Fair value of financial instruments

6 Months Ended

Jun. 30, 2019

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 guidance 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 June 30, 2019 and December 31, 2018, our Level 2 corporate debt and U.S. government 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 their respective closing stock prices 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. There were no transfers out of or into hierarchy levels during the six months ended June 30, 2019.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis (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)		June 30, 2019
Cash and cash equivalents	$	1,416,224	$	—	$	—	$	1,416,224
Debt securities (corporate and government)		—		279,631		—		279,631
Long term investments (Note 9)		115,563		—		—		115,563
Total assets	$	1,531,787	$	279,631	$	—	$	1,811,418

	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, 2018
Cash and cash equivalents	$	1,163,980	$	—	$	—	$	1,163,980
Debt securities (corporate and government)		—		274,343		—		274,343
Long term investment (Note 9)		99,199		—		—		99,199
Total assets	$	1,263,179	$	274,343	$	—	$	1,537,522

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 (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Liabilities		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		June 30, 2019
Acquisition-related contingent consideration	$	—	$	—	$	286,000	$	286,000
Total liabilities	$	—	$	—	$	286,000	$	286,000

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Liabilities		Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Acquisition-related contingent consideration	$	—	$	—	$	287,001	$	287,001
Total liabilities	$	—	$	—	$	287,001	$	287,001

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

Balance at January 1, 2019	$	287,001
Contingent consideration earned during the period but not yet paid		(7,608)
Payments made during the period		(6,672)
Change in fair value of contingent consideration		13,279
Balance at June 30, 2019	$	286,000

The fair value of the contingent consideration was determined using an income approach based on projected ICLUSIG revenues in the European Union and other countries for the approved third-line treatment and discount rates. 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 six months ended June 30, 2019 was due primarily to the passage of time as there were no other significant changes in the key assumptions during the period.

We make payments to Takeda quarterly based on the royalties or any additional milestone payments earned in the previous quarter. At June 30, 2019 and December 31, 2018, contingent consideration earned but not yet paid was $7.6 million and $13.2 million, respectively. Royalties earned in the second quarter of 2019 of $7.6 million were included in accrued and other current liabilities at June 30, 2019.  Royalties earned in the third quarter of 2018 of $6.7 million were included in accounts payable and the royalties earned in the fourth quarter of 2018 of $6.5 million were included in accrued and other current liabilities at December 31, 2018. We paid Takeda $6.7 million for royalties earned in the first quarter of 2019 that were included in accrued and other current liabilities at March 31, 2019.

The following is a summary of our marketable security portfolio (in thousands):

			Net		Net
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
June 30, 2019
Debt securities (corporate and government)	$	279,553	$	78	$	—	$	279,631
December 31, 2018
Debt securities (corporate and government)	$	275,405	$	—	$	(1,062)	$	274,343

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