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Fair Value Measurements

9 Months Ended

Sep. 30, 2020

3.Fair Value Measurements

The Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

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Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.

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Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amounts of the Company’s financial instruments, including accounts payable and accrued liabilities approximate fair value due to their relatively short maturities.

The following tables summarize the Company’s Level 1 and Level 2 financial assets measured at fair value on a recurring basis by level within the fair value hierarchy:

		September 30, 2020
	Valuation Hierarchy	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Aggregate Fair Value
		(in thousands)
Assets:
Money market funds⁽¹⁾	Level 1	$	472,272	$	—	$	—		$	472,272
U.S. government treasuries	Level 2		363,840		235		(1	)		364,074
Total financial assets		$	836,112	$	235	$	(1	)	$	836,346

(1)	Includes $10.6 million of restricted cash equivalents.

		December 31, 2019
	Valuation Hierarchy	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Aggregate Fair Value
		(in thousands)
Assets:
Money market funds⁽¹⁾	Level 1	$	106,127	$	—	$	—		$	106,127
U.S. government treasuries ⁽²⁾	Level 2		298,256		140		(5	)		298,391
Bank time deposits	Level 2		2,500		—		—			2,500
Total financial assets		$	406,883	$	140	$	(5	)	$	407,018

(1)	Includes $13.5 million of restricted cash equivalents.

(2)	Includes $24.3 million classified as long-term investments.

As of September 30, 2020, there were no investments that have been in a continuous unrealized loss position for longer than 12 months. Total net unrealized gains of $0.2 million were recorded in accumulated other comprehensive income (loss) at September 30, 2020. As of September 30, 2020, no securities have contractual maturities of longer than one year.

Level 3 liabilities consist of contingent consideration and derivative liability as of December 31, 2019. As of September 30, 2020, Level 3 liabilities consist of contingent consideration.

Contingent Consideration

Contingent consideration includes potential milestone payments in connection with the acquisitions of Humabs Biomed SA (“Humabs”) and TomegaVax, Inc. (“TomegaVax”). See further discussion in Note 4—Acquisitions.

The estimated fair value of the contingent consideration related to the Humabs acquisition was determined by calculating the probability-weighted clinical, regulatory and commercial milestone payments based on the assessment of the likelihood and estimated timing that certain milestones would be achieved. In May 2020, the Company achieved one of the specified clinical milestones for the HBV product. As such, the Company paid $10.0 million related to this milestone event in June 2020. In October 2020, the Company achieved another specified clinical milestone for the SARS-CoV-2 product and paid $10.0 million. See Note 15—Subsequent Event. As of September 30, 2020, the Company calculated the estimated fair value of the remaining clinical and regulatory milestones using the following significant unobservable inputs:

Unobservable input

Value or Range

(Weighted-Average)¹

Discount rates

10% - 12% (10%)

Probability of achievement

14% - 100% (56%)

(1)	Unobservable inputs were weighted based on the relative fair value of the clinical and regulatory milestone payments.

As of December 31, 2019, the Company calculated the estimated fair value of the clinical and regulatory milestones using discount rates ranging from 7.7% to 11.1%.

For the commercial milestones, the Company used a Monte Carlo simulation because of the availability of a discrete revenue forecast and the increased likelihood that the clinical trials would commence. As of September 30, 2020, the Monte Carlo simulation assumed a commercial product launch and associated discrete revenue forecast, as well as the following significant unobservable inputs:

Unobservable input		Value or Range (Weighted-Average)¹
Volatility		60%
Discount rate		11%
Probability of achievement		14% - 32% (30%)

(1)	Unobservable inputs were weighted based on the relative fair value of the commercial milestone payments.

As of December 31, 2019, the Company’s Monte Carlo simulation assumed a commercial product launch and associated discrete revenue forecast, an expected revenue volatility of 55%, and a discount rate of 13%. The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. As of September 30, 2020 and December 31, 2019, the estimated fair value of the contingent consideration related to the Humabs acquisition was $42.5 million and $14.9 million, respectively, with changes in the estimated fair value recorded in research and development expense in the condensed consolidated statements of operations.

The estimated fair value of the contingent consideration related to the TomegaVax acquisition was determined by using a Monte Carlo simulation model which included estimates of both the probability and timing to achieve the required per share price of the Company’s common stock, and incorporates assumptions as to expected volatility and discount rate. The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. Although the TomegaVax acquisition was accounted for as an asset acquisition, such contingent consideration met the definition of an embedded derivative financial instrument. As of September 30, 2020, the fair value of the contingent consideration was estimated using the following significant unobservable inputs:

Unobservable input

Range

(Weighted-Average)¹

Volatility

85%

Discount rates

0.0% - 0.2% (0.1%)

(1)	Unobservable inputs were weighted based on the relative fair value of the underlying milestones.

As of December 31, 2019, the fair value of the contingent consideration was estimated using expected volatility of 81%, and discount rates ranging from 1.6% to 1.7%. As of September 30, 2020 and December 31, 2019, the estimated fair value of the contingent consideration related to the TomegaVax acquisition was $9.5 million and $2.7 million, respectively, with changes in the estimated fair value recorded in other income (expense), net in the condensed consolidated statements of operations.

The estimated fair value of the contingent consideration related to the Humabs and TomegaVax acquisitions involves significant estimates and assumptions which give rise to measurement uncertainty.

Derivative Liability

The derivative liability relates to the Milestone Shares (as defined in Note 7) in connection with the collaboration and license agreement (the “Alnylam Agreement”) with Alnylam Pharmaceuticals, Inc. (“Alnylam”). See Note 7—Collaboration and License Agreements.

The estimated fair value of the derivative liability was calculated based on the estimated probabilities of the likelihood and timing to achieve the development milestone, a discount for lack of marketability, and the fair value of the Milestone Shares using the Company’s closing stock price as of December 31, 2019 and March 10, 2020, the date the Company achieved the development milestone. As of December 31, 2019, the estimated fair value of the derivative liability was $12.4 million. On March 10, 2020, the Company remeasured and reclassified the derivative liability of $29.2 million to additional paid-in capital upon achievement of the development milestone.

The following table sets forth the changes in the estimated fair value of the Company’s Level 3 financial liabilities (in thousands):

	Contingent Consideration			Derivative Liability			Total
Balance at December 31, 2019	$	17,580		$	12,449		$	30,029
Changes in fair value		44,432			16,796			61,228
Payment of contingent consideration related to Humabs acquisition		(10,000	)		—			(10,000	)
Reclassification of derivative liability to additional paid-in capital upon achievement of development milestone		—			(29,245	)		(29,245	)
Balance at September 30, 2020	$	52,012		$	—		$	52,012

- 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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