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:

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 the related party, 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 June 30, 2020, and December 31, 2019:


	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, 2019
Assets:
Cash, cash equivalents and restricted cash	$	380,726	$	—	$	—	$	380,726	Cash and cash equivalents; restricted cash
Total assets	$	380,726	$	—	$	—	$	380,726
Liabilities:
Derivative financial instruments - related party		—		—		3,075		3,075
Total liabilities	$	—	$	—	$	3,075	$	3,075
At June 30, 2020
Assets:
Cash, cash equivalents and restricted cash	$	316,948	$	—	$	—	$	316,948	Cash and cash equivalents; restricted cash
Total assets	$	316,948	$	—	$	—	$	316,948
Liabilities:
Derivative financial instruments - related party	$	—	$	—	$	832	$	832
Total liabilities	$	—	$	—	$	832	$	832

Changes in Level 3 items during the six months ended June 30, 2020, are as follows:


	Derivative
	financial
	instruments
	(in thousands)
Balance at December 31, 2019	$	3,075
Net gains recognized in profit or loss		(2,206)
Currency translation effects		(37)
Balance at June 30, 2020	$	832

BMS warrants

The Company issued derivative financial instruments related to its collaboration with BMS. The fair value of the BMS derivative financial instruments (“BMS warrants”) as of June 30, 2020, was $0.8 million compared to a fair value of $3.1 million as of December 31, 2019. Changes in the fair value of the BMS warrants are primarily impacted by changes in the Company’s share price, whereby a decrease in share price generally results in a decrease of the fair value. In addition, the Company revised certain unobservable inputs as well as valuation techniques in March 2020 which resulted in a further decrease in fair value of $0.7 million when compared to December 31, 2019. These BMS warrants are described in more detail below.

The Company granted BMS two warrants:

●

A warrant allowing BMS to purchase a specific number of the Company’s unregistered ordinary shares such that its ownership will equal 14.9% immediately after such purchase (“1^st warrant”). The 1^st 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 BMS CLA) 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 the Company’s unregistered ordinary shares such that its ownership will equal 19.9% immediately after such purchase (“2^nd warrant” and together with the 1^st warrant, the “warrants”). The 2^nd warrant can be exercised on the later of (i) the date on which the Company 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).

Pursuant to the terms of the BMS CLA, the exercise price in respect of each warrant is equal to the greater of (i) the product of (A) $33.84 and (B) a compounded annual growth rate of 10% (or approximately $55.07 as of June 30, 2020) and (ii) the product of (A) 1.10 and (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.

As of June 30, 2020, BMS had designated a total of four Collaboration Targets, and as such, the warrants were not exercisable. The Company estimated the exercise of warrants to occur within four and five years after the balance sheet date.

The significant unobservable inputs that the Company uses to develop Level 3 fair value measurements include the number of ordinary shares outstanding at the time of BMS’s warrant exercises. The number of such ordinary shares outstanding at the time of exercise determines the number of unregistered ordinary shares to be issued in connection with the BMS warrants.

The warrants can only be exercised following the occurrence of events contractually defined in the warrant agreements. The probability of the occurrence of these events represent another significant unobservable input used in the calculation of the fair value of the warrants. The Company estimates that the probability of the occurrence of events allowing BMS to exercise the 1^st warrant is within a range of 0% to 44% and between 0% to 11% with respect to the 2^nd warrant. The arithmetic averages related to these ranges are 24% and 5% for the 1^st and 2^nd warrant, respectively.