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Fair Value Measurement | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurement | 3. Fair Value Measurement The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation:
|  | September 30, 2021 |
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (in thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 69,644 |  |  | $ | 69,644 |  |  | $ | — |  |  | $ | — |
Short-term marketable securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. treasury notes |  |  | 60,555 |  |  |  | — |  |  |  | 60,555 |  |  |  | — |
Commercial paper |  |  | 184,277 |  |  |  | — |  |  |  | 184,277 |  |  |  | — |
Corporate debt securities |  |  | 134,351 |  |  |  | — |  |  |  | 134,351 |  |  |  | — |
Supranational debt securities |  |  | 40,081 |  |  |  | — |  |  |  | 40,081 |  |  |  | — |
Total short-term marketable securities |  |  | 419,264 |  |  |  | — |  |  |  | 419,264 |  |  |  | — |
Investment in equity securities |  |  | 17,707 |  |  |  | 17,707 |  |  |  | — |  |  |  | — |
LianBio Warrants |  |  | 2,878 |  |  |  | — |  |  |  | — |  |  |  | 2,878 |
Total financial assets |  | $ | 509,493 |  |  | $ | 87,351 |  |  | $ | 419,264 |  |  | $ | 2,878 |
Liability |  |  |  |  |  |  |  |  |  |  |  |
Embedded derivative |  | $ | 1,413 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,413 |
|  | December 31, 2020 |
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (in thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 266,437 |  |  | $ | 266,437 |  |  | $ | — |  |  | $ | — |
Short-term marketable securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. treasury bills |  |  | 14,999 |  |  |  | — |  |  |  | 14,999 |  |  |  | — |
U.S. treasury notes |  |  | 45,391 |  |  |  | — |  |  |  | 45,391 |  |  |  | — |
Commercial paper |  |  | 144,851 |  |  |  | — |  |  |  | 144,851 |  |  |  |
Corporate debt securities |  |  | 45,770 |  |  |  | — |  |  |  | 45,770 |  |  |  | — |
Total short-term marketable securities |  |  | 251,011 |  |  |  | — |  |  |  | 251,011 |  |  |  | — |
LianBio Warrants |  |  | 3,338 |  |  |  | — |  |  |  | — |  |  |  | 3,338 |
Total financial assets |  | $ | 520,786 |  |  | $ | 266,437 |  |  | $ | 251,011 |  |  | $ | 3,338 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
LEO call option liability |  | $ | 5,550 |  |  | $ | — |  |  | $ | — |  |  |  | 5,550 |
Embedded derivative |  |  | 1,340 |  |  |  | — |  |  |  | — |  |  |  | 1,340 |
Total financial liabilities |  | $ | 6,890 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,890 |
There were no transfers between Level 1, Level 2 or Level 3 during the periods presented. There are uncertainties on the fair value measurement of the instruments classified under Level 3 due to the use of unobservable inputs and interrelationships between these unobservable inputs, which could result in higher or lower fair value measurements. Marketable Securities The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. Investment in Equity Securities We classify our investment in equity securities, which are currently equity securities of publicly held companies, within Level 1 as the fair values of these equity securities are derived from observable inputs such as quoted prices in active markets. LEO Call Option Liability The valuation of the LEO call option contained unobservable inputs that reflected our own assumptions for which there was little, if any, market activity at the measurement date. Accordingly, the LEO call option liability was remeasured to fair value on a recurring basis using unobservable inputs that were classified as Level 3 inputs. The uncertainty of the fair value measurement due to the use of unobservable inputs and interrelationships between these unobservable inputs could have resulted in higher or lower fair value measurement. On March 30, 2021, LEO provided a notice of termination of the LEO call option effective April 15, 2021. As a result and based on the facts and circumstances that existed as of March 31, 2021, we evaluated that the likelihood of LEO exercising said option was remote and we remeasured the LEO call option liability to zero as of March 31, 2021. The following table sets forth a summary of the change in the estimated fair value of the LEO call option recorded in “Other income (expense), net”:
|  | Total |
|  | (in thousands) |
Balance as of December 31, 2020 |  | $ | 5,550 |
Change in fair value upon notice of termination of the LEO call option |  |  | (5,550 | )
Balance as of March 31, 2021 |  | $ | — |
Historically, we estimated the fair value of the LEO call option by estimating the fair value of various clinical, regulatory, and sales milestones based on the estimated risk and probability of achievement of each milestone, and allocated the value using a Black-Scholes option pricing model with the following assumptions as of December 31, 2020:
|  | December 31,
|  | 2020
Probability of milestone achievement |  | 12.0%-84.0%
Discount rate |  | 0.1%-14.3%
Expected term (in years) |  | 1.25-6.25
Expected volatility |  | 80.0%-95.0%
Risk-free interest rate |  | 1.16%-1.53%
Dividend yield |  | —
Eidos Embedded Derivative Liability in Loan Agreement For the SVB and Hercules Loan entered into in November 2019 and prepaid in April 2021 (see Note 9), Eidos determined that the requirement to pay a fee upon certain events (“Success Fee”) is an embedded derivative liability to be measured at fair value. The fair value of the derivative was determined based on an income approach that identified the cash flows using a “with-and-without” valuation methodology. The inputs used to determine the estimated fair value of the derivative instrument were based primarily on the probability of an underlying event triggering the embedded derivative occurring and the timing of such event. The Success Fee survives the prepayment of the SVB and Hercules Loan per the terms of the contract; and, therefore, we continue to carry the embedded derivative liability at its fair value until it is settled or it expires. Notes The fair values of our 2.25% convertible senior notes due 2029 (the “2029 Notes”) and our 2.50% convertible senior notes due 2027 (the “2027 Notes”) (collectively, the “Notes”, see Note 9), which differ from their respective carrying values, are determined by prices for the Notes observed in market trading. The market for trading of the Notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. As of September 30, 2021, the estimated fair value of our 2029 Notes and 2027 Notes, which have aggregate face values of $747.5 million and $550.0 million, respectively, were $647.7 million and $759.8 million, respectively, based on their market prices on the last trading day for the period. As of December 31, 2020, the estimated fair value of the 2027 Notes was $997.9 million based on the market price on the last trading day for the period. Term Loans The fair value of our outstanding term loans (see Note 9) is estimated using the net present value of the payments, discounted at an interest rate that is consistent with a market interest rate, which is a Level 2 input. The estimated fair value of our outstanding term loans approximates the carrying amount, as the term loans bear a floating rate that approximates the market interest rate.

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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=117815213&loc=d3e19207-110258 + Details
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