4 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.

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 March 31, 2019, and December 31, 2018:


	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, 2018
Assets:
Cash, cash equivalents and restricted cash	$	237,342	$	—	$	—	$	237,342
Total assets	$	237,342	$	—	$	—	$	237,342
Liabilities:
Derivative financial instruments - debt	$	—	$	—	$	572	$	572	Accrued expenses and other current liabilities
Derivative financial instruments - related party		—		—		803		803
Total liabilities	$	—	$	—	$	1,375	$	1,375
At March 31, 2019
Assets:
Cash, cash equivalents and restricted cash	$	211,717	$	—	$	—	$	211,717
Total assets	$	211,717	$	—	$	—	$	211,717
Liabilities:
Derivative financial instruments - debt	$	—	$	—	$	—	$	—
Derivative financial instruments - related party		—		—		2,603		2,603
Total liabilities	$	—	$	—	$	2,603	$	2,603

Changes in Level 3 items during the three months ended March 31, 2019, are as follows



	Derivative
	financial
	instruments
	(in thousands)
Balance at December 31, 2018	$	1,375
Losses recognized in profit or loss		2,027
Exercise of warrants		(770)
Currency translation effects		(29)
Balance at March 31, 2019	$	2,603

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 Hercules warrants were exercised as of February 1, 2019. The Company issued 37,175 ordinary shares at $34.25 following the exercise of all Hercules warrants and receipt of $0.5 million from Hercules.

The fair value of the BMS derivative financial instruments (“BMS warrants”) as of March 31, 2019, was $2.6 million compared to a fair value of both the BMS and Hercules derivative financial instruments of $1.4 million as of December 31, 2018. These BMS warrants are described in more detail below.

BMS warrants

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 (a total of seven Collaboration Targets); and (ii) the date on which BMS designates the sixth new target (the seventh Collaboration 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 (a total of ten Collaboration Targets); and (ii) the date on which BMS designates the ninth new target (the tenth Collaboration Target).

As of March 31, 2019, BMS has designated a total of four Collaboration Targets, and as such, the warrants are not exercisable.

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% (or approximately $48.92 as of March 31, 2019) 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. The exercise of warrants is expected to occur within two and four years after the balance sheet date.

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 85%. A further sensitivity analysis was performed assuming the warrants would be exercised a year later than currently estimated. The table below illustrates the impact on the fair market valuation associated with these changes in assumptions as of March 31, 2019.


		Total warrants
	(in thousands)
Base case	$	2,603
Increase volatility by 10% to 85%		568
Extend exercise dates by one year		(9)