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
	Amortized Cost		Gains		Losses			Fair Value
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
	Amortized Cost		Gains		Losses			Fair Value
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.