v3.26.3
Fair Value Measurements
 9 Months Ended
Sep. 30, 2026
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
Assets and Liabilities Measured on a Recurring Basis
The following table presents the hierarchy for our assets and liabilities measured at fair value (in thousands):
September 30, 2026December 31, 2025
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:
Short-term investments$148,901 $242,536 $— $391,437 $183,982 $374,612 $— $558,594 
Pelthos Series A Preferred Shares72,018 — — 72,018 106,262 — — 106,262 
Pelthos Common Shares31,515 — — 31,515 46,500 — — 46,500 
Equity-method investment in RemainCo — — 13,700 13,700 
Derivative assets— 22,685 8,288 30,973 — 10,643 4,989 15,632 
     Total assets$252,434 $265,221 $21,988 $539,643 $336,744 $385,255 $4,989 $726,988 
Liabilities:
Contingent liabilities:
   CyDex CVR$— $— $422 $422 $— $— $395 $395 
   Metabasis CVR— 3,308 — 3,308 — 2,826 — 2,826 
   HilleVax CVR— — 14,600 14,600 — — — — 
   LAVA CVR— — 6,738 6,738 — — — — 
   BioInvent— — 3,300 3,300 — — — — 
   Pulmokine— — 4,700 4,700 — — — — 
   Kinnate CVR - Kinnate programs— — 3,700 3,700 — — — — 
   Kinnate CVR - Exarafenib— — 2,000 2,000 — — — — 
   Other— — 99 99 — — — — 
Total contingent liabilities— 3,308 35,559 38,867 — 2,826 395 3,221 
Derivative liabilities— 279 — 279 — — — — 
     Total liabilities$— $3,587 $35,559 $39,146 $— $2,826 $395 $3,221 
Excluding our investment in corporate equity securities and U.S. government securities, our short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management’s intentions and are classified within level 2 of the fair value hierarchy, as these investment securities are valued based on quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. We have classified marketable securities with original maturities of greater than one year as short-term investments based on our ability and intent to use any or all of those marketable securities to satisfy the liquidity needs of our current operations.
The equity method investment in RemainCo is classified within Level 3 of the fair value hierarchy because its valuation incorporates significant unobservable inputs related to the potential proceeds from the Janssen Litigation, including probability assigned to potential litigation and settlement outcomes, estimated settlement or recovery amounts under each scenario, the expected timing of resolution and related cash flows, and the discount rate applied to the probability-weighted cash flows.
The Castle Creek Warrants and AvenCell embedded derivative are classified within Level 3 of the fair value hierarchy because their valuation incorporates significant unobservable inputs, including, for the Castle Creek Warrants, assumptions
related to expected volatility and the expected term of the warrants, and for the AvenCell embedded derivative, the probability and timing of the contingent event that triggers the payment. All other derivative assets are classified within Level 2 of the fair value hierarchy because their fair values are determined using observable market inputs, either directly or indirectly.
The CyDex CVR liability is classified within Level 3 of the fair value hierarchy because its valuation incorporates significant unobservable inputs, including assumptions regarding the probability and timing of achieving certain milestones and forecasted revenues associated with the revenue-sharing arrangement.
The Metabasis CVR liability is classified within Level 2 of the fair value hierarchy because its fair value is based on quoted prices for the underlying CVRs in a market that is not active. During the three months ended September 30, 2026 and 2025, we recorded a fair value loss of $1.1 million and a fair value gain of $0.5 million, respectively, related to the Metabasis CVR liability. During the nine months ended September 30, 2026 and 2025, we recorded fair value losses of $0.6 million and $1.4 million, respectively, related to the Metabasis CVR liability.
The HilleVax CVR liability represents amounts payable to former HilleVax stockholders under the HilleVax CVR agreement, which we assumed in the XOMA acquisition. The amounts consist of sublease receipts and lease-related savings on the Boston facility lease, interest earned on the restricted cash held to fund the lease obligations, and the return of the lease security deposit, discounted to present value. The liability is classified within Level 3 of the fair value hierarchy because its valuation incorporates significant unobservable inputs, including the estimated timing and amount of future lease costs, sublease receipts and distributions to CVR holders. The liability fair value was $14.5 million and $14.6 million as of the acquisition date and September 30, 2026, respectively. During the three and nine months ended September 30, 2026, we recorded a $0.1 million loss from the change in fair value of the HilleVax CVR liability, primarily reflecting accretion of the discount.
The LAVA CVR liability represents amounts payable to former LAVA stockholders under the LAVA CVR agreement, which we assumed in the XOMA acquisition. The amounts consist of $6.3 million of cash withheld in XOMA’s acquisition of LAVA to pay related taxes and professional fees arising from certain tax matters, and $0.4 million of receipts related to the excess net cash distribution received subsequent to the initial excess net cash distribution that are payable to former LAVA stockholders. The tax matters have not yet been resolved, and the final amount payable to CVR holders will be determined upon their resolution and a final reconciliation under the CVR agreement. The liability is classified within Level 3 of the fair value hierarchy because its valuation incorporates significant unobservable inputs, including the expected outcome and timing of resolution of the tax matters. The liability was recognized at an acquisition-date fair value of $6.7 million and had a fair value of $6.7 million as of September 30, 2026. During the three and nine months ended September 30, 2026, the gain from the change in fair value of the LAVA CVR liability was not material.
The program-related obligations assumed in the XOMA acquisition represent contingent payments to third parties, including BioInvent, former Pulmokine and Kinnate stockholders, and other parties, that are tied to milestones and royalties on certain partnered programs. They are classified within Level 3 of the fair value hierarchy because their valuation incorporates significant unobservable inputs, including the probability and timing of the triggering events, the timing of cash inflows and outflows, and the discount rate. These obligations were measured using probability-weighted discounted cash flow models with discount rates ranging from 11% to 20%. As of September 30, 2026 we estimate the undiscounted range of possible outcomes of the program-related obligations at $106.6 million to $138.5 million, of which $96.6 million to $128.5 million would be fully funded by the related royalty or milestone receipts.
The fair value of the program-related obligations was $13.8 million as of September 30, 2026. We recognized a $5.0 million increase in fair value from the acquisition date, presented in fair value adjustments to contingent liabilities, primarily reflecting a $4.7 million adjustment to the Pulmokine obligation after Gossamer submitted a new drug application to the FDA for seralutinib in September 2026 which was not anticipated as of the acquisition date.
The following table presents a reconciliation of the beginning and ending balances of Level 3 financial instruments measured at fair value on a recurring basis for the nine months ended September 30, 2026 (in thousands).
Assets
Fair value of level 3 financial instruments as of December 31, 2025
$4,989 
Acquired equity method investment from XOMA Acquisition13,700 
Acquired derivative assets3,161 
Fair value adjustments to derivative assets138 
Fair value of level 3 financial instruments as of September 30, 2026
$21,988 
Liabilities
Fair value of level 3 financial instruments as of December 31, 2025
$395 
Acquired contingent liabilities from XOMA Acquisition 30,009 
Payments to CVR holders and other contingent payments(50)
Fair value adjustments to contingent liabilities5,205 
Fair value of level 3 financial instruments as of September 30, 2026
$35,559 
Assets Measured on a Non-Recurring Basis
We apply fair value measurement techniques on a non-recurring basis when evaluating potential impairment losses related to our goodwill, intangible assets with estimated useful lives and other long-lived assets.
We evaluate goodwill annually for impairment and whenever events or changes in circumstances indicate that goodwill may be impaired. We determine the fair value of our reporting unit using a combination of inputs, including our market capitalization and Level 3 inputs such as discounted cash flow analyses, which rely on unobservable assumptions.
We evaluate intangible assets with estimated useful lives and other long-lived assets for impairment whenever events or changes in circumstances indicate that such assets may not be recoverable. We perform the impairment assessment using an undiscounted cash flow analysis at the lowest level at which the cash flows of the intangible assets and long-lived assets are largely independent of the cash flows of other asset groups.
There was no impairment of our goodwill, intangible assets with estimated useful lives, or long-lived assets recorded during the three and nine months ended September 30, 2026 and 2025.
Fair Value of Financial Instruments
Our cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued liabilities, deferred revenue, current operating lease liabilities, and current finance lease liabilities are financial instruments and are recorded at cost in the condensed consolidated balance sheets. The estimated fair value of these financial instruments approximates their carrying value.
Financial Assets Not Measured at Fair Value
Financial royalty assets are carried at amortized cost using the effective interest method or on a non-accrual basis. Management estimates the fair value of financial royalty assets using forecasted royalty receipts. The projected future cash flows are derived from expected royalty payments and milestones, and are discounted using asset‑specific discount rates. Financial royalty assets are classified as Level 3 within the fair value hierarchy because their fair value is based on inputs that are significant and unobservable.
The estimated fair value and carrying value of financial royalty assets were $908.9 million and $800.1 million, respectively, as of September 30, 2026, and $294.9 million and $219.7 million, respectively, as of December 31, 2025.
To determine the fair value of long-term financial royalty assets, we estimated future underlying product sales, applied probabilities of technical and regulatory success for development stage programs, estimated timelines for development and regulatory milestones, and applied discount rates reflecting partner execution and commercialization risk, which ranged from 10% to 26% and 13% to 35% as of September 30, 2026 and December 31, 2025, respectively. The weighted average discount rate (weighted by relative fair value) was 14% and 17% as of September 30, 2026 and December 31, 2025, respectively.