Fair Value Measurements

9 Months Ended

Sep. 30, 2023

6. Fair value measurements

The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy:


		September 30, 2023
	Valuation Hierarchy	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
		(in thousands)
Financial assets:
Cash equivalents:
Money market funds	Level 1	$	61,002	$	-	$	-		$	61,002
U.S. government and agency securities	Level 2		77,384		11		-			77,395
Corporate debt securities	Level 2		4,336		-		-			4,336
Total cash equivalents			142,722		11		-			142,733
Short-term marketable securities:
U.S. government and agency securities	Level 2		82,808		10		(218	)		82,600
Corporate debt securities	Level 2		17,527		2		(7	)		17,522
Total short-term marketable securities			100,335		12		(225	)		100,122
Other assets	Level 3		388		-		-			388
Total financial assets		$	243,445	$	23	$	(225	)	$	243,243
Financial liabilities:
Long-term financial liabilities:
Contingent consideration	Level 3		103,156		-		-			103,156
Success payment liabilities	Level 3		12,414		-		-			12,414
Total long-term financial liabilities			115,570		-		-			115,570
Total financial liabilities		$	115,570	$	-	$	-		$	115,570


		December 31, 2022
	Valuation Hierarchy	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
		(in thousands)
Financial assets:
Cash equivalents:
Money market funds	Level 1	$	114,363	$	-	$	-		$	114,363
U.S. government and agency securities	Level 2		40,532		10		-			40,542
Corporate debt securities	Level 2		9,796		1		(2	)		9,795
Total cash equivalents			164,691		11		(2	)		164,700
Short-term marketable securities:
U.S. government and agency securities	Level 2		222,435		2		(3,711	)		218,726
Corporate debt securities	Level 2		28,836		-		(364	)		28,472
Total short-term marketable securities			251,271		2		(4,075	)		247,198
Long-term marketable securities:
U.S. government and agency securities	Level 2		10,314		-		(263	)		10,051
Total long-term marketable securities			10,314		-		(263	)		10,051
Other assets	Level 3		369		-		-			369
Total financial assets		$	426,645	$	13	$	(4,340	)	$	422,318
Financial liabilities:
Short-term financial liabilities:
Contingent consideration	Level 3	$	55,345	$	-	$	-		$	55,345
Total short-term financial liabilities			55,345		-		-			55,345
Long-term financial liabilities:
Contingent consideration	Level 3		95,034		-		-			95,034
Success payment liabilities	Level 3		21,007		-		-			21,007
Total long-term financial liabilities			116,041		-		-			116,041
Total financial liabilities		$	171,386	$	-	$	-		$	171,386

The Company measures the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. The Level 2 marketable securities include U.S. government and agency securities and corporate debt securities and are valued based on either recent trades of securities in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

The following table summarizes available-for-sale debt securities in a continuous unrealized loss position for less than and greater than twelve months for the periods presented:


	Less than 12 months					12 months or greater					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
	(in thousands)
September 30, 2023
U.S. government and agency securities	$	8,304	$	(4	)	$	26,710	$	(214	)	$	35,014	$	(218	)
Corporate debt securities		13,512		(7	)		-		-			13,512		(7	)
Total	$	21,816	$	(11	)	$	26,710	$	(214	)	$	48,526	$	(225	)
December 31, 2022
U.S. government and agency securities	$	49,253	$	(673	)	$	172,845	$	(3,301	)	$	222,098	$	(3,974	)
Corporate debt securities		13,333		(16	)		19,664		(350	)		32,997		(366	)
Total	$	62,586	$	(689	)	$	192,509	$	(3,651	)	$	255,095	$	(4,340	)

The Company determined that there was no material change in the credit risk of the above investments during the three and nine months ended September 30, 2023. As such, an allowance for credit losses has not been recognized. As of September 30, 2023, the Company does not intend to sell such securities, and it is not more-likely-than-not that the Company will be required to sell the securities prior to the recovery of the amortized cost basis.

As of September 30, 2023, all marketable securities had an effective maturity date of two years or less. Investments in securities with maturities of less than one year, or those for which management intends to use to fund current operations, are included in current assets and classified as available-for-sale. As of September 30, 2023, the balance in accumulated other comprehensive loss included net unrealized gains (losses) related to the Company’s available-for-sale debt securities.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities:


	Contingent Consideration			Cobalt Success Payment Liability			Harvard Success Payment Liability
	(in thousands)
Balance as of December 31, 2022	$	150,379		$	19,016		$	1,991
Changes in fair value – expense (gain)		5,460			(4,760	)		(580	)
Balance as of March 31, 2023		155,839			14,256			1,411
Changes in fair value – expense		5,895			18,505			2,279
Balance as of June 30, 2023		161,734			32,761			3,690
Changes in fair value – gain		(58,578	)		(21,998	)		(2,039	)
Balance as of September 30, 2023	$	103,156		$	10,763		$	1,651

Contingent consideration

The Company utilizes significant estimates and assumptions it believes would be made by a market participant in determining the estimated fair value of the Cobalt Contingent Consideration at each balance sheet date. The fair value of the Cobalt Contingent Consideration was determined by calculating the probability-weighted estimated value of the pre-specified development milestone payments based on the assessment of the likelihood and estimated timing that the milestones would be achieved and the applicable discount rates. The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. The Company assesses these estimates on an ongoing basis as additional data impacting the assumptions are obtained.

The fair value of the Cobalt Contingent Consideration was calculated using the following unobservable inputs:


	September 30, 2023		December 31, 2022
Unobservable Input	Range	Weighted-Average	Range	Weighted-Average
Discount rates	12.7% - 13.3%	13.0%	13.4% – 15.1%	14.6%
Probability of milestone achievement	5.0% - 55.0%	25.7%	5.0% – 85.0%	36.0%

The weighted-average unobservable inputs were calculated based on the relative value of the pre-specified development milestones. The estimated fair value of the Cobalt Contingent Consideration may change significantly as development progresses and additional data are obtained, impacting the assumptions regarding probabilities of successful achievement of the milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. In evaluating the fair value assumptions, judgment is required to interpret the market data used to develop the estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions, inputs and/or different valuation techniques could result in materially different fair value estimates.

Success payments

The Company utilizes significant estimates and assumptions in determining the estimated fair value of the success payment liabilities and the associated expense or gain at each balance sheet date. The estimated fair value of the Cobalt Success Payment and Harvard Success Payment liabilities was determined using a Monte Carlo simulation methodology, which models the estimated fair value of the liability based on several key assumptions, including the expected volatility, remaining term, risk-free interest rate, estimated number and timing of valuation measurement dates on the basis of which payment may be triggered, and, for the Cobalt Success Payment, the Company’s market capitalization, and, for the Harvard Success Payments, the per share fair value of the Company’s common stock.

The fair values of the Cobalt Success Payments and Harvard Success Payments were calculated using the following unobservable inputs:


	September 30, 2023		December 31, 2022
Unobservable Input	Cobalt	Harvard	Cobalt	Harvard
Expected stock price volatility	72.5%	72.5%	70.0%	70.0%
Expected term (years)	15.4	7.5	16.1	8.2

- 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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