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Fair value of financial instruments and marketable securities | 9 Months Ended
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Sep. 30, 2018
Fair Value Disclosures [Abstract] |
Fair value of financial instruments and marketable securities | Fair value of financial instruments and marketable securities The Company follows the fair value measurement rules, which provide guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. These rules establish a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).
· | Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.
· | Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
· | Level 3—Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.
Cash equivalents and investments are reflected in the accompanying financial statements at fair value. The carrying amount of receivables, accounts payable and accrued expenses, and debt approximates fair value due to the short-term nature of those instruments. Fair value of certain marketable securities is based upon market prices using quoted prices in active markets for identical assets quoted on the last day of the period. In establishing the estimated fair value of the remaining investments, the Company used the fair value as determined by its investment advisors using observable inputs other than quoted prices. The Company reviews its investments on a periodic basis for other-than-temporary impairments. This review is subjective, as it requires management to evaluate whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investment. The following represents the fair value using the hierarchy described above for the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:
|  | September 30, 2018
|  | Total |  | Quoted prices in active markets for identical assets (level 1) |  | Significant other observable inputs (level 2) |  | Significant unobservable inputs (level 3)
Marketable securities |  | $ | 42,491 |  |  | $ | — |  |  | $ | 42,491 |  |  | $ | — |
Warrant liability |  | $ | 4 |  |  | $ | — |  |  | $ | — |  |  | $ | 4 |
Stock appreciation rights liability |  | $ | 3,463 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,463 |
Deferred consideration payable |  | $ | 38,200 |  |  | $ | — |  |  | $ | 38,200 |  |  | $ | — |
Contingent consideration payable |  | $ | 218,700 |  |  | $ | — |  |  | $ | — |  |  | $ | 218,700 |
|  | December 31, 2017
|  | Total |  | Quoted prices in active markets for identical assets (level 1) |  | Significant other observable inputs (level 2) |  | Significant unobservable inputs (level 3)
Marketable securities |  | $ | 79,454 |  |  | $ | — |  |  | $ | 79,454 |  |  | $ | — |
Warrant Liability |  | $ | 1 |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |
Stock appreciation rights liability |  | $ | 1,665 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,665 |
Deferred consideration payable |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Contingent consideration payable |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the periods ended September 30, 2018 and December 31, 2017. The following is a summary of marketable securities accounted for as available-for-sale securities at September 30, 2018 and December 31, 2017:
|  | September 30, 2018
|  | Amortized Cost |  | Gross Unrealized |  | Fair Value
|  |  | Gains |  | Losses |
Commercial paper |  | $ | 18,441 |  |  | $ | — |  |  | $ | (6 | ) |  | $ | 18,435 |
Corporate debt securities |  | 24,078 |  |  | 2 |  |  | (24 | ) |  | 24,056 |
|  | $ | 42,519 |  |  | $ | 2 |  |  | $ | (30 | ) |  | $ | 42,491 |
|  | December 31, 2017
|  | Amortized Cost |  | Gross Unrealized |  | Fair Value
|  |  | Gains |  | Losses |
Commercial paper |  | $ | 13,775 |  |  | $ | 52 |  |  | $ | — |  |  | $ | 13,827 |
Corporate debt securities |  | 65,657 |  |  | — |  |  | (30 | ) |  | 65,627 |
|  | $ | 79,432 |  |  | $ | 52 |  |  | $ | (30 | ) |  | $ | 79,454 |
At September 30, 2018 and December 31, 2017, the Company held securities with an unrealized loss position that were not considered to be other-than-temporarily impaired as the Company has the ability to hold such investments until recovery of their fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive (loss) income in stockholders’ equity. As of September 30, 2018 and December 31, 2017, the Company did not have any realized gains/losses from the sale of marketable securities. The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of September 30, 2018 are as follows:
|  | September 30, 2018
|  | Securities in an unrealized loss position less than 12 months |  | Securities in an unrealized loss position greater than 12 months |  | Total
|  | Unrealized losses |  | Fair Value |  | Unrealized losses |  | Fair Value |  | Unrealized losses |  | Fair Value
Commercial paper |  | $ | (6 | ) |  | $ | 18,435 |  |  | $ | — |  |  | $ | — |  |  | $ | (6 | ) |  | $ | 18,435 |
Corporate debt securities |  | (24 | ) |  | 18,067 |  |  | — |  |  | — |  |  | (24 | ) |  | 18,067 |
|  | $ | (30 | ) |  | $ | 36,502 |  |  | $ | — |  |  | $ | — |  |  | $ | (30 | ) |  | $ | 36,502 |
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2017 are as follows:
|  | December 31, 2017
|  | Securities in an unrealized loss position less than 12 months |  | Securities in an unrealized loss position greater than 12 months |  | Total
|  | Unrealized losses |  | Fair Value |  | Unrealized losses |  | Fair Value |  | Unrealized losses |  | Fair Value
Corporate debt securities |  | $ | (28 | ) |  | $ | 59,108 |  |  | $ | (2 | ) |  | $ | 6,519 |  |  | $ | (30 | ) |  | $ | 65,627 |
Marketable securities on the balance sheet at September 30, 2018 and December 31, 2017 mature as follows:
|  | September 30, 2018
|  | Less Than 12 Months |  | More Than 12 Months
Commercial paper |  | $ | 18,435 |  |  | $ | — |
Corporate debt securities |  | 24,056 |  |  | — |
Total Marketable securities |  | $ | 42,491 |  |  | $ | — |
|  | December 31, 2017
|  | Less Than 12 Months |  | More Than 12 Months
Commercial paper |  | $ | 13,827 |  |  | $ | — |
Corporate debt securities |  | 55,550 |  |  | 10,077 |
Total Marketable securities |  | $ | 69,377 |  |  | $ | 10,077 |
The Company classifies all of its securities as current as they are all available for sale and are available for current operations. Convertible 3.0% senior notes In August 2015, the Company issued $150.0 million of 3.0% convertible senior notes due August 15, 2022 (the “Convertible Notes”). Interest is payable semi-annually on February 15 and August 15 of each year, beginning on February 15, 2016. The Company separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds between the liability component and equity component, as further discussed in Note 10. The fair value of the Convertible Notes, which differs from their carrying values, is influenced by interest rates, the Company’s stock price and stock price volatility and is determined by prices for the Convertible Notes observed in market trading which are Level 2 inputs. The estimated fair value of the Convertible Notes at September 30, 2018 and December 31, 2017 was $172.9 million and $115.7 million, respectively. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and borrowings under the credit and security agreement with MidCap Financial Trust and other financial institutions (as further discussed in Note 10) approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts for the credit and security agreement approximate fair value based on market activity for other debt instruments with similar characteristics and comparable risk. Deferred consideration payable Pursuant to the Merger Agreement with Agilis, the Company is required to pay $40.0 million of development milestone payments no later than the second anniversary of the closing of the Merger, regardless of whether the applicable milestones have been achieved. The fair value of the deferred consideration payments at the acquisition date was estimated to be $38.2 million based on calculating the present value utilizing discount rates for BBB rated bonds maturing in the years of expected payments. Level 3 valuation The warrant liability is classified in Other long-term liabilities on the Company’s consolidated balance sheets. The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other expense, net, on the Company’s consolidated statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability is determined at each reporting period by utilizing the Black-Scholes option pricing model. The stock appreciation rights (SARs) liability is classified in Other liabilities on the Company’s consolidated balance sheets. The SARs liability is marked-to-market each reporting period with the change in fair value recorded as compensation expense on the Company’s consolidated statements of operations until the SARS vest. The fair value of the SARs liability is determined at each reporting period by utilizing the Black-Scholes option pricing model. The contingent consideration payable is fair valued each reporting period with the change in fair value recorded as a gain or loss in the consolidated statements of operations. The Company estimates the fair value of its contingent consideration using a probability weighted discounted cash flow valuation approach based on development timelines and the estimated future sales expected from the Agilis platform. The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuations for the warrant liability, the SARs liability, and the contingent consideration payable for the period ended September 30, 2018:
|  | Level 3 liabilities
|  | Warrants |  | SARs |  | Contingent consideration payable
Beginning balance as of December 31, 2017 |  | $ | 1 |  |  | $ | 1,665 |  |  | $ | — |
Additions |  | — |  |  | — |  |  | 218,700 |
Change in fair value |  | 3 |  |  | 3,789 |  |  | — |
Payments |  | — |  |  | (1,991 | ) |  | $ | — |
Ending balance as of September 30, 2018 |  | $ | 4 |  |  | $ | 3,463 |  |  | $ | 218,700 |
Fair value of the warrant liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of September 30, 2018 include (i) volatility (51%-54%), (ii) risk free interest rate (2.59%-2.59%), (iii) strike price ($128.00-$2,520.00), (iv) fair value of common stock ($47.00), and (v) expected life (0.8—1.0 years). The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of December 31, 2017 include (i) volatility (69%-69%), (ii) risk free interest rate (1.89%—1.89%), (iii) strike price ($128.00—$2,520.00), (iv) fair value of common stock ($16.68), and (v) expected life (1.6—1.7 years). Fair value of the SARs liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s SARs as of September 30, 2018 include (i) volatility (45%—54%), (ii) risk free interest rate (2.19%—2.70%), (iii) strike price ($6.76-$30.86), (iv) fair value of common stock ($47.00), and (v) expected life (0.3—1.3 years). The significant assumptions used in preparing the option pricing model for valuing the Company’s SARs as of December 31, 2017 include (i) volatility (31%-70%), (ii) risk free interest rate (1.28%—1.89%), (iii) strike price ($6.76—$30.86), (iv) fair value of common stock ($16.68), and (v) expected life (0.0—2.0 years). Fair value of the contingent consideration liability is estimated using a probability weighted discounted cash flow approach. Some of the more significant assumptions made in the valuation include (i) the estimated revenue forecasts, (ii) probabilities of success, and (iii) discount periods and rate. The probability of achievement of regulatory and sales milestones ranged from 25% to 89%. The achievement of certain development milestones ranged from zero to an aggregate maximum amount of $20.0 million, the achievement of certain regulatory approval milestones together with a milestone payment following the receipt of a priority review voucher ranged from zero up to an aggregate maximum amount of $535.0 million, the achievement of certain net sales milestones ranged from zero up to an aggregate maximum amount of $150.0 million, and a percentage of annual net sales for Friedreich Ataxia and Angelman Syndrome during specified terms, ranging from 2-6%, in periods which sales occur. The $20.0 million development milestones mentioned above do not include $40.0 million in development milestone payments that the Company is required to pay no later than the second anniversary of the closing of the Merger, regardless of whether the applicable milestones have been achieved. Such $40 million development milestones have been recorded as deferred consideration payable on the consolidated balance sheets at its estimated fair value, which was estimated to be $38.2 million. The contingent consideration is classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. If different assumptions were used for the various inputs to the valuation approach, including but not limited to, assumptions involving probability adjusted sales estimates for the Agilis platform and estimated discount rates, the estimated fair value could be significantly higher or lower than the fair value determined.

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