F-19
As ofDecember 31, 2012, we classified the fair valuemeasurements of our investments in the equity securities of Regulus
andSareptaTherapeutics, Inc., or Sarepta, as Level 3. We calculated a lackofmarketability discount on the fair value of these
investments because of trading restrictions on the securities.We consider the inputswe used to calculate the lackofmarketability
discount Level 3 inputs and, as a result, we categorized these investments as Level 3. We determined the lack ofmarketability
discount byusing aBlack-Scholesmodel tovalue a hypothetical put option to approximate the cost of hedging the stockuntil the
restriction ended. As ofDecember 31, 2012, our Level 3 investments inRegulus andSarepta had a gross fair value of $44.4million
and$1.0million, respectively, less a lackofmarketabilitydiscount of $10.8million and$296,000, respectively, for a net carrying
value of $33.6million and$728,000, respectively. In the first quarter of 2013, we sold all of the common stockof Sarepta thatwe
owned resulting in a realizedgainof $1.1million. In the fourthquarter of 2013, we re-classifiedour investment inRegulus to aLevel
1 investment becausewe are no longer subject to contractual trading restrictions on theRegulus shareswe own. We recognize
transfers between levels of the fair value hierarchyon the date of the event or change in circumstances that caused the transfer.
The following is a summaryof our investmentsmeasured at fair value on a recurringbasis using significant unobservable
inputs (Level 3) for the years endedDecember 31, 2013, 2012 and2011 (in thousands):
YearEndedDecember 31,
2013
2012
2011
Beginningbalance of Level 3 investments ................................ $
34,350 $
— $
—
Purchases ...................................................................................
—
3,040
—
Transfers intoLevel 3 investments ............................................
—
25,198
—
Total gains and losses:
Included ingainon investments ............................................
(1,163)
—
—
Included in accumulated other comprehensive income .........
32,272
6,112
—
Transfers out of Level 3 investments .........................................
(65,419)
—
—
Cost basis of shares sold ............................................................
(40)
—
—
Endingbalance of Level 3 investments ..................................... $
— $
34,350 $
—
IncomeTaxes
We use the asset and liabilitymethodof accounting for income taxes. Under the asset and liabilitymethod, deferred tax
assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting
purposes and such amounts asmeasuredunder enacted tax laws. We record a valuation allowance tooffset anynet deferred tax assets
if, basedupon the available evidence, it ismore likely thannot thatwewill not recognize some or all of the deferred tax assets.
Inour financial statements, we recognize the impact of anuncertain income taxpositiononour income tax returns at the
largest amount that the relevant taxing authority ismore-likely-than-not to sustainupon audit. Ifwe feel that the likelihoodof
sustaining anuncertain income taxposition is less than50percent, we donot recognize it.
Impact of recently issued accounting standards
In July2013, theFASB issued accountingguidance on the financial statement presentationof anunrecognized taxbenefit
when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively
for fiscal years, and interimperiodswithin those years, beginning afterDecember 15, 2013. Wewill adopt this guidance inour fiscal
year beginning January1, 2014. We donot believe the adoptionof this guidancewill have amaterial impact onour consolidated
financial statements.
2. Investment inRegulusTherapeutics Inc.
InSeptember 2007, we andAlnylam establishedRegulus as a company focusedon the discovery, development and
commercializationofmicroRNA-targeting therapeutics. Regulus combines our andAlnylam’s technologies, know-how, and
intellectual property relating tomicroRNA-targeting therapeutics. We andAlnylam eachgrantedRegulus exclusive licenses toour
respective intellectual property formicroRNA therapeutic applications, and certain early fundamental patents in themicroRNA field.
InOctober 2012, Regulus completed an IPOof approximately12.7million shares of its common stock at $4.00per share.
As part of the offering, we purchased$3.0million ofRegulus’ common stock at the offeringprice. We began accounting for our
investment inRegulus at fair value in the fourthquarter of 2012whenour ownership inRegulus droppedbelow20percent andwe no
longer had significant influence overRegulus’ operating and financial policies.We also recorded an$18.4milliongain in the fourth
quarter of 2012because of the increase inRegulus’ valuation resulting from its IPO. We have reflected this gain in a separate line on
our consolidated statement of operations called “Gainon investment inRegulus Therapeutics Inc.”
