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Fair value of financial instruments | 9 Months Ended
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Sep. 30, 2018
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, 2018 and December 31, 2017, 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 in to hierarchy levels during the nine months ended September 30, 2018. 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) |  | September 30, 2018 |
Cash and cash equivalents |  | $ | 1,112,179 |  | $ | — |  | $ | — |  | $ | 1,112,179 |
Debt securities (corporate and government) |  |  | — |  |  | 263,134 |  |  | — |  |  | 263,134 |
Long term investments (Note 9) |  |  | 121,381 |  |  | — |  |  | — |  |  | 121,381 |
Total assets |  | $ | 1,233,560 |  | $ | 263,134 |  | $ | — |  | $ | 1,496,694 |
|  | 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, 2017 |
Cash and cash equivalents |  | $ | 899,509 |  | $ | — |  | $ | — |  | $ | 899,509 |
Debt securities (corporate and government) |  |  | — |  |  | 270,136 |  |  | — |  |  | 270,136 |
Long term investment (Note 9) |  |  | 134,356 |  |  | — |  |  | — |  |  | 134,356 |
Total assets |  | $ | 1,033,865 |  | $ | 270,136 |  | $ | — |  | $ | 1,304,001 |
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 Assets |  | Inputs |  | Inputs |  | Balance as of
|  | (Level 1) |  | (Level 2) |  | (Level 3) |  | September 30, 2018
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 Assets |  | Inputs |  | Inputs |  | Balance as of |
|  | (Level 1) |  | (Level 2) |  | (Level 3) |  | December 31, 2017 |
Contingent consideration |  | $ | — |  | $ | — |  | $ | 287,000 |  | $ | 287,000 |
Total liabilities |  | $ | — |  | $ | — |  | $ | 287,000 |  | $ | 287,000 |
The following is a rollforward of our Level 3 liabilities (in thousands):
|  | Level 3
Balance at January 1, 2018 |  | $ | 287,000
Contingent consideration earned during the period but not yet paid |  |  | (13,023)
Payments made during the period |  |  | (6,685)
Change in fair value of contingent consideration |  |  | 18,708
Balance at September 30, 2018 |  | $ | 286,000
The fair value of the contingent consideration was determined using an income approach based on estimated ICLUSIG revenues in the European Union and other countries for the approved third line treatment. 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, 2018 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 September 30, 2018 and December 31, 2017, contingent consideration earned but not yet paid was $6.7 million and $6.6 million, respectively, which were included in accrued and other current liabilities. The royalties earned in the second quarter of 2018 of $6.3 million were included in in accounts payable at September 30, 2018. The following is a summary of our marketable security portfolio.
|  |  |  |  | Net |  | Net |  |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Estimated |
|  | Cost |  | Gains |  | Losses |  | Fair Value |
|  | (in thousands) |
September 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |
Debt securities (corporate and government) |  | $ | 264,589 |  | $ | — |  | $ | (1,455) |  | $ | 263,134 |
December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |
Debt securities (corporate and government) |  | $ | 271,401 |  | $ | — |  | $ | (1,265) |  | $ | 270,136 |
Our debt securities generally have contractual maturity dates of between 12 to 18 months.

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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