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Fair Value Measurements

6 Months Ended

Jun. 30, 2022

The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation:


	June 30, 2022
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	99,569	$	99,569	$	—	$	—
Commercial paper		122,791		—		122,791		—
Agency discount notes		34,933		—		34,933		—
Total cash equivalents		257,293		99,569		157,724		—
Marketable securities:
U.S. treasury notes		75,976		—		75,976		—
Commercial paper		126,503		—		126,503		—
Corporate debt securities		15,987		—		15,987		—
Total marketable securities		218,466		—		218,466		—
Investment in equity securities		27,141		27,141		—		—
LianBio Warrant		751		751		—		—
Total financial assets	$	503,651	$	127,461	$	376,190	$	—
Liability
Embedded derivative	$	1,211	$	—	$	—	$	1,211


	December 31, 2021
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	176,115	$	176,115	$	—	$	—
Commercial paper		56,986		—		56,986		—
Total cash equivalents		233,101		176,115		56,986		—
Marketable securities:
U.S. treasury notes		76,472		—		76,472		—
Commercial paper		167,737		—		167,737		—
Corporate debt securities		122,490		—		122,490		—
Supranational debt securities		27,044		—		27,044		—
Total marketable securities		393,743		—		393,743		—
Investment in equity securities		49,148		49,148		—		—
LianBio Warrant		2,141		2,141		—		—
Total financial assets	$	678,133	$	227,404	$	450,729	$	—
Liability
Embedded derivative	$	1,171	$	—	$	—	$	1,171

There were no transfers between Level 1, Level 2 or Level 3 during the periods presented.

There are uncertainties on the fair value measurement of the instrument classified under Level 3 due to the use of unobservable inputs and interrelationships between these unobservable inputs, which could result in higher or lower fair value measurements.

Marketable Securities

The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.

Investment in Equity Securities

As of June 30, 2022 and December 31, 2021, we have an investment in LianBio whose fair value amounted to $10.8 million and $30.8 million, respectively. This investment was originally accounted for under the equity method until it was converted into an investment in equity securities that is accounted for under ASC 321, Investments — Equity Securities (“ASC 321”), upon completion of LianBio’s initial public offering (“IPO”) in November 2021 (see Note 7).

The LianBio shares were subject to a lock-up agreement, which restricted our ability to sell the securities through April 2022. There are no restrictions on our ability to sell the other investment in equity securities, which had a fair value of $16.3 million and $18.3 million as of June 30, 2022 and December 31, 2021, respectively.

We classify our investment in equity securities, which are currently equity securities of publicly held companies, within Level 1 as the fair values of these equity securities are derived from observable inputs such as quoted prices in active markets.

Total realized and unrealized gains and losses associated with investment in equity securities during the periods presented consisted of the following:



	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
	(in thousands)
Net realized losses recognized on investment in equity securities sold	$	(141	)	$	—		$	(1,385	)	$	—
Net unrealized losses recognized on investment in equity securities held as of the end of the period		(10,221	)		(1,117	)		(21,843	)		(1,117	)
Total net losses included in “Other income (expense), net”	$	(10,362	)	$	(1,117	)	$	(23,228	)	$	(1,117	)

LianBio Warrant

As of June 30, 2022 and December 31, 2021, our subsidiary, QED Therapeutics, Inc. (“QED”), held a warrant which entitles QED to purchase shares of LianBio (the “LianBio Warrant”, see Note 7). We classify the LianBio Warrant, which pertains to an equity security of a publicly held company, within Level 1 as the fair value of this equity security is derived from observable inputs such as quoted prices in an active market.

Notes

The fair values of our 2.25% convertible senior notes due 2029 (the “2029 Notes”) and our 2.50% convertible senior notes due 2027 (the “2027 Notes”) (collectively, the “Notes”, see Note 10), which differ from their respective carrying values, are determined by prices for the Notes observed in market trading. The market for trading of the Notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. As of June 30, 2022, the estimated fair value of our 2029 Notes and 2027 Notes, which have aggregate face values of $747.5 million and $550.0 million, respectively, were $302.7 million and $247.5 million, respectively, based on their market prices on the last trading day for the period. As of December 31, 2021, the estimated fair value of our 2029 Notes and 2027 Notes were $444.8 million and $407.1 million, respectively, based on the market price on the last trading day for the period.

Term Loan

The fair value of our outstanding term loan (see Note 10) is estimated using the net present value of the payments, discounted at an interest rate that is consistent with a market interest rate, which is a Level 2 input. The estimated fair value of our outstanding term loan as of June 30, 2022 was $401.2 million. The estimated fair value of our outstanding term loan as of December 31, 2021 approximated the carrying amount as the term loan was issued close to that date.

LEO Call Option Liability

As of June 30, 2022 and December 31, 2021, we no longer recognized the LEO call option that we previously carried as a liability in our condensed consolidated balance sheet. In November 2018, LEO Pharma (“LEO”) was granted an exclusive, irrevocable option to acquire our subsidiary, PellePharm, Inc. (“PellePharm”). The LEO call option was exercisable by LEO on or before the occurrence of certain events relating to PellePharm’s clinical development programs and no later than July 30, 2021. We accounted for the LEO call option as a current liability because we were obligated to sell our shares in PellePharm to LEO at a pre-determined price, if the option were to be exercised. We remeasured the LEO call option to fair value at each subsequent balance sheet date, using unobservable inputs that were classified as Level 3 inputs, until the LEO call option either was exercised, terminated or had expired. On March 30, 2021, LEO provided a notice of termination of the LEO call option effective April 15, 2021. As a result, and based on the facts and circumstances that existed as of March 31, 2021, we evaluated that the likelihood of LEO exercising said option was remote and we remeasured the LEO call option liability to zero as of March 31, 2021. We recognized a gain on remeasurement of the LEO call option liability of $5.6 million that was included in “Other income (expense), net” for the six months ended June 30, 2021.

- 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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