Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

4. fair value of financial instruments

The Company’s financial instruments that are measured at fair value on a recurring basis consist of cash equivalents, marketable securities, equity securities of Verve Therapeutics, Inc, or Verve, contingent consideration liabilities related to the agreement and plan of merger pursuant to which the Company acquired Guide, or the Guide Merger Agreement, and success payment derivative liabilities pursuant to the license agreement, or the Harvard License Agreement, between President and Fellows of Harvard University, or Harvard, and the Company, and the license agreement, or the Broad License Agreement, between The Broad Institute, Inc., or Broad Institute, and the Company.

The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy at September 30, 2022 (in thousands):


	Carrying amount		Fair value		Level 1		Level 2		Level 3
Assets
Cash equivalents:
Money market funds	$	124,096		124,096	$	124,096	$	—	$	—
Commercial paper		32,415		32,415		—		32,415		—
Marketable securities:
Commercial paper		621,335		621,335		—		621,335		—
Corporate notes		18,921		18,921		—		18,921		—
U.S. Treasury securities		224,320		224,320		—		224,320		—
U.S Government securities		54,679		54,679		—		54,679		—
Equity securities included in marketable securities:
Corporate equity securities		18,788		18,788		18,788		—		—
Total assets	$	1,094,554	$	1,094,554	$	142,884	$	951,670	$	—

Liabilities
Success payment liability – Harvard	$	10,500	$	10,500	$	—	$	—	$	10,500
Success payment liability – Broad Institute		10,800		10,800		—		—		10,800
Contingent consideration liability – Technology		25,835		25,835		—		—		25,835
Contingent consideration liability – Product		6,075		6,075		—		—		6,075
Total liabilities	$	53,210	$	53,210	$	—	$	—	$	53,210

The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy at December 31, 2021 (in thousands):


	Carrying amount		Fair value		Level 1		Level 2		Level 3
Assets
Cash equivalents:
Money market funds	$	540,094	$	540,094	$	540,094	$	—	$	—
Commercial paper		13,997		13,997		—		13,997		—
Corporate notes		5,903		5,903		—		5,903		—
Marketable securities:
Commercial paper		368,743		368,743		—		368,743		—
Corporate notes		16,743		16,743		—		16,743		—
Equity securities included in marketable securities:
Corporate equity securities		20,167		20,167		20,167		—		—
Total assets	$	965,647	$	965,647	$	560,261	$	405,386	$	—

Liabilities
Success payment liability – Harvard	$	21,000	$	21,000	$	—	$	—	$	21,000
Success payment liability – Broad Institute		21,200		21,200		—		—		21,200
Contingent consideration liability – Technology		24,359	$	24,359		—		—		24,359
Contingent consideration liability – Product		7,008		7,008		—		—		7,008
Total liabilities	$	73,567	$	73,567	$	—	$	—	$	73,567

Cash equivalents – Money market funds included within cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. Commercial paper and corporate notes are classified within Level 2 of the fair value hierarchy because pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

Marketable securities – Marketable securities, excluding corporate equity securities, are classified within Level 2 of the fair value hierarchy because pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined using models or other valuation methodologies.

The Company holds an investment in Verve consisting of shares of Verve’s common stock. Prior to Verve's initial public offering in June 2021, the Company valued such investment based on the cost of the equity securities adjusted for any observable market transactions. Following Verve's initial public offering, the equity securities have a readily determinable fair value. As of September 30, 2022, the Company owned 546,970 shares of Verve's common stock valued at $18.8 million, which is included in marketable securities in the condensed consolidated balance sheet.

The following table summarizes other income (expense) incurred due to changes in the fair value of corporate equity securities held (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022			2021
Other income (expense)	$	10,431	$	(4,892	)	$	(1,378	)	$	21,960

Pursuant to ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, the Company records changes in the fair value of its investments in equity securities to other income (expense), in the Company’s condensed consolidated statements of operations.

Success payment liabilities – As discussed further in Note 10, License agreements, the Company is required to make payments to Harvard and Broad Institute based upon the achievement of specified multiples of the initial weighted average value of the Company’s Series A Preferred Stock or, subsequent to the Company’s initial public offering, or IPO, the market value of the Company's common stock, at specified valuation dates. The Company’s liability for the share-based success payments under the Harvard and Broad License Agreements is carried at fair value. To determine the estimated fair value of the success payment liability, the Company uses a Monte Carlo simulation methodology, which models the future movement of stock prices based on several key variables.

The following variables were incorporated in the calculation of the estimated fair value of the Harvard and Broad Institute success payment liabilities:


	Harvard						Broad Institute
	September 30, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Fair value of common stock (per share)	$	47.64		$	79.69		$	47.64		$	79.69
Expected volatility		82	%		76	%		82	%		76	%
Expected term (years)	0.09-6.75			0.10-7.49			0.09-7.61			0.10-8.36

The computation of expected volatility was estimated using available information about the historical volatility of stocks of similar publicly traded companies in addition to the Company's own data for a period matching the expected term assumption. In addition, the Company incorporated the estimated number, timing, and probability of valuation measurement dates in the calculation of the success payment liability.

The following table reconciles the change in the fair value of success payment liabilities based on Level 3 inputs (in thousands):


	Nine Months Ended September 30, 2022
	Harvard			Broad Institute			Total
Balance at December 31, 2021	$	21,000		$	21,200		$	42,200
Change in fair value		(10,500	)		(10,400	)		(20,900	)
Balance at September 30, 2022	$	10,500		$	10,800		$	21,300

Contingent consideration liabilities – As discussed further in Note 9, Guide acquisition, under the Guide Merger Agreement, Guide’s former stockholders and optionholders are eligible to receive up to an additional $100.0 million in technology milestone payments and $220.0 million in product milestone payments, payable in the Company’s common stock valued using the volume-weighted average price of the Company’s stock over the ten-day trading period ending two trading days prior to the date on which the applicable milestone is achieved. As these milestones are payable in the Company’s common stock, the milestone payments result in liability classification under ASC 480, Distinguishing Liabilities from Equity. These contingent consideration liabilities are carried at fair value which was estimated by applying a probability-based model, which utilized inputs based on timing of achievement that were unobservable in the market. These contingent consideration liabilities are classified within Level 3 of the fair value hierarchy.

The following table reconciles the change in fair value of the contingent consideration liabilities based on level 3 inputs (in thousands):


	Nine Months Ended September 30, 2022
	Technology Milestones		Product Milestones			Total
Balance at December 31, 2021	$	24,359	$	7,008		$	31,367
Change in fair value		1,476		(933	)		543
Balance at September 30, 2022	$	25,835	$	6,075		$	31,910

The following variables were incorporated in the calculation of the estimated fair value of the contingent consideration liabilities:


	Technology Milestones						Product Milestones
	September 30, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Discount Rate		10.50	%		7.50	%		10.50	%		7.50	%
Probability of Achievement	10-90%			10-75%			2-15%			2-15%
Projected Year of Achievement	2022-2024			2022-2023			2024-2029			2023-2029

- 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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