cash from its operating cash accounts in overnight investments and reflects these amounts in cash and cash equivalents in the condensed consolidated balance sheets at fair value using quoted prices in active markets for identical assets. The fair value of the interest rate swaps are determined based on observable market-based inputs, including interest rate curves and reflects the contractual terms of these instruments, including the period to maturity. Please refer to Note 12, “Derivative Instruments”, for further details on the interest rate swaps. The Company recorded a contingent receivable and the contingent consideration liabilities resulting from the acquisition of Progenics at fair value based on inputs that are not observable in the market. Please refer to Note 8, “Business Combinations”, for further details on the acquisition.

The tables below present information about the Company’s assets and liabilities measured at fair value on a recurring basis:


	September 30, 2020
(in thousands)	Total Fair Value		Level 1		Level 2		Level 3
Assets:
Money market	$	43,710	$	43,710	$	—	$	—
Contingent receivable	10,200		—		—		10,200
Total assets	$	53,910	$	43,710	$	—	$	10,200
Liabilities:
Interest rate swaps	$	2,073	$	—	$	2,073	$	—
Contingent consideration liabilities	17,200		—		—		17,200
Total liabilities	$	19,273	$	—	$	2,073	$	17,200


	December 31, 2019
(in thousands)	Total Fair Value		Level 1		Level 2		Level 3
Assets:
Money market	$	39,530	$	39,530	$	—	$	—
Total assets	$	39,530	$	39,530	$	—	$	—

During the three and nine months ended September 30, 2020, there were no transfers into or out of Level 3.

As part of the acquisition of Progenics, the Company acquired the right to receive certain future milestone and royalty payments due to Progenics from CytoDyn Inc., related to a prior sale of certain intellectual property. The Company has the right to receive $5.0 million upon regulatory approval and a 5% royalty on net sales of approved products. The Company considers the contingent receivable a Level 3 instrument (one with significant unobservable inputs) in the fair value hierarchy. The estimated fair value was determined based on probability adjusted discounted cash flows that included significant estimates and assumptions pertaining to regulatory events and sales targets. The most significant unobservable inputs are the probabilities of achieving regulatory approval of the development projects and subsequent commercial success.

As part of the acquisition of Progenics, the Company issued CVRs and recorded the fair value as part of consideration transferred. Refer to Note 1, “Basis of Presentation” for further details on the CVRs. Additionally, the Company assumed contingent consideration liabilities related to a previous acquisition completed by Progenics in 2013. These contingent consideration liabilities include potential payments of up to $70.0 million if the Company attains certain net sales targets for AZEDRA and 1095 and a $5.0 million 1095 commercialization milestone. The Company considers the contingent consideration liabilities a Level 3 instrument (one with significant unobservable inputs) in the fair value hierarchy. The estimated fair value was determined based on probability adjusted discounted cash flows and Monte Carlo simulation models that included significant estimates and assumptions pertaining to commercialization events and sales targets. The most significant unobservable inputs are the probabilities of achieving regulatory approval of the development projects and subsequent commercial success.

Significant changes in any of the probabilities of success or the probabilities as to the periods in which milestones will be achieved would result in a significantly higher or lower fair value measurement. The Company records the contingent consideration liability at fair value with changes in estimated fair values recorded in general and administrative expenses in the condensed consolidated statements of operations.

The following tables summarize quantitative information and assumptions pertaining to the fair value measurement of assets and liabilities using Level 3 inputs at September 30, 2020.


(in thousands)	Fair Value at September 30, 2020		Valuation Technique	Unobservable Input	Assumption
Contingent receivable:
Regulatory milestone	$	3,100	Probability adjusted discounted cash flow model	Period of expected milestone achievement	2021
				Probability of success	90	%
				Discount rate	23	%
Royalties	7,100		Probability adjusted discounted cash flow model
				Probability of success	13% - 77%
				Discount rate	23	%
Total	$	10,200


(in thousands)	Fair Value at September 30, 2020		Valuation Technique	Unobservable Input	Assumption
Contingent consideration liability:
Net sales targets - PyL (CVRs)	$	3,900	Monte-Carlo simulation	Period of expected milestone achievement	2022 - 2023

				Discount rate	24	%

1095 commercialization milestone	2,200		Probability adjusted discounted cash flow model	Period of expected milestone achievement	2026
				Probability of success	45	%
				Discount rate	0.48	%





Net sales targets - AZEDRA and 1095	11,100		Monte-Carlo simulation	Probability of success	40% - 100%
				Discount rate	23% - 24%
Total	$	17,200

For those financial instruments with significant Level 3 inputs, the following table summarizes the activities for the periods indicated:


	Financial Assets		Financial Liabilities
(in thousands)	Nine Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Fair value, beginning of period	$	—	$	—
Progenics acquisition	10,100		16,300
Changes in fair value included in net loss	100		900

Fair value, end of period	$	10,200	$	17,200

The change in fair value of the contingent financial asset and contingent financial liabilities of $0.8 million

- 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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