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Fair Value Measurements and Financial Instruments | 12 Months Ended
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Dec. 31, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurements and Financial Instruments | Fair Value Measurements and Financial Instruments Fair value hierarchy We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value as follows: •Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. •Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. •Level 3: Prices or valuation that require inputs that are both significant to the fair value measurement and unobservable. Our financial instruments consist primarily of cash and cash equivalents, marketable securities, equity securities, derivatives, available for sale debt securities and long-term debt. Cash and cash equivalents, marketable securities, equity securities, derivatives and available for sale debt securities are reported at their respective fair values in our consolidated balance sheets. For financial instruments which are carried at fair value, the level in the fair value hierarchy is based on the lowest level of inputs that is significant to the fair value measurement in its entirety. Long-term debt and financial royalty assets are reported at their amortized costs in our consolidated balance sheets but for which fair values are disclosed. The remaining financial instruments are reported in our consolidated balance sheets at amounts that approximate current fair values. Assets and liabilities measured at fair value on a recurring basis The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above (in thousands):
| As of December 31, 2021 |  | As of December 31, 2020
| Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash equivalents |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds | $ | 598,253 |  |  | $ | — |  |  | $ | — |  |  | $ | 598,253 |  |  | $ | 24,302 |  |  | $ | — |  |  | $ | — |  |  | $ | 24,302 |
Commercial paper | — |  |  | 13,997 |  |  | — |  |  | 13,997 |  |  | — |  |  | 77,176 |  |  | — |  |  | 77,176 |
Certificates of deposit | — |  |  | 40,954 |  |  | — |  |  | 40,954 |  |  | — |  |  | 74,502 |  |  | — |  |  | 74,502 |
Marketable securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 32,754 |  |  | — |  |  | 32,754 |
Commercial paper | — |  |  | 207,457 |  |  | — |  |  | 207,457 |  |  | — |  |  | 444,554 |  |  | — |  |  | 444,554 |
Certificates of deposit | — |  |  | 374,415 |  |  | — |  |  | 374,415 |  |  | — |  |  | 505,971 |  |  | — |  |  | 505,971 |
Available for sale debt securities | — |  |  | — |  |  | 66,000 |  |  | 66,000 |  |  | — |  |  | — |  |  | 69,984 |  |  | 69,984 |
Total current assets | $ | 598,253 |  |  | $ | 636,823 |  |  | $ | 66,000 |  |  | $ | 1,301,076 |  |  | $ | 24,302 |  |  | $ | 1,134,957 |  |  | $ | 69,984 |  |  | $ | 1,229,243 |
Equity securities | 226,787 |  |  | — |  |  | 43,013 |  |  | 269,800 |  |  | 298,689 |  |  | — |  |  | — |  |  | 298,689 |
Available for sale debt securities | — |  |  | — |  |  | 187,700 |  |  | 187,700 |  |  | — |  |  | — |  |  | 144,416 |  |  | 144,416 |
Forwards (1) | — |  |  | — |  |  | 16,700 |  |  | 16,700 |  |  | — |  |  | — |  |  | 18,600 |  |  | 18,600 |
Warrant (2) | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 5,439 |  |  | — |  |  | 5,439 |
Total non-current assets | $ | 226,787 |  |  | $ | — |  |  | $ | 247,413 |  |  | $ | 474,200 |  |  | $ | 298,689 |  |  | $ | 5,439 |  |  | $ | 163,016 |  |  | $ | 467,144 |
(1)The balance as of December 31, 2021 includes Series B Forwards and the Development Funding Bond Forward, recorded within Available for sale debt securities in the consolidated balance sheet, related to our obligations to fund acquisitions of the Series B Biohaven Preferred Shares and $150 million of the Development Funding Bonds, respectively. The balance as of December 31, 2020 relates to Series B Forwards, recorded within Available for sale debt securities in the consolidated balance sheet. See Note 3–Available for Sale Debt Securities for additional discussion. (2)Related to the Epizyme transaction as described in Note 4–Derivative Instruments and recorded in Other assets in the consolidated balance sheets as of December 31, 2021 and 2020. The fair value of the warrant was not material as of December 31, 2021. For the years ended December 31, 2021, 2020 and 2019, we recognized a loss of $60.1 million, a loss of $85.4 million and a gain of $104.4 million, on equity securities still held as of December 31, 2021, respectively. The tables presented below summarize the change in the combined fair value (current and non-current) of Level 3 financial instruments, which relate to equity securities and available for sale debt securities, including the underlying debt securities and related forwards (in thousands).
| Years Ended December 31,
| 2021 |  | 2020
Equity Securities |  |  |
Balance at the beginning of the year | $ | — |  |  | $ | — |
Purchases | 35,120 |  |  | — |
Gains on equity securities | 7,893 |  |  | — |
Balance at the end of the year | $ | 43,013 |  |  | $ | — |
| Years Ended December 31,
| 2021 |  | 2020
Debt Securities |  |  |
Balance at the beginning of the year | $ | 214,400 |  |  | $ | 131,280 |
Purchases | 70,441 |  |  | — |
Unrealized gains on available for sale debt securities (1) | 12,900 |  |  | 52,725 |
Settlement of forwards (2) | 18,459 |  |  | — |
Transfer to Level 2 | — |  |  | (184,005) |
Transfer from Level 2 (3) | — |  |  | 198,526 |
Unrealized gains on available for sale debt securities (1) | — |  |  | 15,874 |
Redemption | (62,500) |  |  | — |
Balance at the end of the year | $ | 253,700 |  |  | $ | 214,400 |
| Years Ended December 31,
| 2021 |  | 2020
Forwards |  |  |
Balance at the beginning of the year | $ | 18,600 |  |  | $ | — |
Unrealized gains (4) | 16,559 |  |  | 18,600 |
Settlement of forwards (2) | (18,459) |  |  | — |
Balance at the end of the year | $ | 16,700 |  |  | $ | 18,600 |
(1)For the year ended December 31, 2021, the unrealized gains on available for sale debt securities is comprised of $11.6 million related to Series A Biohaven Preferred Shares as recorded on the consolidated statements of comprehensive income and $1.3 million related to the Series B Biohaven Preferred Shares as recorded on the consolidated statements of operations. For the year ended December 31, 2020, the unrealized gains on available for sale debt securities related to the Series A Biohaven Preferred Shares as recorded on the consolidated statements of comprehensive income, including $52.7 million prior to transferring out of Level 3 and then $15.9 million after transferring back to Level 3. (2)Reflects the fair value attributed to the Series B Forwards that were settled in the period as the Series B Biohaven Preferred Shares were acquired, which is included in the fair value of the Series B Biohaven Preferred Shares. See Note 3–Available for Sale Debt Securities. (3)Includes $14.5 million of unrealized gains on available for sale debt securities included in other comprehensive income while the Series A Biohaven Preferred Shares was classified as a Level 2 asset. (4)Recorded within Unrealized gains on available for sale debt securities on the consolidated statements of operations. Valuation inputs Below is a discussion of the valuation inputs used for financial instruments classified as Level 2 and Level 3 measurements in the fair value hierarchy. Investment in Series A Biohaven Preferred Shares The fair value of the Series A Biohaven Preferred Shares as of December 31, 2021 and 2020 was based on the cash flows due to us from Biohaven of two times the original purchase price of the Series A Biohaven Preferred Shares payable in equal quarterly installments of $15.6 million following the FDA approval and starting one-year after FDA approval, through December 31, 2024. The FDA approved Nurtec ODT in February 2020, at which point we became entitled to receive a fixed payment amount of $250.0 million payable in equal quarterly payments from March 31, 2021 through December 31, 2024. The fair value of the Series A Biohaven Preferred Shares as of December 31, 2021 and 2020 was calculated using probability-adjusted discounted cash flow calculations incorporating Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rates and the probability of a change of control event occurring during the investment term, which would result in accelerated payments and redemptions. Assessing the probability that there will be a change of control event over a four-year time period and developing a risk-adjusted discount rate requires significant judgement. Our estimate of a risk adjusted discount rate of 9.5% and 8.3% as of December 31, 2021 and 2020, respectively, could reasonably be different than the discount rate selected by a market participant in the event of a sale of the Series A Biohaven Preferred Shares, which would mean that the estimated fair value could be significantly higher or lower. Prior to February 2020, we measured our investment in the Series A Biohaven Preferred Shares using a Black-Derman- Toy lattice model, which included the use of Level 3 fair value measurements and inputs. In February 2020, when Nurtec ODT received FDA approval, we began measuring the fair value of the Series A Biohaven Preferred Shares using a discounted cash flow analysis that relied on observable inputs, and therefore, we transferred the Series A Biohaven Preferred Shares from a Level 3 to a Level 2 asset. During the three months ended December 31, 2020, information pertaining to Biohaven’s issuance of debt and its effective interest rate became available and we refined our valuation of the Series A Biohaven Preferred shares as of December 31, 2020 to incorporate this significant unobservable input. As a result, we reclassified the investment from a Level 2 to a Level 3 asset during the three months ended December 31, 2020. Investment in Series B Biohaven Preferred Shares The fair value of the Series B Biohaven Preferred Shares and Series B Forwards as of December 31, 2021 and the fair value of the Series B Forwards as of December 31, 2020 were based on probability-adjusted discounted cash flow calculations using Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rates and the probability that there will be a change of control event in different periods of time, which would result in accelerated payments and redemptions. Assessing the probability that there will be a change of control event over the duration of the Series B Biohaven Preferred Shares and developing a risk-adjusted discount rate requires significant judgement. Our expectation of the probability and timing of the occurrence of a change of control event could reasonably be different than the timing of an actual change of control event, and if so, would mean that the estimated fair value could be significantly higher or lower than the fair value determined by management at any particular date. Our estimate of a risk adjusted discount rate could reasonably be different than the discount rate selected by a market participant in the event of a sale of the Series B Biohaven Preferred Shares or the Series B Forwards, which would mean that the estimated fair value could be significantly higher or lower. MorphoSys Development Funding Bonds The fair value of the Development Funding Bond Forward as of December 31, 2021 was based on a discounted cash flow calculation using an estimated risk-adjusted discount rate, which is a Level 3 fair value input. Our estimate of a risk adjusted discount rate could reasonably be different than the discount rate selected by a market participant in the event of a sale of the instrument, which would mean that the estimated fair value could be significantly higher or lower. We have elected the fair value option to account for the Development Funding Bond Forward as it most accurately reflects the nature of the instrument. BioCryst Equity Securities In November 2021, we purchased 3,846 thousand shares of common stock in BioCryst Pharmaceuticals, Inc.(“BioCryst”), which was calculated based on the volume-weighted average price of BioCryst common stock over a period preceding the closing of the transaction. As part of the transaction, we are restricted from selling the common stock for six months following the close of the transaction. The fair value of the BioCryst common stock as of December 31, 2021 was based on the closing stock price and adjusted for the transfer restriction, which was determined by calculating the value of a put option over the common stock to match the duration of the transfer restriction. This methodology includes the use of Level 3 inputs, including the estimated volatility of the BioCryst common stock, which requires the use of significant judgement. Our estimated volatility could be reasonably different than the actual volatility for the common stock which would mean that the estimated fair value for the common stock could be significantly higher or lower than the fair value determined by management at any particular date. Other financial instruments We use third party pricing services for Level 2 inputs used to value cash equivalents, marketable securities, derivative instruments and borrowings, which provide documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application and corroborative information. Warrants are valued using a Black-Scholes option pricing model which considers observable and unobservable inputs. Financial assets not measured at fair value Financial royalty assets are measured and carried on the consolidated balance sheets at amortized cost using the effective interest method. The fair value of financial royalty assets is calculated by management using the forecasted royalty payments we expect to receive based on the projected product sales for all royalty bearing products as estimated by sell-side equity research analysts’ consensus sales forecasts or, where such consensus sales forecasts are not available, management uses reasonable judgment to make assumptions about the projected product sales. These projected future royalty payments by asset along with any projected incoming or outgoing milestone payments are then discounted to a present value using appropriate individual discount rates. The fair value of our financial royalty assets is classified as Level 3 within the fair value hierarchy since it is determined based upon inputs that are both significant and unobservable. Estimated fair values based on Level 3 inputs and related carrying values for our financial royalty assets as of December 31, 2021 and 2020 are presented below (in thousands).
| December 31, 2021 |  | December 31, 2020
| Fair Value |  | Carrying Value, net |  | Fair Value |  | Carrying Value, net
Financial royalty assets, net | $ | 19,047,183 |  |  | $ | 14,332,596 |  |  | $ | 18,718,179 |  |  | $ | 12,955,277 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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