Fair Value Measurements

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, 2018, 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, 2018 and December 31, 2017 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, 2018		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents (1)	$	138,350	$	138,350	$	—
Corporate debt securities (2)		556,338		—		556,338
Debt securities issued by U.S. government agencies (3)		150,297		—		150,297
Debt securities issued by the U.S. Treasury (3)		54,034		54,034		—
Debt securities issued by states of the U.S. and political subdivisions of the states (3)		83,392		—		83,392
Total	$	982,411	$	192,384	$	790,027

	At December 31, 2017		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents (1)	$	86,262	$	86,262	$	—
Corporate debt securities (3)		647,461		—		647,461
Debt securities issued by U.S. government agencies (3)		136,325		—		136,325
Debt securities issued by the U.S. Treasury (3)		30,818		30,818		—
Debt securities issued by states of the U.S. and political subdivisions of the states (4)		93,932		—		93,932
Total	$	994,798	$	117,080	$	877,718

(1)

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

(2)

At March 31, 2018, $14.6 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 December 31, 2017, $3.5 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.

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 was required to purchase $50 million of Akcea’s common stock at the IPO price or our common stock at a premium if an IPO did not occur by April 2018. Therefore, at the inception of the SPA, we recorded a $5.0 million asset representing the fair value of the potential future premium we could have received if Novartis purchased 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 would have issued unregistered shares to Novartis if they had purchased our common stock. We measured this asset using Level 3 inputs and recorded it in other assets on our consolidated balance sheet. Because Akcea completed its IPO before April 2018, Novartis will not purchase additional shares of Ionis stock. Therefore, this asset no longer had any value and we wrote-off the remaining balance to other expenses in the third quarter of 2017.

The following is a reconciliation of the potential premium we would have received if Akcea had not completed its IPO, 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 instruments at January 1, 2017	$	—
Value of the potential premium we would have received from Novartis at inception of the SPA (January 2017)		5,035
Recurring fair value adjustment during the three months ended March 31, 2017		(1,438	)
Ending balance of Level 3 instruments at March 31, 2017	$	3,597

At March 31, 2018 and December 31, 2017, 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 $729.1 million at March 31, 2018. 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.