Fair Value Disclosures

9 Months Ended

Sep. 30, 2011

6. Fair Value Disclosures

As of September 30, 2011, the Company had $19.2 million of cash equivalents and marketable securities consisting of money market funds, commercial paper, municipal bonds, U.S. government sponsored enterprise securities and corporate debt securities with maturities that range from one day to 18.3 months with an overall average time to maturity of 4.5 months. The Company has the ability to liquidate these investments without restriction or penalty. The Company determines fair value for marketable securities with Level 1 inputs through quoted market prices. The Company determines fair value for marketable securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The Company’s Level 2 marketable securities have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events. The Company’s Level 3 inputs are unobservable inputs based on the Company’s assessment of what market participants would use in pricing the instruments.

On June 3, 2009, the Company sold warrants to purchase 2.9 million shares of common stock to institutional investors as part of an equity financing. The Company accounts for the common stock warrants which may potentially be settled with cash as a liability. The Company determines fair value for the common stock warrants with Level 3 inputs through a Black-Scholes pricing model.

There have been no transfers of assets or liabilities between the fair value measurement classifications.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 (in thousands):


			Fair Value Measurements at Reporting Date Using
	September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Description
Assets:
Money market funds	$	857	$	857	$	—	$	—
Commercial paper		300		—		300		—
Municipal bonds		3,987		—		3,987		—
U.S. government sponsored enterprise securities		10,994		—		10,994		—
Corporate debt securities		2,802		—		2,802		—

Total financial assets	$	18,940	$	857	$	18,083	$	—

Liabilities:
Common stock warrants	$	460	$	—	$	—	$	460

Total financial liabilities	$	460	$	—	$	—	$	460

The Company reassesses the fair value of the common stock warrants at each reporting date utilizing a Black-Scholes pricing model. The following inputs were utilized in the Black-Scholes pricing model at September 30, 2011 and 2010:


	September 30,
	2011			2010
Risk-free interest rate		0.43	%		0.96	%
Dividend yield		0.00	%		0.00	%
Expected volatility		79.43	%		91.76	%
Weighted-average expected life of warrant (in years)		2.7			3.7

As a result of the Company’s reassessment of the fair value of the common stock warrants, the Company recorded a gain of $0.5 million and a loss of $0.8 million for the three months ended September 30, 2011 and 2010, respectively. As a result of the Company’s reassessment of the fair value of the common stock warrants, the Company recorded a gain of $1.4 million and a loss of $0.01 million for the nine months ended September 30, 2011 and 2010, respectively. The gain (loss) is reflected in the Company’s unaudited condensed consolidated statement of operations as a component of other income (expense), net.

The following table is a roll forward of the fair value of the common stock warrants, as to which fair value is determined by Level 3 inputs (in thousands):


	Three months ended September 30,					Nine months ended September 30,
	2011		2010			2011		2010
Beginning balance	$	957	$	3,143		$	1,881	$	3,897
Purchases, issuances, and settlements		—		—			—		—
Realized gain (loss) included in net loss		497		(767	)		1,421		(13	)

Ending balance	$	460	$	3,910		$	460	$	3,910

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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Reference 13: http://www.xbrl.org/2003/role/presentationRef

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+ Details

ANADYS PHARMACEUTICALS INC 10-Q