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Fair Value Measurements

9 Months Ended

Dec. 31, 2023

Note 13—Fair Value Measurements

Recurring Fair Value Measurements

The following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2023 and March 31, 2023, by level, within the fair value hierarchy (in thousands):

	As of December 31, 2023								As of March 31, 2023
	Level 1		Level 2		Level 3		Balance as of December 31, 2023		Level 1		Level 2		Level 3		Balance as of March 31, 2023
Assets:
Money market funds	$	6,513,936	$	—	$	—	$	6,513,936	$	1,496,726	$	—	$	—	$	1,496,726
Investment in Datavant Class A units		—		—		135,934		135,934		—		—		178,579		178,579
Investment in Arbutus common shares		97,119		—		—		97,119		117,708		—		—		117,708
Other investments		6,874		—		—		6,874		8,030		—		—		8,030
Total assets at fair value	$	6,617,929	$	—	$	135,934	$	6,753,863	$	1,622,464	$	—	$	178,579	$	1,801,043
Liabilities:
Debt issued by Dermavant to NovaQuest	$	—	$	—	$	221,510	$	221,510	$	—	$	—	$	207,640	$	207,640
Liability instruments measured at fair value⁽¹⁾		—		—		28,374		28,374		29,895		—		33,651		63,546
Total liabilities at fair value	$	—	$	—	$	249,884	$	249,884	$	29,895	$	—	$	241,291	$	271,186

⁽¹⁾

At December 31, 2023, Level 3 includes the fair value of the Earn-Out Shares of $24.9 million and other liability instruments issued of $3.5 million. At March 31, 2023, Level 1 includes the fair value of the Public Warrants of $29.9 million, and Level 3 includes the fair value of the Earn-Out Shares of $15.2 million, Private Placement Warrants of $15.2 million, and other liability instruments issued of $3.3 million.

There were no transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy that occurred during the nine months ended December 31, 2023.

Level 3 Disclosures

The Company measures its Level 3 assets and liabilities at fair value based on significant inputs not observable in the market, which causes them to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of the Level 3 assets and liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an ongoing basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value related to updated assumptions and estimates are recorded within the statements of operations at the end of each reporting period.

The fair value of Level 3 assets and liabilities may change significantly as additional data are obtained, impacting the Company’s assumptions regarding probabilities of potential scenarios used to estimate fair value. In evaluating this information, considerable judgment is required to interpret the data used to develop the assumptions and estimates. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.

The changes in fair value of the Level 3 assets during the nine months ended December 31, 2023 and 2022 were as follows (in thousands):

Balance at March 31, 2022	$	193,963
Changes in fair value of investment in Datavant, included in net loss		(21,452	)
Balance at December 31, 2022	$	172,511

Balance at March 31, 2023	$	178,579
Changes in fair value of investment in Datavant, included in net loss		(42,645	)
Balance at December 31, 2023	$	135,934

The changes in fair value of the Level 3 liabilities during the nine months ended December 31, 2023 and 2022 were as follows (in thousands):

Balance at March 31, 2022	$	204,293
Fair value of liability instrument issued		248
Payments related to long-term debt		(22,031	)
Changes in fair value of debt and liability instruments, included in net loss		68,328
Balance at December 31, 2022	$	250,838

Balance at March 31, 2023	$	241,291
Payments related to long-term debt		(22,031	)
Exercise of Private Placement Warrants		(28,090	)
Changes in fair value of debt and liability instruments, included in net loss		58,714
Balance at December 31, 2023	$	249,884

Investment in Datavant

The Company elected the fair value option to account for the investment in Datavant. The estimate of fair value for this investment was determined using the income approach and implementation of the option pricing method (“OPM”). The OPM allows for the allocation of a company’s equity value among the various equity capital owners (preferred and common shareholders). The OPM uses the preferred shareholders’ liquidation preferences, participation rights, dividend policy, and conversion rights to determine how proceeds from a liquidity event shall be distributed among the various ownership classes at a future date. The fair value was calculated using significant unobservable inputs including the following:

	Point Estimate Used
Input	As of December 31, 2023		As of March 31, 2023
Volatility		95.0%		100.0%
Risk-free rate		4.46%		4.02%

Debt issued by Dermavant to NovaQuest

The fair value of the debt instrument as of December 31, 2023 and March 31, 2023 represents the fair value of amounts payable to NovaQuest calculated using the Monte Carlo simulation method under the income approach determined by using probability assessments of the expected future payments through 2032. The future payments are based on significant inputs that are not observable in the market which are subject to remeasurement at each reporting date. The estimates of fair value may not be indicative of the amounts that could ultimately be paid by Dermavant to NovaQuest.

Earn-Out Shares

The fair value of the Earn-Out Shares issued as part of the Business Combination was calculated using the Monte Carlo simulation method under the income approach. The model was structured to include the lock-up periods to which the Earn-Out Shares are subject. Refer to Note 12, “Earn-Out Shares, Public Warrants and Private Placement Warrants” for additional details. Significant unobservable inputs used to calculate the fair value of the Earn-Out Shares included the following:

	Point Estimate Used
Input	As of December 31, 2023		As of March 31, 2023
Volatility		61.9%		79.9%
Risk-free rate		4.07%		3.76%

As of December 31, 2023 and March 31, 2023, the fair value of the Earn-Out Shares was $24.9 million and $15.2 million, respectively. Earn-Out Shares were included in “Liability instruments measured at fair value” in the accompanying condensed consolidated balance sheets.

Private Placement Warrants

Prior to their settlement, the fair value of the Private Placement Warrants issued as part of the Business Combination was calculated using the Monte Carlo simulation method under the income approach. The model was structured to incorporate the redemption features as discussed in Note 12, “Earn-Out Shares, Public Warrants and Private Placement Warrants” and the added restriction by which the Company could not redeem the Private Placement Warrants if the Reference Value was greater than $18.00. Significant unobservable inputs used to calculate the fair value of the Private Placement Warrants included the following:

	Point Estimate Used
Input	As of March 31, 2023
Volatility		50.5%
Risk-free rate		3.76%
Term (in years)		3.50

In August 2023, the Company announced that it would redeem all Warrants that remain outstanding on September 1, 2023. All of the Private Placement Warrants were exercised. As of March 31, 2023, the fair value of the Private Placement Warrants was $15.2 million, which was included in “Liability instruments measured at fair value” in the accompanying condensed consolidated balance sheets.

- 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.

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