v3.26.3
Fair Value Measurements
 9 Months Ended
Sep. 30, 2026
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
 
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three‑level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
•Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
•Level 2—inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model‑derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability. 
•Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
 
The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. Investments also include U.S. Treasury securities, which are valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from, or corroborated by, observable market data.

The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands): 
September 30, 2026
Fair Value Measurements Using
Quoted prices in active markets 
for identical assets		Significant other observable inputsSignificant unobservable inputs
(Level 1)(Level 2)(Level 3)Total
Assets            
Cash equivalents:
Money market funds
$34,861 $— $— $34,861 
U.S. Treasury securities
— — — — 
Marketable debt securities:
U.S. Treasury securities
— 397,790 — 397,790 
Total financial assets
$34,861 $397,790 $— $432,651 
Liabilities
Derivative liability$— $— $18,320 $18,320 
December 31, 2025
Fair Value Measurements Using
Quoted prices in active markets
for identical assets		Significant other observable inputsSignificant unobservable inputs
(Level 1)(Level 2)(Level 3)Total
Assets            
Cash equivalents:
Money market funds
$9,069 $— $— $9,069 
Marketable debt securities:
U.S. Treasury securities— 82,478 — 82,478 
Total financial assets
$9,069 $82,478 $— $91,547 
Liabilities
Derivative liability$— $— $18,000 $18,000 

The carrying amounts reported in the accompanying unaudited condensed consolidated financial statements for cash, restricted cash, prepaid and other current assets, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts.

Level 3 Valuation

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuations for the three and nine months ended September 30, 2026 and September 30, 2025:
Derivative liabilityTotal
Balance at June 30, 2026
$18,530 $18,530 
Change in fair value(210)(210)
Balance at September 30, 2026
$18,320 $18,320 
Contingent considerationDerivative liabilityTotal
Balance at December 31, 2025
$— $18,000 $18,000 
Change in fair value6,574 320 6,894 
Settlement of contingent consideration(6,574)— (6,574)
Balance at September 30, 2026
$— $18,320 $18,320 
Derivative liabilityTotal
Balance at June 30, 2025
$10,630 $10,630 
Change in fair value12,530 12,530 
Balance at September 30, 2025
$23,160 $23,160 
Derivative liabilityTotal
Balance at December 31, 2024
$8,480 $8,480 
Change in fair value14,680 14,680 
Balance at September 30, 2025
$23,160 $23,160 
Contingent Consideration Pursuant to AlmataBio Transaction

In March 2024, the Company acquired abdakibart through a merger of AlmataBio, Inc. (“AlmataBio”) with and into its wholly owned subsidiary (the “AlmataBio Transaction”). In addition to the shares issued pursuant to the AlmataBio Transaction, the transaction included potential developmental milestones payments to the former AlmataBio stockholders, including $5.0 million due upon the first patient dosed in a Phase 2 trial of abdakibart in HS (the “Phase 2 Milestone”), and $15.0 million due upon the first patient dosed in a Phase 3 trial of abdakibart (the “Phase 3 Milestone”), both of which were payable in cash or stock at the election of the former AlmataBio stockholders. The Phase 2 Milestone was determined to be probable as of the transaction close date and was included as part of the GAAP purchase price at close. The Phase 3 Milestone was not determined to be probable as of the transaction close date and remained not probable through March 31, 2026.

In the second quarter of 2026, the Company entered into the Milestone Buyout Option and Amendment to the Agreement and Plan of Merger and Reorganization with the parties named therein (the “AlmataBio Buyout Agreement”) pursuant to which the parties agreed, among other things, to amend the Phase 3 Milestone and all related rights and obligations such that the Company would (i) pay $2.25 million to the former AlmataBio stockholders upfront and (ii) have the option, exercisable in its sole discretion within ninety (90) days of the effective date, to pay $5.125 million, payable in cash, shares of Avalo common stock, or a combination thereof at the election of Avalo, in lieu of and in full satisfaction of the $15.0 million Phase 3 Milestone (the “Milestone Buyout Option”). Further, in the second quarter of 2026, the Company made the $2.25 million upfront payment and exercised the Milestone Buyout Option, which was settled in 50% cash and 50% common stock. Pursuant to the AlmataBio Buyout Agreement, the amount of common stock issued was calculated based on the volume weighted average price per share for the twenty (20) trading day period prior to the date which Avalo issued the common stock. The Company recognized a $6.6 million change in fair value of contingent consideration, measured based on the contractual cash payments and the grant-date fair value of the shares issued which was recognized in other income (expense), net in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2026. Following the settlement of the Milestone Buyout Option, no contingent milestone obligations remain outstanding related to the AlmataBio Transaction.

Derivative Liability

In the fourth quarter of 2022, Avalo sold its economic rights to future milestone and royalty payments for previously out-licensed assets AVTX-501, AVTX-007, and AVTX-611 to ES Therapeutics, LLC (“ES”), an affiliate of Armistice Capital LLC (“Armistice”), in exchange for $5.0 million (the “ES Transaction”). At the time of the transaction, Armistice was a significant stockholder of the Company whose chief investment officer, Steven Boyd, and managing director, Keith Maher, served on Avalo’s Board until August 8, 2022. The ES Transaction was approved in accordance with Avalo’s related party transaction policy.

The economic rights sold include (a) rights to a milestone payment of $20.0 million upon the filing and acceptance of an NDA for AVTX-501 pursuant to an agreement with Janssen Pharmaceutics, Inc., now Johnson & Johnson Innovative Medicine (“J&J”) (the “AVTX-501 Milestone”) and (b) rights to any future milestone payments and royalties relating to AVTX-007 under a license agreement with Apollo AP43 Limited (“Apollo”), including up to $6.25 million of development milestones, up to $67.5 million in sales-based milestones, and royalty payments over a ten year period of a low single digit percentage of annual net sales (which percentage increases to another low single digit percentage if annual net sales exceed a specified threshold) (the “AVTX-007 Milestones and Royalties”). In addition, Avalo waived all its rights to AVTX-611 sales-based payments of up to $20.0 million that were payable by ES.
The exchange of the economic rights of the AVTX-501 Milestone and AVTX-007 Milestones and Royalties for cash met the definition of a derivative instrument. The fair value of the derivative liability is determined using a combination of a scenario-based method and an option pricing method (implemented using a Monte Carlo simulation). The significant inputs including probabilities of success, expected timing, and forecasted sales as well as market-based inputs for volatility, risk-adjusted discount rates and allowance for counterparty credit risk are unobservable and based on the best information available to Avalo. Certain information used in the valuation is inherently limited in nature and could differ from J&J’s and Apollo’s internal estimates.

The fair value of the derivative liability as of the transaction date was approximately $4.8 million, of which $3.5 million was attributable to the AVTX-501 Milestone and $1.3 million was attributable to the AVTX-007 Milestones and Royalties. Subsequent to the transaction date, at each reporting period, the derivative liability is remeasured at fair value. As of September 30, 2026, the fair value of the derivative liability was $18.3 million, which was classified as a non-current liability and comprised of $18.2 million related to the AVTX-007 Milestone and Royalties and $0.1 million related to the AVTX-501 Milestone. For the three and nine months ended September 30, 2026, the $0.2 million and $0.3 million change in fair value was recognized in other income (expense), net in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss, respectively.

The fair value of AVTX-007 Milestones and Royalties was primarily driven by sales forecasts with peak annual net sales reaching $1.8 billion in atopic dermatitis, an approximate 41% probability of success, and an estimated time to commercialization of approximately 6.0 years. The fair value of the AVTX-501 Milestone was primarily driven by an approximate 1% probability of success of achieving the milestone in approximately 10.5 years, reflecting Avalo’s assessment of publicly available information regarding the initiation of a study of aticaprant (previously referred to as AVTX-501 by Avalo) in schizophrenia. These assumptions were based on Avalo’s assessment of limited publicly available information regarding Apollo’s and J&J’s clinical development activities, market opportunity, and other industry data. We estimated these unobservable inputs based on limited publicly available information and therefore could differ from J&J’s and Apollo’s respective internal development plans, assessments of probability of success and other inputs of our fair value calculation. Any changes to these inputs may result in significant changes to the fair value measurement. Notably, the peak annual net sales forecast (for the AVTX-007 Milestones and Royalties) and the probability of success (for both the AVTX-501 Milestone and the AVTX-007 Milestone and Royalties) are the largest drivers of the fair value, so changes to either would likely result in significant changes to their respective fair values.

In the event that J&J and/or Apollo are required to make payment(s) to ES Therapeutics pursuant to the underlying agreements, Avalo will recognize revenue under its existing contracts with those customers for that amount when it is no longer probable there would be a significant revenue reversal with any differences between the fair value of the derivative liability related to that payment immediately prior to the revenue recognition and revenue recognized to be recorded as other expense. However, given Avalo is no longer entitled to collect these payments, the potential ultimate settlement of the payments in the future from J&J and/or Apollo to ES Therapeutics (and the future mark-to-market activity each reporting period) will not impact Avalo’s future cash flows.
No changes in valuation techniques occurred during the three and nine months ended September 30, 2026 and 2025. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three and nine months ended September 30, 2026 and 2025.