Fair Value Measurements

3 Months Ended

Mar. 31, 2017

We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities and our investment in equity securities in publicly-held biotechnology companies; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. We classify the majority of our securities as Level 2. We obtain the fair value of our Level 2 investments from our custodian bank or from a professional pricing service. We validate the fair value of our Level 2 investments by understanding the pricing model used by the custodian banks or professional pricing service provider and comparing that fair value to the fair value based on observable market prices. During the three months ended March 31, 2017, there were no transfers between our Level 1 and Level 2 investments. When we recognize transfers between levels of the fair value hierarchy, we recognize the transfer on the date the event or change in circumstances that caused the transfer occurs.

The following tables present the major security types we held at March 31, 2017 and December 31, 2016 that are regularly measured and carried at fair value. The tables segregate each security type by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities’ fair value (in thousands):

	At March 31, 2017		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents (1)	$	100,318	$	100,318	$	—
Corporate debt securities (2)		529,024		—		529,024
Debt securities issued by U.S. government agencies (3)		90,260		—		90,260
Debt securities issued by the U.S. Treasury (4)		26,774		26,774		—
Debt securities issued by states of the U.S. and political subdivisions of the states (5)		110,540		—		110,540
Total	$	856,916	$	127,092	$	729,824

	At December 31, 2016		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents (1)	$	54,137	$	54,137	$	—
Corporate debt securities (3)		396,221		—		396,221
Debt securities issued by U.S. government agencies (3)		55,179		—		55,179
Debt securities issued by the U.S. Treasury (3)		29,286		29,286		—
Debt securities issued by states of the U.S. and political subdivisions of the states (5)		109,111		—		109,111
Investment in Regulus Therapeutics Inc.		2,414		2,414		—
Total	$	646,348	$	85,837	$	560,511

(1)

Included in cash and cash equivalents on our condensed consolidated balance sheet.

(2)

At March 31, 2017, $6.8 million was included in cash and cash equivalents on our condensed consolidated balance sheet, with the difference included in short-term investments on our condensed consolidated balance sheet.

(3)

Included in short-term investments on our condensed consolidated balance sheet.

(4)

At March 31, 2017, $1.0 million was included in cash and cash equivalents on our condensed consolidated balance sheet, with the difference included in short-term investments on our condensed consolidated balance sheet.

(5)

At March 31, 2017 and December 31, 2016, $2.7 million and $9.3 million, respectively, were included in cash and cash equivalents on our condensed consolidated balance sheet, with the difference included in short-term investments on our condensed consolidated balance sheet.

Other Fair Value Disclosures

Novartis Future Stock Purchase

In January 2017, we and Akcea entered into a SPA with Novartis. As part of the SPA, Novartis is required to purchase $50 million of common stock in the future. Novartis will make this purchase either in Akcea’s common stock at the IPO price if an IPO occurs under certain conditions, in our common stock at a premium if an IPO does not occur by April 2018, or in a combination of both of these under certain conditions. If an IPO does not occur within the required timeframe, Novartis is required to purchase our common stock at a premium calculated in the same manner as Novartis’ initial investment. Therefore, at the inception of the SPA, we recorded a $5.0 million asset representing the fair value of the potential future premium we will receive if Novartis purchases our common stock. We determined the fair value of the future premium by calculating the value based on the stated premium in the SPA and estimating the probability of an Akcea IPO. We also included a lack of marketability discount when we determined the fair value of the premium because we will issue unregistered shares to Novartis if they purchase our common stock. We measured this asset using Level 3 inputs and recorded it in other assets on our condensed consolidated balance sheet. At the end of each period prior to an Akcea IPO or the purchase by Novartis of our common stock, we will remeasure the fair value of this asset and record an adjustment to other income/expense on our condensed consolidated statement of operations for the change in value.

The following is a reconciliation of the potential premium we may receive measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2017 (in thousands):

Beginning balance of Level 3 asset (at December 31, 2016)	$	—
Value of the potential premium we will receive from Novartis at inception of the SPA (January 2017)		5,035
Recurring fair value adjustment at March 31, 2017		(1,438	)
Ending balance of Level 3 asset (at March 31, 2017)	$	3,597

At December 31, 2016 we did not have any financial instruments that were valued using Level 3 inputs.

Convertible Notes

Our 1 percent notes had a fair value of $661.9 million at March 31, 2017. We determine the fair value of our notes based on quoted market prices for these notes, which are Level 2 measurements because the notes do not trade regularly.

- 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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