Convertible debt
We account for convertible debt instruments, including our 1 percent and 2¾ percent convertible notes, that
may be settled in cash upon conversion (including partial cash settlement) by separating the liability and equity
components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. We determine
the carrying amount of the liability component by measuring the fair value of similar debt instruments that do
not have the conversion feature. If no similar debt instrument exists, we estimate fair value by using assumptions
that market participants would use in pricing a debt instrument, including market interest rates, credit standing,
yield curves and volatilities. Determining the fair value of the debt component requires the use of accounting
estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a
significant impact on the determination of the debt component, and the associated non-cash interest expense.
We assign a value to the debt component of our convertible notes equal to the estimated fair value of
similar debt instruments without the conversion feature, which resulted in us recording our debt at a discount. We
are amortizing the debt discount over the life of the convertible notes as additional non-cash interest expense
utilizing the effective interest method. For additional information, see Note 4,
Long-TermObligations and
Commitments,
in the Notes to the Consolidated Financial Statements.
Fair ValueMeasurements
We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These
tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets,
which includes our money market funds and treasury securities classified as available-for-sale securities and our
investment in equity securities in publicly-held biotechnology companies; Level 2, defined as inputs other than
quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income
securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. Our
Level 3 investments include our investments in the equity securities of publicly-held biotechnology companies
for which we calculated a lack of marketability discount because there were restrictions on when we could trade
the securities. We determine the lack of marketability discount by using a Black-Scholes model to value a
hypothetical put option to approximate the cost of hedging the stock until the restriction ends. The majority of
our securities have been classified as Level 2. We obtain the fair value of our Level 2 investments from our
custodian bank or from a professional pricing service. We validate the fair value of our Level 2 investments by
understanding the pricing model used by the custodian banks or professional pricing service provider and
comparing that fair value to the fair value based on observable market prices. During the years ended
December 31, 2014 and 2013 there were no transfers between our Level 1 and Level 2 investments. We
recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances
that caused the transfer.
We measure the following major security types at fair value on a recurring basis. The following summary
breaks down the fair-value hierarchy that we valued each security with at December 31, 2014 and 2013 (in
thousands):
At December 31,
2014
Quoted
Prices in
ActiveMarkets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents (1) . . . . . . . . . . . . . . . . . . . . . . . . . .
$104,680
$104,680 $ — $ —
Corporate debt securities (2) . . . . . . . . . . . . . . . . . . . .
372,002
— 372,002
—
Debt securities issued by U.S. government
agencies (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,855
— 109,855
—
Debt securities issued by the U.S. Treasury (4). . . . .
19,017
19,017
— —
Debt securities issued by states of the United States
and political subdivisions of the states (5) . . . . . . .
105,033
— 105,033
—
Investment in Regulus Therapeutics Inc. . . . . . . . . . .
81,881
— — 81,881
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$792,468
$123,697 $586,890 $81,881
F-18
