Fair Value of financial instruments

9 Months Ended

Sep. 30, 2017

Fair value of financial instruments.

Fair value of financial instruments

4.     Fair value of financial instruments

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

Recurring Fair Value Measurements

Our marketable securities consist of investments in corporate debt securities and U.S. government securities that are classified as available-for-sale.

At September 30, 2017 and December 31, 2016, our Level 2 corporate debt securities were valued using readily available pricing sources which utilize market observable inputs, including the current interest rate and other characteristics for similar types of investments. Our long term investments classified as Level 1 were valued using the unadjusted closing stock price on The NASDAQ Stock Market. 

Our policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the end of the reporting period. During the three months ended September 30, 2017, we transferred a long term investment with a carrying value of $78.3 million from Level 2 to Level 1 due to the lapse of the marketability restrictions. The investment is now valued using the unadjusted closing stock price on The NASDAQ Stock Market.  There were no transfers out of Level 1 to Level 2 during the period.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis as of September 30, 2017 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		September 30, 2017
Cash and cash equivalents	$	1,128,046	$	—	$	—	$	1,128,046
Debt securities (corporate and government)		—		153,343		—		153,343
Long term investments (Note 9)		169,020		—		—		169,020
Total assets	$	1,297,066	$	153,343	$	—	$	1,450,409

The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as of September 30, 2017 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		September 30, 2017
Contingent consideration (Note 3)	$	—	$	—	$	284,000	$	284,000
Total liabilities	$	—	$	—	$	284,000	$	284,000

The following is a rollforward of our Level 3 liabilities (in thousands):

	Level 3
Balance at January 1, 2017	$	301,000
Contingent consideration earned during the period but not yet paid		(5,657)
Payments made during the period		(9,429)
Change in fair value of contingent consideration		(1,914)
Balance at September 30, 2017	$	284,000

The fair value of the contingent consideration was determined using an income approach based on estimated ICLUSIG revenues in the Territory for both the approved third line treatment, as well as the second line treatment that was under development until discontinued in the third quarter of 2017.  The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the condensed consolidated statements of operations. The change in fair value of the contingent consideration during the three and nine months ended September 30, 2017 is due to the passage of time and a benefit of $24.0 million recorded during the third quarter related to the lack of expected future sales royalties payable due to the discontinued OPTIC-2L clinical trial.

We make payments to ARIAD quarterly based on the royalties or any additional milestone payments earned in the previous quarter.  During the three months ended September 30, 2017, contingent consideration earned but not yet paid was $5.7 million and we paid ARIAD $5.1 million for royalties earned in the second quarter of 2017 that were included in accrued and other current liabilities at June 30, 2017.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis as of December 31, 2016 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		December 31, 2016
Cash and cash equivalents	$	652,343	$	—	$	—	$	652,343
Debt securities (corporate and government)		—		156,203		—		156,203
Long term investment (Note 9)		31,987		—		—		31,987
Total assets	$	684,330	$	156,203	$	—	$	840,533

The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as of December 31, 2016 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		December 31, 2016
Contingent consideration (Note 3)	$	—	$	—	$	301,000	$	301,000
Total liabilities	$	—	$	—	$	301,000	$	301,000

The following is a summary of our marketable security portfolio as of September 30, 2017 and December 31, 2016, respectively.

			Net		Net
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(in thousands)
September 30, 2017
Debt securities (corporate and government)	$	153,650	$	—	$	(307)	$	153,343
December 31, 2016
Debt securities (corporate and government)	$	156,330	$	—	$	(127)	$	156,203

Our debt securities generally have contractual maturity dates of between 12 to 18 months.