Fair Value Measurements

9 Months Ended

Sep. 30, 2020

9. Fair Value Measurements

The Company is required to disclose information on the fair value of financial instruments and inputs that enable an assessment of the fair value. The three levels of the fair value hierarchy prioritize valuation inputs based upon the observable nature of those inputs as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly;

Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

The following table presents the fair value of financial instruments recorded originally at amortized cost or fair value and not remeasured on a recurring basis:

		September 30, 2020
Balance Sheet Classification	Type of Instrument	Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents:	Money market funds	$	271,158	$	—	$	—	$	271,158
	Bank certificates of deposit		40,821		—		—		40,821
Total Financial Assets		$	311,979	$	—	$	—	$	311,979

Financial Liabilities:
Convertible senior notes	Convertible senior notes*	$	—	$	—	$	370,994	$	370,994
Total Financial Liabilities		$	—	$	—	$	370,994	$	370,994

		December 31, 2019
Balance Sheet Classification	Type of Instrument	Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	Money market funds	$	281,314	$	—	$	—	$	281,314
Total Financial Assets		$	281,314	$	—	$	—	$	281,314

Financial Liabilities:
Convertible senior notes	Convertible senior notes*	$	—	$	—	$	149,496	$	149,496
Total Financial Liabilities		$	—	$	—	$	149,496	$	149,496

* The convertible notes were measured and recognized at fair value on the consolidated balance sheet at inception.

The fair value of debt component of the Company's Convertible Notes was $371.0 million and $149.5 million, as of September 30, 2020 and December 31, 2019, respectively, based on the discounted cash flows for comparable straight debt instrument. The Convertible Notes accrue a semi-annual coupon at an annual rate of 3.5%, which was included in accrued expenses in the consolidated balance sheets at September 30, 2020 and December 31, 2019.

The following table presents the fair value of financial instruments recorded at fair value at inception and remeasured on a recurring basis:

		September 30, 2020
Balance Sheet Classification	Type of Instrument	Level 1		Level 2		Level 3		Total
Financial Assets:
Marketable Securities:	US government obligations	$	292,603	$	—	$	—	$	292,603
	US government agency		19,995		—		—		19,995
Total Financial Assets		$	312,598	$	—	$	—	$	312,598

Financial Liabilities:
Development derivative liability	Development derivative liability	$	—	$	—	$	217,778	$	217,778
Total Financial Liabilities		$	—	$	—	$	217,778	$	217,778

		December 31, 2019
Balance Sheet Classification	Type of Instrument	Level 1		Level 2		Level 3		Total
Financial Liabilities:
Development derivative liability	Development derivative liability	$	—	$	—	$	134,839	$	134,839
Total Financial Liabilities		$	—	$	—	$	134,839	$	134,839

The fair value of the SFJ Agreement is presented as a derivative liability based on level 3 inputs. The derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ Agreement was consistent with an arm’s-length transaction. Key inputs to the level 3 fair value model include (i) the probability and timing of achieving stated development milestones to receive the next tranches of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing (8.0%), and (iv) the Company’s cost of borrowing (16.18%).

SFJ’s implied cost of borrowing was 8.0% and the Company’s implied cost of borrowing was 16.18% as of the reporting date. These implied costs of borrowing were determined assuming the SFJ Agreement was initially executed with arm’s-length terms. If the SFJ Agreement was instead not determined to be an arm’s-length transaction, then implied discount rates could differ.

- 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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