| Fair Value Measurements and Financial Instruments | 3. Fair Value Measurements and Financial Instruments
Fair value measurements
The summary below presents information about our assets and
liabilities that are measured at fair value on a recurring basis as
of March 31, 2021 and December 31, 2020, and the
valuation techniques we utilized to determine such fair value.
•
Level 1: Unadjusted quoted prices in active
markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities. Our Level 1 assets consist
of equity securities with readily determinable fair values and
money market funds.
•
Level 2: Quoted prices in markets that are not
active or financial instruments for which all significant inputs
are observable, either directly or indirectly. Our Level 2
assets generally include marketable securities, warrants,
derivatives and, historically, our interest rate swap
contracts.
•
Level 3: Prices or valuation that require inputs
that are both significant to the fair value measurement and
unobservable. Our Level 3 assets consist of our investments in
the Series A Biohaven Preferred Shares, Series B Biohaven Preferred
Shares and the Series B Forwards. See Note 5––Available
for Sale Debt Securities for a description of our investments in
the Series A Biohaven Preferred Shares, Series B Biohaven Preferred
Shares and the Series B Forwards.
For financial instruments which are carried at fair value, the
level in the fair value hierarchy is based on the lowest level of
inputs that is significant to the fair value measurement in its
entirety.
Fair value hierarchy
The following is a summary of the inputs used to value our
financial assets and liabilities measured at fair value as of
March 31, 2021 and December 31, 2020 (in thousands):
As of March 31, 2021
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents
Money market funds $ 201,439 $
— $
— $ 201,439
Certificates of deposit
— 91,660
— 91,660
Marketable securities
Commercial paper
— 369,037
— 369,037
Certificates of deposit
— 699,876
— 699,876
Available for sale debt securities
—
— 69,261 69,261
Total current assets $
201,439 $
1,160,573 $
69,261 $
1,431,273
Equity securities $ 244,503 $
— $
— $ 244,503
Available for sale debt securities
—
— 157,539 157,539
Forwards (1)
—
— 22,400 22,400
Warrants (2)
— 2,884
— 2,884
Total non-current $
244,503 $ 2,884 $
179,939 $
427,326
(1)
The Series B Forwards, recorded within Available
for sale debt securities
(2)
Related to the Epizyme transaction as described in
Note 4––Derivative Instruments and recorded in the
non-current Derivative financial instruments
The net unrealized loss recognized on equity securities still held
as of March 31, 2021 was a loss of $54.2 million and
$119.6 million for the three months ended March 31, 2021
and 2020, respectively.
As of December 31,
2020
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents
Money market funds $ 24,302 $
— $
— $ 24,302
Commercial paper
— 77,176
— 77,176
Certificates of deposit
— 74,502
— 74,502
Marketable securities
Corporate debt securities
— 32,754
— 32,754
Commercial paper
— 444,554
— 444,554
Certificates of deposit
— 505,971
— 505,971
Available for sale debt securities
—
— 69,984 69,984
Total current assets $
24,302 $
1,134,957 $
69,984 $
1,229,243
Equity securities (1) $ 298,689 $
— $
— $ 298,689
Available for sale debt securities
—
— 144,416 144,416
Forwards (2)
—
— 18,600 18,600
Warrants (3)
— 5,439
— 5,439
Total non-current $
298,689 $ 5,439 $
163,016 $
467,144
(1)
Upon Gilead’s acquisition of Immunomedics, our
investment in Immunomedics common stock was redeemed in full in the
three months ended December 31, 2020, resulting in a gain of
$292.3 million recognized within (Gain)/loss on equity
securities
(2)
The Series B Forwards, recorded within Available
for sale debt securities
(3)
Related to the Epizyme transaction as described in
Note 4––Derivative Instruments and recorded in the
non-current Derivative financial instruments
The tables presented below summarize the change in the combined
carrying value (current and non-current)
For the three months ended
2021 2020
Series A Biohaven Preferred Shares
Balance at the beginning of the period $ 214,400 $ 131,280
Unrealized gains on available for sale debt securities (1) 5,125 52,725
Transfer to Level 2
— (184,005 )
Redemption (15,625 )
—
Balance at the end of the period $
203,900 $
—
For the three months ended
2021
2020
Series B Biohaven Preferred Shares
Balance at the beginning of the period $
— $
—
Purchases 17,585
—
Settlement of forwards (2) 5,315
—
Balance at the end of the period $
22,900 $
—
For the three months ended
2021
2020
Series B Forwards
Balance at the beginning of the period $ 18,600 $
—
Unrealized gains included in earnings (3) 9,115
—
Settlement of forwards (2) (5,315 )
—
Balance at the end of the period $
22,400 $
—
(1)
Recorded in other comprehensive income within
Unrealized gain on available for sale debt securities
(2)
Reflects the fair value attributed to the Series B
Forwards that were settled in the period, which is included in the
fair value of the Series B Biohaven Preferred Shares. See Note
5––Available for Sale Debt Securities.
(3)
Recorded in earnings within Unrealized gain on
available for sale debt securities
Valuation inputs
Below is a discussion of the valuation inputs used for financial
instruments classified as Level 2 and Level 3
measurements in the fair value hierarchy.
Investment in Series A Biohaven Preferred Shares
The fair value of the Series A Biohaven Preferred Shares as of
March 31, 2021 and December 31, 2020 was based on the
cash flows due to us from Biohaven Pharmaceutical Holding Company
Ltd. (“Biohaven”) of two times (2x) the original
purchase price of the Series A Biohaven Preferred Shares payable in
equal quarterly installments of $15.6 million following U.S.
Food and Drug Administration (“FDA”) approval and
starting one-year
The fair value of the Series A Biohaven Preferred Shares as of
March 31, 2021 and December 31, 2020 was calculated using
probability-adjusted discounted cash flow calculations
incorporating Level 3 fair value measurements and inputs,
including estimated risk-adjusted discount rates and the
probability of a change of control event occurring during the
investment term, which would result in accelerated payments and
redemptions. Assessing the probability that there will be a change
of control event over a four-year time period and developing a
risk-adjusted discount rate requires significant judgement. Our
estimate of a risk adjusted discount rate of 7.9% as of
March 31, 2021 and 8.3% as of December 31, 2020 could
reasonably be different than the discount rate selected by a market
participant in the event of a sale of the Series A Biohaven
Preferred Shares, which would mean that the estimated fair value
could be significantly higher or lower. As of March 31, 2021
and December 31, 2020, we estimated a fair value for the
Series A Biohaven Preferred Shares of $203.9 million and
$214.4 million, respectively, which we classified as
Available for sale debt securities Unrealized gain on available for
sale debt securities
Our investment in the Series A Biohaven Preferred Shares was
transferred from a Level 3 asset to a Level 2 asset in
February 2020, when Nurtec ODT (rimegepant) received FDA approval,
at which time we began using a discounted cash flow analysis that
relied on observable inputs. During the three months ended
December 31, 2020, information pertaining to Biohaven’s
issuance of debt and its effective interest rate became available
and we refined our valuation of the Series A Biohaven Preferred
shares as of December 31, 2020 to incorporate this significant
unobservable input. As a result, we reclassified the investment
from a Level 2 to a Level 3 asset during the three months
ended December 31, 2020.
Investment in Series B Biohaven Preferred Shares
We have committed to acquiring 3,992 shares of Series B Biohaven
Preferred Shares at a price of $50,100 per preferred share for a
total of $200.0 million payable on a quarterly basis between
March 31, 2021 and December 31, 2024 (“Series B
Forwards”). As of March 31, 2021, we have acquired 351
shares of Series B Biohaven Preferred Shares. In return, Biohaven
will be required to redeem the Series B Biohaven Preferred Shares
in a series of equal fixed quarterly payments equal to
approximately 1.8 times the original issue price per share between
March 31, 2025 and December 31, 2030. For additional
discussion of our investment in the Series B Biohaven Preferred
Shares, see Note 5–Available for Sale Debt Securities.
The fair value of the Series B Biohaven Preferred Shares as of
March 31, 2021 and the fair value of the Series B Forwards as
of March 31, 2021 and December 31, 2020 were based on
probability-adjusted discounted cash flow calculations using
Level 3 fair value measurements and inputs, including
estimated risk-adjusted discount rates and the probability that
there will be a change of control event in different periods of
time, which would result in accelerated payments and redemptions.
Assessing the probability that there will be a change of control
event over a 10-year Available for sale debt securities
The unrealized movement in fair value of the Series B Preferred
Shares and Series B Forwards is recorded in earnings within
Unrealized gain on available for sale debt securities
Other financial instruments
We use a third party pricing service for Level 2 inputs used
to value cash equivalents, marketable securities and borrowings,
which provides documentation on an ongoing basis that includes,
among other things, pricing information with respect to reference
data, methodology, inputs summarized by asset class, pricing
application and corroborative information. Warrants are valued
using a Black-Scholes option pricing model which considers
observable and unobservable inputs.
Financial assets not measured at fair value
Financial royalty assets are measured and carried on the condensed
consolidated balance sheets at amortized cost using the effective
interest method. The current portion of financial royalty assets
approximates fair value. The fair value of financial royalty assets
is calculated by management using the forecasted royalty payments
we expect to receive based on the projected product sales for all
royalty bearing products as estimated by sell-side equity research
analysts’ consensus forecasts. These projected future royalty
payments by asset are then discounted to a present value using
appropriate individual discount rates. The fair value of our
financial royalty assets is classified as Level 3 within the
fair value hierarchy since it is determined based upon inputs that
are both significant and unobservable. Estimated fair values based
on Level 3 inputs and related carrying values for the
non-current
March 31, 2021 December 31, 2020
Fair value
Carrying value, net Fair value
Carrying value, net
Financial royalty assets, net $ 18,464,028 $ 12,599,080 $ 18,718,179 $ 12,368,084 | 3. Fair Value Measurements and Financial Instruments
Fair value measurements
The summary below presents information about our assets and
liabilities that are measured at fair value on a recurring basis as
of December 31, 2020 and 2019, and the valuation techniques we
utilized to determine such fair value.
•
Level 1: Unadjusted quoted prices in active
markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities. Our Level 1 assets consist
of equity securities with readily determinable fair values and
money market funds.
•
Level 2: Quoted prices in markets that are not
active or financial instruments for which all significant inputs
are observable, either directly or indirectly. Our Level 2
assets generally include marketable securities, warrants,
derivatives and our interest rate swap contracts, which may be in
an asset or liability position.
•
Level 3: Prices or valuation that requires inputs
that are both significant to the fair value measurement and
unobservable. Our Level 3 assets consist of our investments in
the Series A Biohaven Preferred Shares and the Series B Forwards
and, historically, our investment in Tecfidera. See
Note 5--Available
For financial instruments which are carried at fair value, the
level in the fair value hierarchy is based on the lowest level of
inputs that is significant to the fair value measurement in its
entirety.
Fair value hierarchy
The following is a summary of the inputs used to value our
financial assets and liabilities measured at fair value as of
December 31, 2020 and 2019 (in thousands):
As of December 31,
2020
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents
Money market funds $ 24,302 $
— $
— $ 24,302
Commercial paper
— 77,176
— 77,176
Certificates of deposit
— 74,502
— 74,502
Marketable securities
Corporate debt securities
— 32,754
— 32,754
Commercial paper
— 444,554
— 444,554
Certificates of deposit
— 505,971
— 505,971
Available for sale debt securities
—
— 69,984 69,984
Total current assets $ 24,302 $ 1,134,957 $ 69,984 $ 1,229,243
Equity securities (1) 298,689
—
— 298,689
Available for sale debt securities
—
— 144,416 144,416
Forwards (2)
—
— 18,600 18,600
Warrants (3)
— 5,439
— 5,439
Total non-current $ 298,689 $ 5,439 $ 163,016 $ 467,144
(1)
Upon Gilead’s acquisition of Immunomedics, our
investment in Immunomedics common stock was redeemed in full in the
fourth quarter of 2020, resulting in a gain of $292.3 million
recognized within (Gain)/loss on equity
securities
(2)
The Series B Forwards, recorded
within Other assets
(3)
Related to Epizyme transaction as described in
Note 4-Derivative non-current Derivative financial
instruments
The net unrealized gain or loss recognized on equity securities
still held as of December 31, 2020 was a loss of
$45.2 million, a gain of $125.6 million and a loss of
$7.8 million for the years ended December 31, 2020, 2019
and 2018, respectively.
As of December 31,
2019
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents
Money market funds $ 222,326 $ —
$
— $ 222,326
Certificates of deposit
— 4,000
— 4,000
Marketable securities
U.S. government securities
— 12,877
— 12,877
Commercial paper
— 21,367
— 21,367
Certificates of deposit
— 60,211
— 60,211
Total current assets $ 222,326 $ 98,455 $
— $ 320,781
Equity securities 380,756
—
— 380,756
Available for sale debt securities
—
— 131,280 131,280
Warrants (1)
— 30,815
— 30,815
Forward purchase contract (1)
— 11,500
— 11,500
Total non-current $ 380,756 $ 42,315 $ 131,280 $ 554,351
Liabilities:
Interest rate swaps
— (9,215 )
— (9,215 )
Total current liabilities $
— $ (9,215 ) $
— $ (9,215 )
Interest rate swaps
— (18,902 )
— (18,902 )
Total non-current $
— $ (18,902 ) $
— $ (18,902 )
(1)
Related to Epizyme warrants and put option as
described in Note 4-Derivative non-current Derivative financial
instruments
The tables presented below summarize the change in the carrying
value of Level 3 financial instruments, which relate to our
investment in the Series A Biohaven Preferred Shares and the Series
B Forwards (in thousands).
For the years ended December 31,
2020 2019
Available for sale debt securities
Balance at the beginning of the period $ 131,280 $
—
Purchases
— 125,121
Unrealized gains on available for sale debt securities 52,725
—
Transfer to Level 2 (184,005 )
—
Transfer from Level 2 (1) 198,526
—
Unrealized gains on available for sale debt securities 15,874 6,159
Balance at the end of the period $ 214,400 $ 131,280
(1)
Includes $14.5 million of unrealized gains on
available for sale debt securities included in other comprehensive
income while the instrument was classified as a Level 2
asset.
For the year ended
2020
Forwards
Balance at the beginning of the period $
—
Unrealized gains included in earnings (1) 18,600
Balance at the end of the period $
18,600
(1)
Recorded within Unrealized gain
on forwards
Valuation inputs
Below is a discussion of the valuation inputs used for financial
instruments classified as Level 2 and Level 3
measurements in the fair value hierarchy.
Investment in Series A Biohaven Preferred Shares
The fair value of the Series A Biohaven Preferred Shares at
December 31, 2020 is based on the cash flows due to us from
Biohaven Pharmaceutical Holding Company Ltd.
(“Biohaven”) of two times (2x) the original purchase
price of the Series A Biohaven Preferred Shares payable in equal
quarterly installments of $15.6 million following U.S. Food
and Drug Administration (“FDA”) approval and
starting one-year 5--Available
The fair value of the Series A Biohaven Preferred Shares at
December 31, 2020 was calculated using probability-adjusted
discounted cash flow calculations incorporating Level 3 fair
value measurements and inputs, including estimated risk-adjusted
discount rates and the probability of a change of control event
occurring during the investment term, which would result in
accelerated payments and redemptions. Assessing the probability
that there will be a change of control event over a four-year time
period and developing a risk-adjusted discount rate requires
significant judgement. Our estimate of a risk adjusted discount
rate of 8.3% could reasonably be different than the discount rate
selected by a market participant in the event of a sale of the
Series A Biohaven Preferred Shares, which would mean that the
estimated fair value could be significantly higher or lower. At
December 31, 2020 we estimated the fair value for the Series A
Biohaven Preferred Shares as $214.4 million, which we
classified as available for sale debt securities.
For periods prior to March 31, 2020, we valued the Series A
Biohaven Preferred Shares using a Black-Derman Toy
(“BDT”) lattice model. The fair value of the Series A
Biohaven Preferred Shares at December 31, 2019 was determined
based on significant inputs that were not observable in the market,
referred to as Level 3 inputs. Key inputs to the BDT model for
the December 31, 2019 valuation included, most notably, the
probability (1) of Biohaven’s pipeline product, Nurtec
ODT (rimegepant), being approved by the FDA by specific dates,
(2) of a change of control event by specific dates and
(3) that Biohaven will elect to redeem the Series A Biohaven
Preferred Shares for a lump sum payment as opposed to payback over
time. Probabilities for the above considerations were developed by
management, which has significant healthcare and finance expertise
to make such assessments. The most critical assumption that
impacted the valuation of our Series A Biohaven Preferred Shares at
December 31, 2019 was the probability that Nurtec ODT
(rimegepant) would be approved by the FDA.
Assumptions used in the valuation model as of December 31,
2019 included the following significant unobservable inputs:
•
Change of Control probability on a quarterly basis
(0%)
•
Likelihood of FDA
approval (0%-86%)
•
Likelihood of FDA approval at the end of any given
quarter by December 31, 2024
(Range: 0%-59%).
Our investment in the Series A Biohaven Preferred Shares was
transferred from a Level 3 asset to a Level 2 asset in
February 2020, when Nurtec ODT (rimegepant) received FDA approval,
at which time we began using a discounted cash flow analysis that
relied on observable inputs. During the three months ended
December 31, 2020, we became aware of Biohaven’s
issuance of debt and its effective interest rate and refined our
valuation of the Series A Biohaven Preferred shares as of
December 31, 2020 to incorporate this significant unobservable
input. As a result, we reclassified the investment from a
Level 2 to a Level 3 asset during the three months ended
December 31, 2020.
Investment in Series B Biohaven Preferred Shares
We have committed to acquiring 3,992 shares of Series B Biohaven
Preferred Shares at a price of $50,100 per preferred share for a
total of $200.0 million payable on a quarterly basis between
March 31, 2021 and December 31, 2024 (“Series B
Forwards”). In return, Biohaven will be required to redeem
the Series B Biohaven Preferred Shares in a series of equal fixed
quarterly payments equal to approximately 1.8 times the original
issue price per share between March 31, 2025 and
December 31, 2030. For additional discussion of our investment
in the Series B Biohaven Preferred Shares, see
Note 5-Available
The fair value of the Series B Forwards as of December 31,
2020 is based on probability-adjusted discounted cash flow
calculations using Level 3 fair value measurements and inputs,
including estimated risk-adjusted discount rates and the
probability that there will be a change of control event in
different periods of time, which would result in accelerated
payments and redemptions. Assessing the probability that there will
be a change of control event over a 10-year Other
assets Unrealized gain on
forwards
Other financial instruments
We use a third party pricing service for Level 2 inputs used
to value cash equivalents, marketable securities and borrowings,
which provides documentation on an ongoing basis that includes,
among other things, pricing information with respect to reference
data, methodology, inputs summarized by asset class, pricing
application and corroborative information. Warrants are valued
using a Black-Scholes option pricing model which considers
observable and unobservable inputs. Level 2 interest rate
swaps are typically valued using counterparty confirmations, LIBOR
yield curves and credit valuation adjustments.
Financial assets not measured at fair value
Financial royalty assets are measured and carried on the
consolidated balance sheets at amortized cost using the effective
interest method. The current portion of financial royalty assets
approximates fair value. The fair value of financial royalty assets
is calculated by management using the forecasted royalty payments
we expect to receive based on the projected product sales for all
royalty bearing products as estimated by sell-side equity research
analysts’ consensus forecasts. These projected future royalty
payments by asset are then discounted to a present value using
appropriate individual discount rates. The fair value of our
financial royalty assets is classified as Level 3 within the
fair value hierarchy since it is determined based upon inputs that
are both significant and unobservable. Estimated fair values based
on Level 3 inputs and related carrying values for
the non-current
December 31, 2020 December 31, 2019
Fair value
Carrying value, net Fair value
Carrying value, net
Financial royalty assets, net $ 18,718,179 $ 12,368,084 $ 16,501,819 $ 10,842,052 |
