Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

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 is 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 13, “Derivative Instruments”, for further details on the interest rate swaps. The Company recorded a contingent receivable and the contingent consideration liabilities resulting from the Progenics Acquisition at fair value based on inputs that are not observable in the market.

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


	September 30, 2022
(in thousands)	Total Fair Value		Level 1		Level 2		Level 3
Assets:
Money market	$	176,909	$	176,909	$	—	$	—
Interest rate swaps	5,660		—		5,660		—
Contingent receivable	8,200		—		—		8,200
Total assets	$	190,769	$	176,909	$	5,660	$	8,200
Liabilities:
Contingent consideration liabilities	$	110,500	$	—	$	—	$	110,500
Total liabilities	$	110,500	$	—	$	—	$	110,500


	December 31, 2021
(in thousands)	Total Fair Value		Level 1		Level 2		Level 3
Assets:
Money market	$	40,140	$	40,140	$	—	$	—
Interest rate swaps	357		—		357		—
Contingent receivable	9,300		—		—		9,300
Total assets	$	49,797	$	40,140	$	357	$	9,300
Liabilities:
Contingent consideration liabilities	$	86,200	$	—	$	—	$	86,200
Total liabilities	$	86,200	$	—	$	—	$	86,200

During the three and nine months ended September 30, 2022, there were no transfers into or out of Level 3.

As part of the Progenics Acquisition, 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 Progenics Acquisition, the Company issued CVRs and recorded the fair value as part of consideration transferred. Each CVR entitles its holder to receive a pro rata share of aggregate cash payments equal to 40% of U.S. net sales generated by PYLARIFY in 2022 and 2023 in excess of $100.0 million and $150.0 million, respectively, subject to a maximum cap. Refer to Note 1, “Basis of Presentation” for further details on the CVRs. The Company considers the contingent consideration liabilities relating to the CVRs a Level 3 instrument (one with significant unobservable inputs) in the fair value hierarchy. The estimated fair value of these had been determined based on Monte Carlo simulation models that included significant estimates and assumptions pertaining to commercialization events and sales targets. Because of revised revenue forecasts for the balance of 2022, the Company updated the valuation technique for the CVRs from the Monte Carlo simulation model to a probability adjusted discounted cash flow model as the Company currently expects to pay out the full amount of the CVRs from available cash in the first half of 2023 based on U.S. net sales generated by PYLARIFY in 2022 and, under either valuation technique, the estimated liability would be approximately the same.

The Company also assumed contingent consideration liabilities related to a previous acquisition completed by Progenics in 2013 (“2013 Acquisition”). These contingent consideration liabilities include potential payments of up to $70.0 million if the Company attains certain net sales targets primarily for AZEDRA and 1095 and a $5.0 million 1095 commercialization milestone. Additionally, there is a potential payment of up to $10.0 million related to a 1404 commercialization milestone. The Company’s total potential payments related to the 2013 Acquisition are approximately $85.0 million. The Company considers the contingent consideration liabilities relating to the 2013 Acquisition each a Level 3 instrument (one with significant unobservable inputs) in the fair value hierarchy. The estimated fair value of these 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 with respect to 1095 and 1404 are the probabilities of achieving regulatory approval of those development projects and subsequent commercial success.

Significant changes in any of the probabilities of success, the probabilities as to the periods in which sales targets and milestones will be achieved, discount rates or underlying revenue forecasts 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 Company can give no assurance that the actual amounts paid, if any, in connection with the contingent consideration liabilities, including the CVRs, will be consistent with any recurring fair value estimate of such contingent consideration liabilities.

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, 2022.


	Fair Value at						Assumptions
(in thousands)	September 30, 2022		December 31, 2021		Valuation Technique	Unobservable Input	September 30, 2022		December 31, 2021
Contingent receivable:
Regulatory milestone	$	2,400	$	2,500	Probability adjusted discounted cash flow model	Period of expected milestone achievement	2023		2022
						Probability of success	70	%	70	%
						Discount rate	19	%	17	%
Royalties	5,800		6,800		Probability adjusted discounted cash flow model
						Probability of success	10% - 60%		10% - 60%
						Discount rate	19	%	17	%
Total	$	8,200	$	9,300


	Fair Value at						Assumptions
(in thousands)	September 30, 2022		December 31, 2021		Valuation Technique	Unobservable Input	September 30, 2022		December 31, 2021
Contingent consideration liability:
Net sales targets - PYLARIFY (CVRs)	$	99,700	$	73,200	Probability adjusted discounted cash flow model (as of 9/30/2022) Monte Carlo simulation (as of 12/31/2021)	Period of expected milestone achievement and sales targets	2022 - 2023		2022 - 2023
						Probability of success	100	%	N/A
						Discount rate	N/A		17	%
1095 commercialization milestone	1,700		1,900		Probability adjusted discounted cash flow model
						Period of expected milestone achievement	2026		2026
						Probability of success	40	%	40	%
						Discount rate	3.7	%	1.3	%



Net sales targets - AZEDRA and 1095	9,100		11,100		Monte Carlo simulation
						Probability of success and sales targets	20% - 100%		40% - 100%
						Discount rate	18% - 19%		16% - 17%
Total	$	110,500	$	86,200

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,				Nine Months Ended September 30,
	2022		2021		2022		2021
Fair value, beginning of period	$	9,300	$	11,300	$	86,200	$	15,800

Changes in fair value included in net income (loss)	(1,100)		2,500		24,300		31,000

Fair value, end of period	$	8,200	$	13,800	$	110,500	$	46,800

The change in fair value of the contingent financial asset and contingent financial liabilities, including the CVRs, resulted in an expense of $25.4 million for the nine months ended September 30, 2022 and was primarily due to changes in revenue forecasts, changes in market conditions, an increase in discount rates (excluding the CVRs) and the passage of time. The Company expects to make all applicable cash payments related to the CVRs in the first half of 2023. As of September 30, 2022, the Company had $99.7 million in current liabilities to account for the expected payments related to the CVRs.

- 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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