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Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Measurements

3.    Fair Value Measurements

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

  •  

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

 

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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Recurring Fair Value Measurements

The following table represents the fair value hierarchy for our financial assets (cash equivalents and marketable securities) measured at fair value on a recurring basis as of December 31, 2012 and 2011 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

December 31, 2012

            

Money market funds

    $ 3,140       $ —       $ —       $ 3,140   

U.S. government agency securities

      —         119,233         —         119,233   

U.S. treasury securities

      —         500         —         500   

Municipal securities

      —         715         —         715   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 3,140       $ 120,448       $ —       $ 123,588   
     Level 1      Level 2      Level 3      Total  

December 31, 2011

            

Money market funds

    $ 17,171       $ —       $ —       $ 17,171   

U.S. government agency securities

      —         28,495         —         28,495   

U.S. treasury securities

      —         7,425         —         7,425   

Corporate debt securities, secured by the U.S. government

      —         58,580         —         58,580   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 17,171       $ 94,500       $ —       $ 111,671   
  

 

 

     

 

 

     

 

 

     

 

 

  

Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

U.S. Government agency securities, U.S. treasury securities, municipal securities and corporate debt securities are measured at fair value using Level 2 inputs. We review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

 

We are obligated to make future contingent cash payments to the former Holdings shareholders related to certain payments received by us, if any, from future partnering agreements pertaining to our hepatitis C and cancer therapy programs. We estimated the valuation of this contingent liability using a discounted cash flow model. The discounted cash flow model was derived from management’s assumptions regarding the timing, amounts, and probability of potential upfront and milestone payments for the development and/or commercialization of the hepatitis C program based on transactions for similar stage programs by other companies. These cash flows were discounted at a rate of 16% for the fiscal year ended December 31, 2010.

Changes in the fair value of the contingent consideration liability are recognized in “other income (expense)” in the consolidated statements of operations in the period of the change. During the fiscal year ended December 31, 2010, we reduced the assumed probability of our receipt of upfront and milestone payments from a potential partnership and extended the timing of when these expected receipts would occur. In addition, based on our assumptions regarding our beta and risk free interest rate used in the discounted cash flow model, the change in fair value of the contingent consideration liability resulted in other income of $2.2 million for the fiscal year ended December 31, 2010. During the year ended December 31, 2011, we determined that we would not receive any upfront or milestone payments from a potential partnership for our hepatitis C therapy program and, therefore, estimated the fair value of the liability to be zero as of December 31, 2011 resulting in other income of $0.8 million. There was no change in this determination during 2012. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement.

The following table represents the changes in the fair value measurement of the contingent liability (in thousands):

 

Contingent liability to Holdings

    Amount  

Acquisition date fair value measurement at December 30, 2009

    $ 3,040   

Adjustment to fair value measurement

      (2,197 ) 
  

 

 

  

Balance as of December 31, 2010

      843   

Adjustment to fair value measurement

      (843 ) 
  

 

 

  

Balance as of December 31, 2011 and 2012

    $ —   
  

 

 

  

In connection with our purchase of all of the outstanding equity of Symphony Dynamo, Inc. (“SDI”) on December 30, 2009, we issued warrants to Holdings that were subject to certain anti-dilution protection in the event that we issued other equity securities within six months from December 30, 2009. Due to this adjustment provision, the warrants did not meet the criteria set forth in ASC 815, Derivatives and Hedging, to be considered indexed to our own stock and therefore were recorded as a liability at fair value, which was estimated at the issuance date using the Black-Scholes Model. This fair value measurement was based on significant inputs not observed in the market and thus represented a Level 3 measurement. In connection with an equity offering completed in April 2010 prior to the expiration of the anti-dilution provision, Holdings received warrants to purchase 7,038,210 shares of common stock (“April 2010 Warrants”). The warrants issued on December 30, 2009 were cancelled upon the issuance of the April 2010 Warrants.

The incremental fair value of the April 2010 Warrants was remeasured at June 30, 2010, and resulted in an increase of $9.5 million to the warrant liability, which was reported as other expense in the consolidated statement of operations. Following the expiration of Symphony’s anti-dilution protection on June 30, 2010, the value of the April 2010 Warrants of $12 million was reclassified into stockholders’ equity in the consolidated balance sheet.