3 Fair value measurement

The Company measures certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. U.S. GAAP, requires disclosure of methodologies used in determining the reported fair values, and establishes a hierarchy of inputs used when available. The three levels of the fair value hierarchy are described below:

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 - Valuations based on quoted prices for similar assets or liabilities in markets that are not active or models for which the inputs are observable, either directly or indirectly.

Level 3 - Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and are unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Items measured at fair value on a recurring basis include financial instruments and contingent consideration. The carrying amount of cash and cash equivalents, accrued income from related parties, prepaid expenses, other assets, accounts payable, accrued expenses and other current liabilities reflected in the consolidated balance sheets approximate their fair values due to their short-term maturities.

The following table sets forth the Company’s assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2018, and December 31, 2017:


	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		Classification in consolidated balance sheets
		in thousands
At December 31, 2017
Assets:
Cash, cash equivalents and restricted cash	$	161,851	$	—	$	—	$	161,851
Total assets		161,851		—		—		161,851
Liabilities:
Derivative financial instruments - debt		—		—		337		337	Accrued expenses and other current liabilities
Derivative financial instruments - related party		—		—		1,298		1,298
Contingent consideration		—		—		3,964		3,964
Total liabilities	$	—	$	—	$	5,599	$	5,599
At September 30, 2018
Assets:
Cash, cash equivalents and restricted cash	$	242,000	$	—	$	—	$	242,000
Total assets		242,000		—		—		242,000
Liabilities:
Derivative financial instruments - debt		—		—		857		857	Accrued expenses and other current liabilities
Derivative financial instruments - related party		—		—		1,085		1,085
Contingent consideration		—		—		—		—
Total liabilities	$	—	$	—	$	1,942	$	1,942

Changes in Level 3 items during the nine months ended September 30, 2018, are as follows



			Derivative
	Contingent		financial
	consideration		instruments		Total
	in thousands
Balance at December 31, 2017	$	3,964	$	1,635	$	5,599
(Gains) / losses recognized in profit or loss		(3,846)		330		(3,516)
Currency translation effects		(118)		(23)		(141)
Balance at September 30, 2018	$	—	$	1,942	$	1,942

Contingent consideration

In connection with the Company’s acquisition of the InoCard business (“InoCard”) in 2014, the Company recorded contingent consideration related to amounts potentially payable to InoCard’s former shareholders. The amounts payable in accordance with the sale and purchase agreement (as amended in August 2017) are contingent upon realization of milestones associated with our S100A1 protein research program and, as of October 2018, we do not expect to realize those milestones.

Derivative financial instruments

The Company issued derivative financial instruments related to its collaboration with Bristol-Meyers Squibb Company (“BMS”) and in relation to the issuance of the Hercules Technology Growth Corp. (“Hercules”) loan facility. The fair value of these derivative financial instruments as of September 30, 2018, was $1.9 million (December 31, 2017: $1.6 million), and these derivative financial instruments are described in more detail below.

BMS collaboration

On April 6, 2015, the Company entered into several agreements with BMS (the “BMS Agreements”). Pursuant to the terms of the BMS Agreements the Company granted BMS two warrants:

A warrant allowing BMS to purchase a specific number of uniQure ordinary shares such that its ownership will equal 14.9% immediately after such purchase. The warrant can be exercised on the later of (i) the date on which the Company receives from BMS the Target Designation Fees (as defined in the collaboration agreements) associated with the first six New Targets (as defined in the BMS Agreements); and (ii) the date on which BMS designates the sixth New Target.

A warrant allowing BMS to purchase a specific number of uniQure ordinary shares such that its ownership will equal 19.9% immediately after such purchase. The warrant can be exercised on the later of (i) the date on which uniQure receives from BMS the Target Designation Fees associated with the first nine New Targets; and (ii) the date on which BMS designates the ninth New Target.

Pursuant to the terms of the BMS Agreements the exercise price, in respect of each warrant, is equal to the greater of (i) the product of (A) $33.84, multiplied by (B) a compounded annual growth rate of 10% and (ii) the product of (A) 1.10 multiplied by (B) the VWAP for the 20 trading days ending on the date that is five trading days prior to the date of a notice of exercise delivered by BMS.

In March 2018, the Company reduced the probability of the warrants being exercised resulting in a reduction of the warrants fair value by $1.1 million.

The Company conducted a sensitivity analysis to assess the impact on changes in assumptions on the fair value. Specifically, the Company examined the impact on the fair market of the warrants by increasing the volatility by 10% to 82.5%. A further sensitivity analysis was performed assuming the exercise date of the warrants would occur one year later than what was assumed in the initial valuation. The table below illustrates the impact on the fair market valuation associated with these changes in assumptions as of September 30, 2018.


		Total warrants
	in thousands
Base case	$	1,085
Increase volatility by 10% to 82.5%		291
Extend exercise dates by one year		36

Hercules loan facility

On June 14, 2013, the Company entered into a venture debt loan facility with (the “Original Facility”) with Hercules Technology Growth Capital, Inc. (“Hercules”) pursuant to a Loan and Security Agreement (the “Loan Agreement”) which included a warrant. The warrant was not closely related to the host contract and was accounted for separately as a derivative financial liability measured at fair value though profit or loss. The warrant included in the Original Facility remained in place following the 2014 and 2016 amendments of the loan.

There were no significant changes in the sensitivity of the fair value from (un)observable inputs as of September 30, 2018, compared to December 31, 2017.