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Fair value of financial instruments and marketable securities
 9 Months Ended
Sep. 30, 2019
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 and accounts payable and accrued expenses approximates fair value due to the short-term nature of those instruments. The carrying amounts for borrowings under the credit and security agreement with MidCap Financial approximate fair value based on market activity for other debt instruments with similar characteristics and comparable risk.
In May 2019, the Company purchased $4.0 million of shares of MRI Interventions, Inc.'s ("MRI") common stock, at a purchase price of $3.10 per share, in connection with a securities purchase agreement that the Company entered into with MRI, a publicly traded medical device company. The Company determined that the equity investment represents a financial instrument and therefore, recorded it at fair value, which is readily determinable. The equity investment is a component of deposits and other assets on the consolidated balance sheet. During the three and nine month periods ended September 30, 2019, the Company recorded an unrealized gain of $2.4 million and $2.5 million, respectively, which are components of other (expense) income, net within the consolidated statement of operations. The fair value of the equity investment was $6.5 million as of September 30, 2019. The Company classifies its equity investment in MRI as a Level 1 asset within the fair value hierarchy, as the value is based on a quoted market price in an active market, which is not adjusted.
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, 2019 and December 31, 2018:
 
 
September 30, 2019
 
 
Total
 
Quoted prices
in active
markets for
identical assets
(level 1)
 
Significant
other
observable
inputs
(level 2)
 
Significant
unobservable
inputs
(level 3)
Marketable securities
 
$
185,072

 
$
—

 
$
185,072

 
$
—

Equity investment in MRI
 
$
6,529

 
$
6,529

 
$
—

 
$
—

Stock appreciation rights liability
 
$
2,235

 
$
—

 
$
—

 
$
2,235

Deferred consideration payable
 
$
39,000

 
$
—

 
$
39,000

 
$
—

Contingent consideration payable- development and regulatory milestones
 
$
285,300


$
—


$
—


$
285,300

Contingent consideration payable- net sales milestones and royalties
 
$
59,600


$
—


$
—


$
59,600

 
 
December 31, 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
 
$
58,088


$
—


$
58,088


$
—

Stock appreciation rights liability
 
$
3,814


$
—


$
—


$
3,814

Deferred consideration payable
 
$
37,700


$
—


$
37,700


$
—

Contingent consideration payable- development and regulatory milestones
 
$
257,040


$
—


$
—


$
257,040

Contingent consideration payable- net sales milestones and royalties
 
$
53,200


$
—


$
—


$
53,200


No transfers of assets between Level 1, Level 2, or Level 3 of the fair value measurement hierarchy occurred during the periods ended September 30, 2019 and December 31, 2018.
The following is a summary of marketable securities accounted for as available-for-sale securities at September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
 
Gains
 
Losses
 
Commercial paper
 
$
47,898

 
$
80

 
$
—

 
$
47,978

Corporate debt securities
 
115,109

 
612

 
(4
)
 
115,717

Asset-backed securities
 
21,310

 
67

 
—

 
21,377

Total
 
$
184,317

 
$
759

 
$
(4
)
 
$
185,072

 
 
December 31, 2018
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
 
Gains
 
Losses
 
Commercial paper
 
$
31,657

 
$
43

 
$
(1
)
 
$
31,699

Corporate debt securities
 
26,399

 
—

 
(10
)
 
26,389

Total
 
$
58,056

 
$
43

 
$
(11
)
 
$
58,088


At September 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, 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, 2019 are as follows:
 
 
September 30, 2019
 
 
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
 
(4
)
 
3,017

 
—

 
—

 
(4
)
 
3,017

Total
 
$
(4
)
 
$
3,017

 
$
—

 
$
—

 
$
(4
)
 
$
3,017

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, 2018 are as follows:
 
 
December 31, 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
 
$
(1
)

$
1,993


$
—


$
—


$
(1
)

$
1,993

Corporate debt securities
 
(7
)

14,230


(3
)

10,087


(10
)

24,317

Total
 
$
(8
)

$
16,223


$
(3
)

$
10,087


$
(11
)

$
26,310


Marketable securities on the balance sheet at September 30, 2019 and December 31, 2018 mature as follows:
 
 
September 30, 2019
 
 
Less Than
12 Months
 
More Than
12 Months
Commercial paper
 
$
47,978

 
$
—

Corporate debt securities
 
58,533

 
57,184

Asset-backed securities
 
21,377

 
—

Total Marketable securities
 
$
127,888

 
$
57,184

 
 
December 31, 2018
 
 
Less Than
12 Months
 
More Than
12 Months
Commercial paper
 
$
31,699

 
$
—

Corporate debt securities
 
26,389

 
—

Total Marketable securities
 
$
58,088

 
$
—


The Company classifies all of its securities as current as they are all available for sale and are available for current operations.
Convertible senior notes
In August 2015, the Company issued $150.0 million of 3.0% convertible senior notes due August 15, 2022 (the “2022 Convertible Notes”). In September 2019, the Company issued $287.5 million of 1.5% convertible senior notes due September 15, 2026 (the “2026 Convertible Notes,” together with the “2022 Convertible Notes,” the “Convertible Notes”). 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 11. 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 2022 Convertible Notes at September 30, 2019 and December 31, 2018 was $156.4 million and $146.6 million, respectively. The estimated fair value of the 2026 Convertible Notes at September 30, 2019 was $273.8 million.
Deferred consideration payable
Pursuant to the Merger Agreement, Agilis equityholders may become entitled to receive contingent consideration payments from the Company based on the achievement of certain development milestones up to an aggregate maximum amount of $60.0 million and the achievement of certain regulatory approval milestones together with a milestone payment following the receipt of a priority review voucher up to an aggregate maximum amount of $535.0 million. 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 payable at September 30, 2019 was estimated to be $39.0 million by applying a discounted cash flow approach. The discount rates are estimated utilizing Corporate B rated bonds maturing in the years of expected payments based on the Company’s estimated development timelines for the acquired product candidates. As of September 30, 2019, $19.7 million of the deferred consideration payable was classified as current on the balance sheet.
Level 3 valuation
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 fair value of the development and regulatory milestones is estimated utilizing a probability adjusted, discounted cash flow approach. The discount rates are estimated utilizing Corporate B rated bonds maturing in the years of expected payments based on the Company’s estimated development timelines for the acquired product candidate. The fair value of the net sales milestones and royalties is determined utilizing an option pricing model with Monte Carlo simulation to simulate a range of possible payment scenarios, and the average of the payments in these scenarios is then discounted to calculate present fair value.
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuations for the SARs liability, and the contingent consideration payable for the period ended September 30, 2019. The changes in the fair value of the Company's Level 3 valuations for the period ended September 30, 2018 were immaterial.
 
 
Level 3 liabilities
 
 
SARs
 
Contingent consideration payable- development and regulatory milestones
Contingent consideration payable- net sales milestones and royalties
Beginning balance as of December 31, 2018
 
$
3,814

 
$
257,040

$
53,200

Additions
 
—

 
—

—

Change in fair value
 
2,236

 
28,260

6,400

Payments
 
(3,815
)
 
$
—

—

Ending balance as of September 30, 2019
 
$
2,235

 
$
285,300

$
59,600


The following significant unobservable inputs were used in the valuation of the SARs liability, and the contingent consideration payable for the periods ended September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
SARs
 
$2,235
Option-pricing model
Volatility
43.23%
Risk free interest rate
1.88%
Strike price
$6.76 - $30.86
Fair value of common stock
$33.82
Expected life
0.26 years
Contingent consideration payable- development and regulatory milestones

$285,300
Probability-adjusted discounted cash flow
Potential development and regulatory milestones
$0 - $555 million
Probabilities of success
25% - 94%
Discount rates
2.7% - 5.1%
Projected years of payments
2020 - 2026
Contingent considerable payable- net sales milestones and royalties
$59,600
Option-pricing model with Monte Carlo simulation

Potential net sales milestones
$0 - $150 million
Probabilities of success
25% - 89%
Potential percentage of net sales for royalties
2% - 6%
Discount rate
14.0%
Projected years of payments
2021 - 2038
 
 
December 31, 2018
 
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
SARs
 
$3,814
Option-pricing model
Volatility
46.53% - 59.59%
Risk free interest rate
2.44% - 2.63%
Strike price
$6.76 - $30.86
Fair value of common stock
$34.32
Expected life
0.01 - 1.01 years
Contingent consideration payable- development and regulatory milestones

$257,040
Probability-adjusted discounted cash flow
Potential development and regulatory milestones
$0 - $555 million
Probabilities of success
25% - 94%
Discount rates
5.8% - 8.0%
Projected years of payments
2020 - 2026
Contingent considerable payable- net sales milestones and royalties
$53,200
Option-pricing model with Monte Carlo simulation

Potential net sales milestones
$0 - $150 million
Probabilities of success
25% - 89%
Potential percentage of net sales for royalties
2% - 6%
Discount rate
14.0%
Projected years of payments
2021 - 2038

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.