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EXCEL - IDEA: XBRL DOCUMENT - ARIAD PHARMACEUTICALS INCFinancial_Report.xls
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v2.4.0.6
Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2012
Fair Value of Financial Instruments
9. Fair Value of Financial Instruments

The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based on the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements may be classified based on the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities using the following three levels:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect the Company’s estimates of the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.

 

The following table presents information about the Company’s assets and liabilities as of September 30, 2012 and December 31, 2011 that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

 

     September 30, 2012  
In thousands    Total      Level 1      Level 2      Level 3  

Marketable securities

   $ 65,041       $ —         $ 65,041       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
In thousands    Total      Level 1      Level 2      Level 3  

Warrant liability

   $ 58,639       $ —         $ 58,639       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s marketable securities are carried at fair value. Marketable securities are classified as Level 2 in the fair value hierarchy as their prices are based on observable inputs but not for identical securities. Therefore, their fair value is based on observable inputs other than quoted prices included within Level 1.

The Company’s warrant liability was carried at fair value and, at December 31, 2011 was classified as Level 2 in the fair value hierarchy as the unobservable inputs did not have a significant impact on the valuation of the warrant liability. This classification as Level 2 reflects that the warrants’ exercise price was significantly lower than the market price of the underlying common stock on the reporting date. The fair value of the warrants on December 31, 2011 was determined to be $58.6 million using the Black-Scholes option valuation model applying the following assumptions: (i) the market price of the Company’s common stock of $12.25 on that date, (ii) a risk-free rate of 0.015%, (iii) an expected term of 0.2 years, (iv) no dividend yield, and (v) a volatility of 59.9%. As of September 30, 2012, all warrants have been exercised and the fair value of the warrants on the exercise dates plus the proceeds from exercise were recorded in equity. The changes in the fair value of the warrant liability for the three and nine-month periods ended September 30, 2012 and 2011 were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
In thousands    2012      2011     2012     2011  

Balance, beginning of period

   $ —         $ 55,427      $ 58,639      $ 28,815   

Revaluation of warrants

     —           (14,846      15,924        26,629   

Exercise of warrants

     —           (2,028     (74,563     (16,891 
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ —         $ 38,553      $ —        $ 38,553   
  

 

 

    

 

 

   

 

 

   

 

 

 

The carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The carrying amount of the Company’s bank term loan approximates fair value due to its variable interest rate and other terms. The Company’s obligation under its executive compensation plan is based in part on the current fair value of specified mutual funds, which is therefore stated at its estimated fair value. The carrying amounts of cash equivalents, accounts payable, accrued liabilities, the bank term loan liability and the executive compensation liability are classified as Level 2 in the fair value hierarchy.