UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, ~~2019~~2020


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From ______ to ______ .

Commission File Number: 001-33093

LIGAND PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware			77-0160744
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3911 Sorrento Valley Boulevard, Suite 110
San Diego
CA			92121
(Address of principal executive offices)			(Zip Code)

(858) 550-7500

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading symbol:	Name of each exchange on which registered:
Common Stock , par value $0.001 per share	LGND	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November ~~6, 2019,~~3, 2020, the registrant had ~~17,563,389~~16,091,319 shares of common stock outstanding.

LIGAND PHARMACEUTICALS INCORPORATED

QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. Condensed Consolidated Financial Statements (unaudited)	54
	Condensed Consolidated Balance Sheets	54
	Condensed Consolidated Statements of Operations	65
	Condensed Consolidated Statements of Comprehensive Income (Loss)	76
	Condensed Consolidated Statements of Stockholders' Equity	87
	Condensed Consolidated Statements of Cash Flows	109
	Notes to Condensed Consolidated Financial Statements	1211
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	2728
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	34
	ITEM 4. Controls and Procedures	34
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings	34
	ITEM 1A. Risk Factors	34
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	3637
	ITEM 3. Defaults Upon Senior Securities	37
	ITEM 4. Mine Safety Disclosures	37
	ITEM 5. Other Information	37
	ITEM 6. Exhibits	38
	SIGNATURE	38


GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation			Definition
~~2018~~2019 Annual Report			Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on February ~~28, 2019~~27, 2020
2019 Notes			$245.0 million aggregate principal amount of convertible senior unsecured notes due 2019
2023 Notes			$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
Ab Initio			Ab Initio Biotherapeutics, Inc.
~~Abvivo~~			~~Abvivo, LLC~~
Amgen			Amgen, Inc.
ANDA			Abbreviated New Drug Application
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Aziyo			Aziyo Med, LLC
~~BeiGene~~			~~BeiGene Switzerland GmbH~~
~~BendaRx~~			~~BendaRx Corp.~~
CE			Captisol-enabled
~~CEO~~			~~Chief Executive Officer~~
Company			Ligand Pharmaceuticals Incorporated, including subsidiaries
~~COPD~~			~~Chronic obstructive pulmonary disease~~
CorMatrix			CorMatrix Cardiovascular, Inc.
CVR			Contingent value right
Crystal			Crystal Bioscience, Inc.
CStone Pharmaceuticals			CStone Pharmaceuticals (Suzhou) Co., Ltd.
CyDex			CyDex Pharmaceuticals, Inc.
Dianomi Therapeutics			Dianomi Therapeutics, Inc.
ESPP			Employee Stock Purchase Plan, as amended and restated
FASB			Financial Accounting Standards Board
FDA			Food and Drug Administration
GAAP			Generally accepted accounting principles in the United States
~~GigaGen~~Gilead			~~GigaGen,~~Gilead Sciences, Inc.
~~GPCR~~			~~G-protein coupled receptor~~
GRA			Glucagon receptor antagonist
~~Hikma~~Icagen			~~Hikma Pharmaceuticals PLC~~
~~IPR&D~~			~~In-process Research and Development~~
~~Kira Pharma~~			~~Kira Pharmaceuticals Ltd.~~Icagen, Inc.
Ligand			Ligand Pharmaceuticals Incorporated, including subsidiaries
~~Marinus Pharmaceuticals~~			~~Marinus Pharmaceuticals, Inc.~~
Metabasis			Metabasis Therapeutics, ~~Inc.~~
~~Metavant~~			~~Metavant Sciences~~
~~Millennium~~			~~Millennium Pharmaceuticals,~~ Inc.
NDA			New Drug Application
~~Novan~~Pfenex			~~Novan,~~Pfenex Inc.
~~Novartis~~			~~Novartis AG~~
~~Nucorion Pharmaceuticals~~			~~Nucorion Pharmaceuticals, Inc.~~
~~Opthea~~			~~Opthea Limited~~
~~OTTI~~			~~Other-than-temporary impairment~~
~~PFS~~			~~Progression-free Survival~~
Pfizer			Pfizer Inc.
~~Q3 2018~~			~~The Company's fiscal quarter ended September 30, 2018~~
Q3 2019			The Company's fiscal quarter ended September 30, 2019
~~Quadriga Bio~~Q3 2020			~~Quadriga Biosciences, Inc.~~The Company's fiscal quarter ended September 30, 2020
Roivant			Roivant Sciences GmbH
Roivant License Agreement			License Agreement, dated March 5, 2018, between Ligand and Roivant
Retrophin			Retrophin, Inc.
~~Roivant~~SBC			~~Roivant Sciences GMBH~~


~~Sage Therapeutics~~			~~Sage Therapeutics, Inc.~~Share-based compensation expense
SEC			Securities and Exchange Commission
~~Seelos Therapeutics~~			~~Seelos Therapeutics, Inc.~~
Selexis			Selexis, SA
~~Sermonix Pharmaceuticals~~			~~Sermonix Pharmaceuticals, LLC~~
sNDA			Supplemental New Drug Application
~~SQ Innovation~~Taurus			~~SQ Innovation, Inc.~~
~~Takeda~~			~~Takeda Pharmaceutical Company~~
~~Talem Therapeutics~~			~~Talem Therapeutics~~Taurus Biosciences, LLC
Teva			Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
Vernalis			Vernalis plc
~~VDP~~			~~Vernalis Design Platform~~
~~Verona Pharma~~			~~Verona Pharma plc~~
Viking			Viking Therapeutics, Inc.
~~WuXi~~xCella			~~WuXi Biologics Ireland Limited~~xCella Biosciences, Inc.
YTD			Year-to-date

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value)


		September 30, 2019		December 31, 2018			September 30, 2020		December 31, 2019
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	225,302	$	117,164	Cash and cash equivalents	$	456,916	$	71,543
Short-term investments	Short-term investments	874,383		601,217		Short-term investments	338,154		998,324
Investment in Viking		49,856		55,448
Accounts receivable, net	Accounts receivable, net	21,958		55,850		Accounts receivable, net	32,907		30,387
Inventory	Inventory	6,565		7,124		Inventory	13,430		7,296
Derivative asset		—		22,576
Income taxes receivable						Income taxes receivable	0		11,361
Other current assets	Other current assets	5,039		11,161		Other current assets	3,191		4,734
Assets held for sale						Assets held for sale	13,143		0
Total current assets	Total current assets	1,183,103		870,540		Total current assets	857,741		1,123,645
Deferred income taxes, net	Deferred income taxes, net	—		46,521		Deferred income taxes, net	27,026		25,608
Intangible assets, net	Intangible assets, net	216,268		219,793		Intangible assets, net	224,582		210,448
Goodwill	Goodwill	93,513		86,646		Goodwill	102,136		95,229
Commercial license and other economic rights, net	Commercial license and other economic rights, net	35,413		31,460		Commercial license and other economic rights, net	10,834		20,090
Property and equipment, net	Property and equipment, net	6,411		5,372		Property and equipment, net	7,157		7,185
Operating lease right-of-use assets	Operating lease right-of-use assets	10,280		—		Operating lease right-of-use assets	4,269		10,353
Other assets	Other assets	2,488		471		Other assets	13,704		2,357
Total assets	Total assets	$	1,547,476	$	1,260,803	Total assets	$	1,247,449	$	1,494,915
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	2,040	$	4,183	Accounts payable	$	10,169	$	2,420
Accrued liabilities	Accrued liabilities	13,060		19,200		Accrued liabilities	14,498		9,836
Income tax payable		16,571		—
Income taxes payable						Income taxes payable	674		0
Current contingent liabilities	Current contingent liabilities	1,794		5,717		Current contingent liabilities	1,194		2,607
Deferred revenue	Deferred revenue	2,230		3,286		Deferred revenue	5,404		2,139
2019 convertible senior notes, net		—		26,433
Derivative liability		—		23,430
Liabilities related to assets held for sale						Liabilities related to assets held for sale	10,361		0
Total current liabilities	Total current liabilities	35,695		82,249		Total current liabilities	42,300		17,002
2023 convertible senior notes, net	2023 convertible senior notes, net	631,533		609,864		2023 convertible senior notes, net	454,973		638,959
Long-term contingent liabilities	Long-term contingent liabilities	7,995		6,825		Long-term contingent liabilities	9,604		6,335
Deferred income taxes, net	Deferred income taxes, net	3,761		—		Deferred income taxes, net	13,508		32,937
Long-term operating lease liabilities	Long-term operating lease liabilities	9,932		—		Long-term operating lease liabilities	3,920		9,970
Other long-term liabilities	Other long-term liabilities	7,979		951		Other long-term liabilities	25,320		22,480
Total liabilities	Total liabilities	696,895		699,889		Total liabilities	549,625		727,683
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; none issued and outstanding at September 30, 2019 and December 31, 2018		—		—
Common stock, $0.001 par value; 60,000 shares authorized; 17,563 and 20,766 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		17		21
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 issued and outstanding at September 30, 2020 and December 31, 2019						Preferred stock, $0.001 par value; 5,000 shares authorized; 0 issued and outstanding at September 30, 2020 and December 31, 2019	0		0
Common stock, $0.001 par value; 60,000 shares authorized; 16,091 and 16,823 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively						Common stock, $0.001 par value; 60,000 shares authorized; 16,091 and 16,823 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	16		17
Additional paid-in capital	Additional paid-in capital	444,587		791,114		Additional paid-in capital	313,057		367,326
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(1,493)		(1,024)		Accumulated other comprehensive loss	(1,441)		(216)
Retained earnings (accumulated deficit)		407,470		(229,197)
Retained earnings						Retained earnings	386,192		400,105
Total stockholders' equity	Total stockholders' equity	850,581		560,914		Total stockholders' equity	697,824		767,232
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	1,547,476	$	1,260,803	Total liabilities and stockholders' equity	$	1,247,449	$	1,494,915

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)


		Three months ended						Nine months ended							Three months ended				Nine months ended
		September 30,						September 30,							September 30,				September 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Revenues:	Revenues:									Revenues:
Royalties	Royalties	$	9,767	$	36,127	$	35,931	$	88,343	Royalties	$	9,005	$	9,767	$	22,751	$	35,931
Material sales		6,849		7,027		24,357		19,030
License fees, milestones and other revenues		8,192		2,509		32,991		84,490
Captisol										Captisol	23,389		6,849		68,966		24,357
Contract revenue										Contract revenue	9,454		8,192		24,712		32,991
Total revenues	Total revenues	24,808		45,663		93,279		191,863		Total revenues	41,848		24,808		116,429		93,279
Operating costs and expenses:	Operating costs and expenses:									Operating costs and expenses:
Cost of material sales		3,147		1,460		9,410		3,382
Cost of Captisol										Cost of Captisol	6,353		3,147		18,680		9,410
Amortization of intangibles	Amortization of intangibles	3,552		5,725		10,560		12,309		Amortization of intangibles	3,875		3,552		11,285		10,560
Research and development	Research and development	13,742		5,483		37,244		19,023		Research and development	12,853		13,742		37,476		37,244
General and administrative	General and administrative	9,525		9,633		31,607		26,571		General and administrative	15,020		9,525		34,353		31,607
Total operating costs and expenses	Total operating costs and expenses	29,966		22,301		88,821		61,285		Total operating costs and expenses	38,101		29,966		101,794		88,821
Gain from sale of Promacta license	Gain from sale of Promacta license	—		—		812,797		—		Gain from sale of Promacta license	0		0		0		812,797
Income (loss) from operations	Income (loss) from operations	(5,158)		23,362		817,255		130,578		Income (loss) from operations	3,747		(5,158)		14,635		817,255
Other income (expense):	Other income (expense):									Other income (expense):
Gain (loss) from Viking		(10,520)		62,398		(5,592)		124,206
Loss from short-term investments										Loss from short-term investments	(9,862)		(13,297)		(17,143)		(8,524)
Interest income	Interest income	7,396		5,474		22,590		9,111		Interest income	991		7,396		7,690		22,590
Interest expense	Interest expense	(8,993)		(11,200)		(26,911)		(28,133)		Interest expense	(6,269)		(8,993)		(21,030)		(26,911)
Other expense, net		(2,596)		(808)		(2,528)		(5,643)
Other income (expense), net										Other income (expense), net	(219)		181		1,940		404
Total other income (loss), net	Total other income (loss), net	(14,713)		55,864		(12,441)		99,541		Total other income (loss), net	(15,359)		(14,713)		(28,543)		(12,441)
Income (loss) before income taxes	Income (loss) before income taxes	(19,871)		79,226		804,814		230,119		Income (loss) before income taxes	(11,612)		(19,871)		(13,908)		804,814
Income tax benefit (expense)	Income tax benefit (expense)	4,620		(11,864)		(168,147)		(44,316)		Income tax benefit (expense)	4,911		4,620		5,162		(168,147)
Net income (loss)	Net income (loss)	$	(15,251)	$	67,362	$	636,667	$	185,803	Net income (loss)	$	(6,701)	$	(15,251)	$	(8,746)	$	636,667

Basic net income (loss) per share	Basic net income (loss) per share	$	(0.81)	$	3.19	$	32.51	$	8.77	Basic net income (loss) per share	$	(0.42)	$	(0.81)	$	(0.54)	$	32.51
Shares used in basic per share calculations	Shares used in basic per share calculations	18,770		21,148		19,586		21,189		Shares used in basic per share calculations	16,082		18,770		16,222		19,586

Diluted net income (loss) per share	Diluted net income (loss) per share	$	(0.81)	$	2.80	$	31.29	$	7.61	Diluted net income (loss) per share	$	(0.42)	$	(0.81)	$	(0.54)	$	31.29
Shares used in diluted per share calculations	Shares used in diluted per share calculations	18,770		24,052		20,349		24,430		Shares used in diluted per share calculations	16,082		18,770		16,222		20,349

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)


		Three months ended						Nine months ended							Three months ended				Nine months ended
		September 30,						September 30,							September 30,				September 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Net income (loss):	Net income (loss):	$	(15,251)	$	67,362	$	636,667	$	185,803	Net income (loss):	$	(6,701)	$	(15,251)	$	(8,746)	$	636,667
Unrealized net gain (loss) on available-for-sale securities, net of tax	Unrealized net gain (loss) on available-for-sale securities, net of tax	(187)		87		546		73		Unrealized net gain (loss) on available-for-sale securities, net of tax	(54)		(187)		(84)		546
Foreign currency translation	Foreign currency translation	(764)		—		(1,015)		—		Foreign currency translation	923		(764)		(1,141)		(1,015)

Comprehensive income (loss)	Comprehensive income (loss)	$	(16,202)	$	67,449	$	636,198	$	185,876	Comprehensive income (loss)	$	(5,832)	$	(16,202)	$	(9,971)	$	636,198

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(in thousands)


		Common Stock					Additional paid in capital		Accumulated other comprehensive income (loss)		Retain earnings (Accumulated deficit)			Total stockholders' equity			Common Stock				Additional paid in capital		Accumulated other comprehensive income (loss)		Retained earnings		Total stockholders' equity
		Shares	Amount													Accumulated other comprehensive income (loss)		Retained earnings		Total stockholders' equity
Balance at January 1, 2019		20,765	$	21	$	791,114							$	(1,024)	$							(229,197)	$	560,914
Issuance of common stock under employee stock compensation plans, net		135	—		(991)		—		—		(991)
Share-based compensation		—	—		5,347		—		—		5,347
Repurchase of common stock		(1,236)	(1)		(151,584)		—		—		(151,585)
Unrealized net gain on available-for-sale securities, net of deferred tax		—	—		—		230		—		230
Foreign currency translation adjustment		—	—		—		291		—		291
Other tax adjustments		—	—		(569)		—		—		(569)
Net income		—	—		—		—		666,337		666,337
Balance at March 31, 2019		19,664	$	20	$	643,317	$	(503)	$	437,140	$	1,079,974
Issuance of common stock under employee stock compensation plans, net		17	—		740		—		—		740
Share-based compensation		—	—		6,571		—		—		6,571
Repurchase of common stock		(291)	(1)		(33,716)		—		—		(33,717)
Unrealized net gain on available-for-sale securities, net of deferred tax		—	—		—		503		—		503
Foreign currency translation adjustment		—	—		—		(542)		—		(542)
Other tax adjustments		—	—		2,343		—		—		2,343
Net loss		—	—		—		—		(14,419)		(14,419)
Balance at June 30, 2019		19,390	$	19	$	619,255	$	(542)	$	422,721	$	1,041,453
Balance at January 1, 2020														Balance at January 1, 2020	16,823		$	17	$	367,326	$	(216)	$	400,105	$	767,232
Issuance of common stock under employee stock compensation plans, net	Issuance of common stock under employee stock compensation plans, net	7	—		199		—		—		199			Issuance of common stock under employee stock compensation plans, net	105		—		(1,008)		—		—		(1,008)
Share-based compensation	Share-based compensation	—	—		6,297		—		—		6,297			Share-based compensation	—		—		5,653		—		—		5,653
Repurchase of common stock	Repurchase of common stock	(1,834)	(2)		(181,186)		—		—		(181,188)			Repurchase of common stock	(878)		(1)		(73,286)		—		—		(73,287)
Unrealized net loss on available-for-sale securities, net of deferred tax	Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(187)		—		(187)			Unrealized net loss on available-for-sale securities, net of deferred tax	—		—		—		(2,772)		—		(2,772)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		(764)		—		(764)			Foreign currency translation adjustment	—		—		—		(1,879)		—		(1,879)
Other tax adjustments		—	—		22		—		—		22
Reacquisition of equity due to 2023 debt extinguishment, net of tax														Reacquisition of equity due to 2023 debt extinguishment, net of tax	—		—		(2,745)		—		—		(2,745)
Cumulative-effect adjustment from adoption of ASU 2016-13, net of tax														Cumulative-effect adjustment from adoption of ASU 2016-13, net of tax	—		—		—		—		(5,167)		(5,167)
Net loss	Net loss	—	—		—		—		(15,251)		(15,251)			Net loss	—		—		—		—		(24,131)		(24,131)
Balance at September 30, 2019		17,563	$	17	$	444,587	$	(1,493)	$	407,470	$	850,581
Balance at March 31, 2020														Balance at March 31, 2020	16,050		$	16	$	295,940	$	(4,867)	$	370,807	$	661,896
Issuance of common stock under employee stock compensation plans, net														Issuance of common stock under employee stock compensation plans, net	21		—		1,128		—		—		1,128
Share-based compensation														Share-based compensation	—		—		7,359		—		—		7,359
Unrealized net gain on available-for-sale securities, net of deferred tax														Unrealized net gain on available-for-sale securities, net of deferred tax	—		—		—		2,742		—		2,742
Foreign currency translation adjustment														Foreign currency translation adjustment	—		—		—		(185)		—		(185)
Adjustment on reacquisition of equity due to 2023 debt extinguishment, net of tax														Adjustment on reacquisition of equity due to 2023 debt extinguishment, net of tax	—		—		(23)		—		—		(23)
Net income														Net income	—		—		—		—		22,086		22,086
Balance at June 30, 2020														Balance at June 30, 2020	16,071		$	16	$	304,404	$	(2,310)	$	392,893	$	695,003
Issuance of common stock under employee stock compensation plans, net														Issuance of common stock under employee stock compensation plans, net	20		—		910		—		—		910
Share-based compensation														Share-based compensation	—		—		7,740		—		—		7,740
Unrealized net loss on available-for-sale securities, net of deferred tax														Unrealized net loss on available-for-sale securities, net of deferred tax	—		—		—		(54)		—		(54)
Foreign currency translation adjustment														Foreign currency translation adjustment	—		—		—		923		—		923
Other														Other	—		—		3		—		—		3
Net loss														Net loss	—		—		—		—		(6,701)		$	(6,701)
Balance at September 30, 2020														Balance at September 30, 2020	16,091		$	16	$	313,057	$	(1,441)	$	386,192	$	697,824


		Common Stock					Additional paid in capital		Accumulated other comprehensive income (loss)		Accumulated deficit			Total stockholders' equity			Common Stock				Additional paid in capital		Accumulated other comprehensive income (loss)		Retained earnings (Accumulated deficit)		Total stockholders' equity
		Shares	Amount													Accumulated other comprehensive income (loss)		Retained earnings (Accumulated deficit)		Total stockholders' equity
Balance at January 1, 2018		21,149	$	21	$	798,205							$	2,486	$							(400,924)	$	399,788
Balance at January 1, 2019														Balance at January 1, 2019	20,765		$	21	$	791,114	$	(1,024)	$	(229,197)	$	560,914
Issuance of common stock under employee stock compensation plans, net	Issuance of common stock under employee stock compensation plans, net	166	1		5,118		—		—		5,119			Issuance of common stock under employee stock compensation plans, net	135		—		(991)		—		—		(991)
Reclassification of equity component of currently redeemable convertible notes		—	—		2,781		—		—		2,781
Share-based compensation														Share-based compensation	—		—		5,347		—		—		5,347
Repurchase of common stock														Repurchase of common stock	(1,236)		(1)		(151,584)		—		—		(151,585)
Unrealized net gain on available-for-sale securities, net of deferred tax														Unrealized net gain on available-for-sale securities, net of deferred tax	—		—		—		230		—		230
Foreign currency translation adjustment														Foreign currency translation adjustment	—		—		—		291		—		291
Other tax adjustments														Other tax adjustments	—		—		(569)		—		—		(569)
Net income														Net income	—		—		—		—		666,337		666,337
Balance at March 31, 2019														Balance at March 31, 2019	19,664		$	20	$	643,317	$	(503)	$	437,140	$	1,079,974
Issuance of common stock under employee stock compensation plans, net														Issuance of common stock under employee stock compensation plans, net	17		—		740		—		—		740
Share-based compensation														Share-based compensation	—		—		6,571		—		—		6,571
Repurchase of common stock														Repurchase of common stock	(291)		(1)		(33,716)		—		—		(33,717)
Unrealized net gain on available-for-sale securities, net of deferred tax														Unrealized net gain on available-for-sale securities, net of deferred tax	—		—		—		503		—		503
Foreign currency translation adjustment														Foreign currency translation adjustment	—		—		—		(542)		—		(542)
Other tax adjustments														Other tax adjustments	—		—		2,343		—		—		2,343
Net loss														Net loss	—		—		—		—		(14,419)		(14,419)
Balance at June 30, 2019														Balance at June 30, 2019	19,390		$	19	$	619,255	$	(542)	$	422,721	$	1,041,453
Issuance of common stock under employee stock compensation plans, net														Issuance of common stock under employee stock compensation plans, net	7		—		199		—		—		199
Share-based compensation	Share-based compensation	—	—		4,555		—		—		4,555			Share-based compensation	—		—		6,297		—		—		6,297
Repurchase of common stock	Repurchase of common stock	(13)	(1)		(1,894)		—		—		(1,895)			Repurchase of common stock	(1,834)		(2)		(181,186)		—		—		(181,188)
Unrealized net loss on available-for-sale securities, net of deferred tax	Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(110)		—		(110)			Unrealized net loss on available-for-sale securities, net of deferred tax	—		—		—		(187)		—		(187)
Cumulative-effect adjustment from adoption of ASU 2016-01		—	—		—		(2,662)		2,662		—
Cumulative-effect adjustment from adoption of ASU 2014-09, net of tax		—	—		—		—		25,583		25,583
Net income		—	—		—		—		45,279		45,279
Balance at March 31, 2018		21,302	$	21	$	808,765	$	(286)	$	(327,400)	$	481,100
Issuance of common stock under employee stock compensation plans, net		60	—		3,296		—		—		3,296
Reclassification of equity component of currently redeemable convertible notes		—	—		16,078		—		—		16,078
Share-based compensation		—	—		4,812		—		—		4,812
Repurchase of common stock		(267)	—		(50,832)		—		—		(50,832)
Unrealized net loss on available-for-sale securities, net of deferred tax		—	—		—		(495)		—		(495)
Derivative associated with 2019 Notes and Bond Hedge		—	—		(1,559)		—		—		(1,559)
Loss on settlement of 2019 Notes		—	—		590		—		—		590
Tax effect on 2019 Notes transactions		—	—		67		—		—		67
Derivative associated with 2023 Notes and Bond Hedge		—	—		(1,807)		—		—		(1,807)
Warrant derivative in connection with 2023 Notes		—	—		97,805		—		—		97,805
Tax effect for 2023 Notes transactions		—	—		(3,240)		—		—		(3,240)
Foreign currency translation adjustment														Foreign currency translation adjustment	—		—		—		(764)		—		(764)
Other tax adjustments	Other tax adjustments	—	—		208		630		—		838			Other tax adjustments	—		—		22		—		—		22
Net income		—	—		—		—		73,160		73,160
Balance at June 30, 2018		21,095	$	21	$	874,183	$	(151)	$	(254,240)	$	619,813
Issuance of common stock under employee stock compensation plans, net		131	—		6,788		—		—		6,788
Share-based compensation		—	—		5,470		—		—		5,470
Other comprehensive income		—	—		—		87		—		87
Other tax adjustments		—	—		(2,964)		—		2,964		—
Net income		—	—		—		—		67,362		67,362
Balance at September 30, 2018		21,226	21		883,477		(64)		(183,914)		699,520
Net loss														Net loss	—		—		—		—		(15,251)		(15,251)
Balance at September 30, 2019														Balance at September 30, 2019	17,563		$	17	$	444,587	$	(1,493)	$	407,470	$	850,581

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


		Nine months ended							Nine months ended
		September 30,							September 30,
		2019		2018			2020		2019
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income		$	636,667	$	185,803
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)						Net income (loss)	$	(8,746)	$	636,667
Adjustments to reconcile net income to net cash provided by (used in) operating activities:						Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain from sale of Promacta license	Gain from sale of Promacta license	(812,797)		—		Gain from sale of Promacta license	0		(812,797)
Non-cash change in estimated fair value of contingent liabilities		762		3,637
Depreciation and amortization		12,560		11,421
Amortization of discount on investments, net		(7,477)		(3,780)
Change in estimated fair value of contingent liabilities						Change in estimated fair value of contingent liabilities	(397)		762
Depreciation and amortization of intangible assets						Depreciation and amortization of intangible assets	12,645		11,648
Amortization of premium (discount) on investments, net						Amortization of premium (discount) on investments, net	1,507		(7,477)
Amortization of debt discount and issuance fees	Amortization of debt discount and issuance fees	22,562		25,155		Amortization of debt discount and issuance fees	17,743		22,562
Amortization of other economic rights		9,135		—
Amortization of commercial license and other economic rights						Amortization of commercial license and other economic rights	2,505		10,047
Gain on debt extinguishment						Gain on debt extinguishment	(659)		0
Share-based compensation	Share-based compensation	18,215		14,837		Share-based compensation	20,752		18,215
Deferred income taxes	Deferred income taxes	57,766		44,149		Deferred income taxes	(19,311)		57,766
Loss (gain) from investment in Viking		5,592		(121,679)
Loss from short-term investments						Loss from short-term investments	17,143		8,524
Other	Other	(1,249)		(976)		Other	(1,525)		(4,253)
Royalties recorded in retained earnings upon adoption of ASC 606		—		32,707
Changes in operating assets and liabilities, net of effects from acquisition:
Changes in operating assets and liabilities, net of acquisition:						Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net	Accounts receivable, net	33,892		(21,380)		Accounts receivable, net	(5,080)		33,892
Inventory	Inventory	(1,500)		(3,763)		Inventory	(4,914)		(1,500)
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	(3,374)		(42)		Accounts payable and accrued liabilities	9,894		(3,302)
Income tax payable		16,571		—
Income tax receivable and payable						Income tax receivable and payable	12,026		16,571
Other economic rights	Other economic rights	(12,000)		—		Other economic rights	0		(12,000)
Other	Other	2,678		(4,602)		Other	466		2,678
Net cash provided by (used in) operating activities		(21,997)		161,487
Net cash provided by (used in ) operating activities						Net cash provided by (used in ) operating activities	54,049		(21,997)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from sale of Promacta license	Proceeds from sale of Promacta license	812,797		—		Proceeds from sale of Promacta license	0		812,797
Purchase of short-term investments	Purchase of short-term investments	(1,682,586)		(1,158,290)		Purchase of short-term investments	(337,016)		(1,682,586)
Proceeds from sale of short-term investments	Proceeds from sale of short-term investments	144,182		75,993		Proceeds from sale of short-term investments	389,296		144,182
Proceeds from maturity of short-term investments	Proceeds from maturity of short-term investments	1,274,851		381,690		Proceeds from maturity of short-term investments	589,155		1,274,851
Cash paid for acquisition, net of cash acquired	Cash paid for acquisition, net of cash acquired	(11,840)		—		Cash paid for acquisition, net of cash acquired	(26,857)		(11,840)
Cash paid for equity method investment	Cash paid for equity method investment	(1,000)		—		Cash paid for equity method investment	(500)		(1,000)
Other	Other	(6,307)		2,036		Other	(228)		(6,307)
Net cash provided by (used in) investing activities		530,097		(698,571)
Net cash provided by investing activities						Net cash provided by investing activities	613,850		530,097

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Repayment of debt		(27,323)		(21,785)
Gross proceeds from issuance of 2023 Notes		—		750,000
Payment of debt issuance costs		—		(16,900)
Proceeds from issuance of warrants		—		90,000
Purchase of convertible bond hedge		—		(140,250)
Repurchase of 2023 Notes						Repurchase of 2023 Notes	(203,210)		0
Repayment of 2019 Notes						Repayment of 2019 Notes	0		(27,323)
Proceeds from convertible bond hedge settlement	Proceeds from convertible bond hedge settlement	12,401		52,129		Proceeds from convertible bond hedge settlement	0		12,401
Payments to convert holders for bond conversion		(12,401)		—
Payments to convertible bond holders for bond conversion						Payments to convertible bond holders for bond conversion	0		(12,401)
Net proceeds from stock option exercises and ESPP	Net proceeds from stock option exercises and ESPP	2,856		18,860		Net proceeds from stock option exercises and ESPP	2,459		2,856
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(2,906)		(3,657)		Taxes paid related to net share settlement of equity awards	(1,429)		(2,906)
Share repurchase	Share repurchase	(371,106)		(52,727)		Share repurchase	(73,287)		(371,106)
Payments to CVR Holders	Payments to CVR Holders	(3,000)		—		Payments to CVR Holders	(2,325)		(3,000)
Net cash provided by (used in) financing activities		(401,479)		675,670
Other						Other	(5,224)		0
Net cash used in financing activities						Net cash used in financing activities	(283,016)		(401,479)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(88)		—		Effect of exchange rate changes on cash	(50)		(88)
Net increase in cash, cash equivalents and restricted cash	Net increase in cash, cash equivalents and restricted cash	106,533		138,586		Net increase in cash, cash equivalents and restricted cash	384,833		106,533
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	119,780		20,620		Cash, cash equivalents and restricted cash at beginning of period	72,273		119,780
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	226,313	$	159,206	Cash, cash equivalents and restricted cash at end of period	$	457,106	$	226,313

109


Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Interest paid	Interest paid	$	3,015	$	1,513	Interest paid	$	2,531	$	3,015
Taxes paid	Taxes paid	$	93,817	$	341	Taxes paid	$	2,130	$	93,817
Restricted cash in other current assets	Restricted cash in other current assets	$	1,011	$	—	Restricted cash in other current assets	$	190	$	1,011

Supplemental schedule of non-cash activity:	Supplemental schedule of non-cash activity:					Supplemental schedule of non-cash activity:

Accrued fixed asset purchases	Accrued fixed asset purchases	$	—	$	4	Accrued fixed asset purchases	$	381	$	0

Unrealized gain on AFS investments		$	699	$	—
Excess of conversion value over the principal amount of 2019 Notes paid in shares		$	—	$	(31,571)
Value of shares reacquired under convertible bond hedge transaction entered into with 2019 Notes		$	—	$	31,571
Accrued inventory purchases						Accrued inventory purchases	$	1,390	$	0
Accrued financing lease payment						Accrued financing lease payment	$	2,500	$	0
Unrealized gain (loss) on AFS investments						Unrealized gain (loss) on AFS investments	$	(109)	$	699

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Our condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our ~~2018~~2019 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.

Reclassifications

Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, effective the second quarter of 2020, we began to include our investment in Viking ~~warrants~~in “short-term investments” in the condensed consolidated balance sheet, and present “gain (loss) from short-term investments” in the condensed consolidated statements of operations to include both the gain (loss) from investment in Viking and other short-term investments, which was ~~reclassified from~~previously included in “other ~~current assets” to “investment in Viking” in~~income, net”. As a result, the audited consolidated balance sheet as of December 31, ~~2018.~~

~~Prior Period Immaterial Error~~

~~During~~2019 and the second quarter of 2019, in connection with the preparation of our condensed consolidated statement of cash flows for the six months ended June 30, 2019, an immaterial error was identified in our condensed consolidated statement of cash flows for the three months ended March 31, 2019 by including a $4.6 million accrued liability for the share repurchase as of December 31, 2018 that was paid during the first quarter of 2019 in the cash flows for operating activities instead of financing activities. Our condensed consolidated statement of cash flows for the three months ended March 31, 2019 understated cash flows provided by operating activities by $4.6 million and understated cash flows used in financing activities by $4.6 million. We evaluated the materiality of the error considering both quantitative and qualitative factors as required by authoritative guidance and determined the related impact was not material to our previously issued condensed consolidated financial statements. The immaterial error has been corrected in our condensed consolidated statement of cash flows for the six months ended June 30, 2019 included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. The immaterial error did not impact our condensed consolidated balance sheet as of March 31, 2019, nor did it impact our condensed consolidated statements of operations ~~comprehensive income or equity~~ for the three and nine months ended ~~March 31, 2019.~~September 30, 2019 have been reclassified to conform to the current period presentation.

Significant Accounting Policies

We have described our significant accounting policies in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our ~~2018~~2019 Annual Report.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.

Impact of COVID-19 Pandemic

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees and partners, patients, communities and business operations, as well as the U.S. and global economy and financial markets. International and U.S. governmental authorities in impacted regions have taken actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have restricted in-person access to our executive offices, our administrative employees are mostly working remotely, and we have limited the number of staff in our research and development laboratories and other facilities. The continued spread of the COVID-19 pandemic and the measures taken by the governments of countries have affected, and could continue to affect, our business and the business of our partners, including future disruptions to our supply chain and the manufacture or shipment of drug substance and finished drug product for Captisol, delays by us or our partners in the initiation or enrollment of patients in clinical trials, discontinuations by patients enrolled in clinical trials, difficulties launching or commercializing products and other related activities, which could delay ongoing clinical trials, increase development costs, reduce royalty revenues and have a material adverse effect on our business, financial condition and results of operations. Several of our partners have reported that their operations have been impacted including delays in research and development programs and deprioritizing clinical trials in favor of treating patients who have contracted the virus or to prevent the spread of the virus. This may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are currently enrolled in the clinical trials being conducted by us or our partners. In addition, certain of our partners have reported negative impacts on product sales which will impact our royalty revenues.

Some of our partners are working to develop drugs to treat COVID-19. For example, we are supplying Captisol to partners, including Gilead for Veklury® (remdesivir), the first FDA-approved treatment for COVID-19 for the treatment of patients with COVID-19 requiring hospitalization and, as a result, we have extended our Captisol supply agreement with Gilead until September 2030 and worked to increase our manufacturing of Captisol to meet this increased demand. We believe our existing production capacity, together with our planned expansion, will provide adequate supply of Captisol and do not expect any significant risk or disruption to our supply chain for the foreseeable future. In addition, certain of our OmniAb and Vernalis partners have initiated antibody discovery programs for the potential treatment of COVID-19.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, the businesses of our partners, our results of operations and our financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact, including the timing and extent of governments reopening or further restricting activities, and the economic impact on local, regional, national and international markets.

Accounting Standards Recently Adopted

~~Leases~~ ~~- In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. This standard requires organizations that lease assets to recognize the assets and liabilities created by those leases. The standard also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In 2018, the FASB issued guidance that provides an optional transition method for adoption of this standard, which allows organizations to initially apply the new requirements at the effective date, recognize a cumulative effect adjustment to the opening balance of retained earnings, and continue to apply the legacy guidance in ASC 840, ~~Leases (Topic 840), including its disclosure~~

requirements, in the comparative periods presented. We adopted this standard on January 1, 2019 by applying this optional transition method. For leases with a term of 12 months or less, we elected to not recognize lease assets and lease liabilities and expense the leases over a straight-line basis for the term of those leases. In addition, we elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We did not elect to use the hindsight practical expedient to determine the lease term or evaluate impairment for existing leases. We continue to report our financial position as of December 31, 2018 under Topic 840 in our audited consolidated balance sheet. The adoption of this standards update resulted in the recognition of right-of-use assets of approximately $5.2 million and lease liabilities of approximately $5.9 million on our unaudited condensed consolidated balance as of January 1, 2019, with no material impact to our consolidated statement of operations. See ~~Note 9, Leases, for further information regarding the impact of the adoption of ASU 2016-02 on our financial statements.~~

~~Accounting Standards Not Yet Adopted~~

~~Financial Instruments~~Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. ~~ASU 2016-13 is effective for us beginning in the first quarter of 2020, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.~~ This standard includes our financial instruments, such as accounts receivable, investments that are generally of high credit quality, and commercial license rights. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new guidance requires us to identify, analyze,

document and support new methodologies for quantifying expected credit loss estimates for our financial instruments, using information such as historical experience and current economic conditions, plus the use of reasonable supportable forecast

information. We adopted ASU 2016-13 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance sheet of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment, net of tax, recorded on January 1, 2020, is approximately $5.2 million on our unaudited condensed consolidated balance sheet as of January 1, 2020. Results for periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported under previously applicable accounting standards. See additional disclosure on credit losses under “Short-term Investments”, “Accounts Receivable and Allowance for Credit Losses” and “Commercial License and Other Economic Rights” discussed below.

Goodwill Impairment Testing - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, although it cannot exceed the total amount of goodwill allocated to that reporting unit. ~~This~~We adopted this standard ~~is effective for us beginning in the first quarter of~~on January 1, 2020, ~~with earlier adoption permitted. We do not expect~~and the adoption todid not have a material impact on our condensed consolidated financial statements.

Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. ~~ASU 2018-13 is effective for us beginning in~~We adopted this standard on January 1, 2020, and the ~~first quarter of 2020, with earlier~~ adoption ~~permitted. We are currently evaluating the~~did not have a material impact ~~of this ASU~~ on our condensed consolidated financial statements.

Collaborative Arrangements - In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (Topic 808). The new standard clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, Revenue from Contracts with Customers, when the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.

Income Taxes - In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The standard is expected to reduce cost and complexity related to accounting for income taxes. The new guidance eliminates certain exceptions and clarifies and amends existing guidance to promote consistent application among reporting entities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. We adopted this standard on a prospective basis on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The new guidance simplifies accounting for convertible instruments by removing major separation models required under current GAAP. This standard removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This standard is effective for fiscal years beginning after December 15, ~~2019, and~~2023, including interim periods within those fiscal years. Early adoption is permitted, ~~in any interim period for entities that have adopted ASC 606. The standard should~~but no earlier than fiscal years beginning after December 15, 2020 and adoption must be ~~applied retrospectively to~~as of the ~~period when we initially adopted ASC 606.~~beginning of the Company’s annual fiscal year. We ~~do not expect~~are currently evaluating the ~~adoption~~impact of this standard ~~to have a material impact~~ on our consolidated financial ~~statements.~~statements and related disclosures.

We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our condensed consolidated financial statements or disclosures.

Revenue

Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, and contract revenue for services, license fees and development, regulatory and sales based milestone ~~payments, and other service revenue.~~payments.

Royalties ~~License Fees and Milestones~~

We receive royalty revenue on sales by our partners of products covered by patents that we own. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded ~~no sooner than~~when the underlying ~~sale.~~sale occurs. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.

Contract Revenue

Our ~~contracts with customers often will include~~contract revenue includes service revenue, license fees and future contingent milestone based payments. We recognize service revenue for contracted R&D services performed for our customers over time. We measure our progress using an input method based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make estimates and use judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.

We include contingent milestone based payments in the estimated transaction price when there is a basis to reasonably estimate the amount of the payment. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon or after the development milestone or regulatory approval.

~~Material~~Captisol Sales

We recognize revenue when control of Captisol material is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. We have elected to recognize the cost for freight and shipping when or after

control over Captisol material has transferred to the customer as an expense in cost of Captisol. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.

Deferred Revenue

Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. ~~We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of material sales.~~

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Except for royalty revenue and certain service revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the three and nine months ended September 30, 2020, the amount recognized as revenue that was previously deferred was $5.8 million and $8.3 million, respectively. During the three and nine months ended September 30, 2019, the amount recognized as revenue that was previously deferred was $1.0 million and $5.0 million, respectively. ~~During~~We expect to satisfy the ~~three and nine months ended September 30, 2018,~~performance obligations related to long-term deferred revenue within the ~~amount recognized as revenue that was previously deferred was not material.~~next 3 years.

Disaggregation of Revenue

The following table represents disaggregation of ~~Royalties, Material Sales~~royalties, Captisol and ~~License fees, milestone and other~~contract revenue (in thousands):


		Three months ended				Nine months ended
		September 30,				September 30,
		2020		2019		2020		2019
Royalties
	Kyprolis	$	6,923	$	7,602	$	16,809	$	16,317
	Evomela	1,802		1,515		4,577		3,570
	Other	280		650		1,365		1,851
	Promacta	0		0		0		14,193
		$	9,005	$	9,767	$	22,751	$	35,931

Captisol		$	23,389	$	6,849	$	68,966	$	24,357

Contract
	Service Revenue	$	7,341	$	4,548	$	15,280	$	12,990
	License Fees	158		243		1,793		3,083
	Milestone	960		2,674		4,766		15,425
	Other	995		727		2,873		1,493
		$	9,454	$	8,192	$	24,712	$	32,991

Total		$	41,848	$	24,808	$	116,429	$	93,279

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Royalties
Promacta $ — $ 27,812 $ 14,193 $ 68,191
Kyprolis 7,602 6,286 16,317 14,411
Evomela 1,515 1,356 3,570 4,116
Other 650 673 1,851 1,625
$ 9,767 $ 36,127 $ 35,931 $ 88,343
Material Sales
Captisol $ 6,849 $ 7,027 $ 24,357 $ 19,030
License fees, milestones and other
License Fees $ 243 $ 265 $ 3,083 $ 75,201
Milestone 4,790 1,308 20,897 6,052
Other 3,159 936 9,011 3,237
$ 8,192 $ 2,509 $ 32,991 $ 84,490
Total $ 24,808 $ 45,663 $ 93,279 $ 191,863

Short-term Investments

Our investments, excluding investment in Viking, consist of the following at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


		September 30, 2019														December 31, 2018															September 30, 2020				December 31, 2019
		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value			Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value

Short-term investments	Short-term investments																	Short-term investments
Bank deposits	Bank deposits	$	490,828	$	294	$	(11)	$	491,111	$	311,066	$	26	$	(29)	$	311,063	Bank deposits	$	68,226	$	101	$	0	$	68,327	$	411,690	$	188	$	(3)	$	411,875
Corporate bonds	Corporate bonds	58,581		240		—		58,821		53,223		1		(45)		53,179		Corporate bonds	27,125		102		0		27,227		63,818		161		0		63,979
Commercial paper	Commercial paper	322,160		86		(29)		322,217		225,731		8		(76)		225,663		Commercial paper	47,943		60		0		48,003		210,525		43		(16)		210,552
U.S. Government bonds		—		—		—		—		7,982		—		(9)		7,973
Municipal bonds		—		—		—		—		2,017		—		(4)		2,013
Corporate equity securities⁽¹⁾		4,505		325		(2,661)		2,169		135		1,191		—		1,326
Corporate equity securities																		Corporate equity securities	4,484		415		(2,624)		2,275		4,506		416		(1,850)		3,072
Mutual fund																		Mutual fund	151,513		204		0		151,717		250,635		0		(249)		250,386
Warrants	Warrants	—		65		—		65		—		—		—		—		Warrants	0		155		0		155		0		125		0		125
		$	876,074	$	1,010	$	(2,701)	$	874,383	$	600,154	$	1,226	$	(163)	$	601,217		$	299,291	$	1,037	$	(2,624)	$	297,704	$	941,174	$	933	$	(2,118)	$	939,989

~~(1) The~~

In addition, as of September 30, 2020 and December 31, 2019, we recorded shares of Viking common stock we own at fair value of $33.9 million and $48.4 million, respectively, in “Short-term investments” in our consolidated balance sheets. We also own warrants to purchase up to 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in “Short-term investments” in our consolidated balance sheet at fair value of $6.6 million and $9.9 million at September 30, 2020 and December 31, 2019, respectively.

Gain (loss) from short-term investments on our condensed consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities.

For available-for-sale debt securities with unrealized losses, the new credit losses standard (Topic 326) now requires allowances to be recorded instead of reducing the amortized ~~cost for corporate equity securities represents the original purchase~~ cost of the ~~equity securities.~~investment. This standard limits the amount of credit losses to be recognized for available-for-sale debt securities to be the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The provisions of the new credit losses standard did not have a material impact on our available-for-sale debt securities during the three and nine months ended September 30, 2020.

The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):


	September 30, 2020
	Amortized Cost		Fair Value
Within one year	$	121,452	$	121,610
After one year through five years	21,842		21,947
After five years	0		0
Total	$	143,294	$	143,557

The following table summarizes our available-for-sale debt securities in an unrealized loss position (in thousands):


	Less than 12 months				12 months or greater				Total
	Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value
September 30, 2020
Bank deposits	$	0	$	5,011	$	0	$	0	$	0	$	5,011
Corporate bonds	(0.4)		3,007		0		0		(0.4)		3,007
Total	$	(0.4)	$	8,018	$	0	$	0	$	(0.4)	$	8,018

December 31, 2019
Bank deposits	$	(3)	$	58,584	$	0	$	0	$	(3)	$	58,584
Commercial paper	(16)		79,363		0		0		(16)		79,363
Total	$	(19)	$	137,947	$	0	$	0	$	(19)	$	137,947

Our investment policy is capital preservation and we only invested in U.S.-dollar denominated investments. We held a total of 2 positions which were in an unrealized loss position as of September 30, 2020. We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses are largely due to changes in interest rates and not to unfavorable changes in the credit quality associated with these securities that impacted our assessment on collectability of principal and interest. We do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of the amortized cost basis. Accordingly, 0 credit losses were recognized for the three and nine months ended September 30, 2020.

Accounts Receivable and Allowance for Credit Losses

Our accounts receivable arise primarily from sales on credit to customers. We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers. During the three and nine months ended September 30, 2020, we considered the current and expected future economic and market conditions including, but not limited to, the anticipated unfavorable impacts of the surrounding novel coronavirus (COVID-19) pandemic on our business and recorded an adjustment of $(0.1) million and $0.2 million, of allowance for credit losses, respectively, as of September 30, 2020.

Inventory

Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the first-in, first-out method or the specific identification method.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other identifiable intangible assets consist of the following (in thousands):


		September 30,		December 31,			September 30,		December 31,
		2019		2018			2020		2019
Goodwill	Goodwill	$	93,513	$	86,646	Goodwill	$	102,136	$	95,229
Definite lived intangible assets	Definite lived intangible assets					Definite lived intangible assets
Complete technology	Complete technology	242,813		235,413		Complete technology	257,317		242,813
Less: accumulated amortization⁽¹⁾	Less: accumulated amortization⁽¹⁾	(44,786)		(35,070)		Less: accumulated amortization(1)	(59,869)		(50,203)
Trade name	Trade name	2,642		2,642		Trade name	2,642		2,642
Less: accumulated amortization	Less: accumulated amortization	(1,147)		(1,048)		Less: accumulated amortization	(1,279)		(1,180)
Customer relationships	Customer relationships	29,600		29,600		Customer relationships	40,700		29,600
Less: accumulated amortization	Less: accumulated amortization	(12,854)		(11,744)		Less: accumulated amortization	(14,929)		(13,224)
Total goodwill and other identifiable intangible assets, net	Total goodwill and other identifiable intangible assets, net	$	309,781	$	306,439	Total goodwill and other identifiable intangible assets, net	$	326,718	$	305,677

(1) accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.
(1) Accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.						(1) Accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.

Commercial License and Other Economic Rights

Commercial license and other economic rights consist of the following (in thousands):


	September 30, 2020						December 31, 2019
	Gross		Adjustments(1)		Net		Gross		Adjustments(2)		Net
Aziyo and CorMatrix	$	17,696	$	(9,644)	$	8,052	$	17,696	$	(5,500)	$	12,196
Palvella	10,000		(10,000)		0		10,000		(7,492)		2,508
Selexis and Dianomi	10,602		(7,820)		2,782		10,602		(5,216)		5,386
Total	$	38,298	$	(27,464)	$	10,834	$	38,298	$	(18,208)	$	20,090

September 30, December 31,
2019 2018
Aziyo and CorMatrix $ 17,696 $ 17,696
Novan 12,000 —
Palvella 10,000 10,000
Selexis 8,602 8,602
Dianomi 2,000 —
50,298 36,298
Less: accumulated amortization attributed to principal or research and development (14,885) (4,838)
Total commercial license and other economic rights, net $ 35,413 $ 31,460
(1) Amounts represent accumulated amortization to principal or research and development expenses of $21.5 million and credit loss adjustments of $6.0 million as of September 30, 2020.

(2) Amounts represent accumulated amortization to principal or research and development expenses as of December 31, 2019.

Commercial license and other economics rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, Palvella in December 2018, and Dianomi in January ~~2019 and Novan in May~~ 2019. Commercial license rights acquired are accounted for as financial assets and other economic rights are accounted for as funded research and developments as further discussed below.

In May 2017, we entered into a Royalty Agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. We account for the Aziyo commercial license right as a financial asset, and in accordance with ASC 310, Receivables, we amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the Royalty Agreement with Aziyo as of September 30, ~~2019~~2020 is 23%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest.

In December 2018, we entered into a development funding and royalties agreement with Palvella. Pursuant to the agreement, we may receive up to $8.0 million of milestone payments upon the achievement by Palvella of certain corporate, financing and regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congentia. In addition to the milestone payments, Palvella will pay us tiered royalties from 5.0% to 9.8% based on any aggregate annual worldwide net sales of any PTX-022 products, subject to Palvella’s right to reduce the royalty rates by making payments in certain circumstances. We paid Palvella an upfront payment of $10.0 million, which Palvella is required to use to fund the development of PTX-022. We are not obligated to provide additional funding to Palvella for the development or commercialization of PTX-022. We determined the economic rights related to Palvella should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20, Research and Development Arrangements, and ~~will~~ reduce our asset as the funds are expended by Palvella. ~~We will evaluate~~As of September 30, 2020, the ~~remaining asset~~fund has been fully expended by Palvella and our cost basis for ~~impairment on an ongoing basis. As it is~~

~~anticipated, prior to~~ the ~~receipt of any payments from Palvella that the cost basis will be~~asset has been reduced to zero, we will recognize milestones and royalties as revenue when earned. During the second quarter of 2020, we recorded a $3.0 million milestone from Palvella under contract revenue, which has been included in our condensed consolidated statement of operations for the nine months ended September 30, 2020.

We recorded a $5.5 million pre-tax reserve for credit losses upon adoption of the new credit losses on January 1, 2020. We estimated the credit losses at the individual asset level by considering the performance against the programs, the company operating performance and the macroeconomic forecast. In ~~May 2019,~~addition, we entered into a development funding and royalties agreement with Novan, pursuant to which we will receive certain payments at specified milestones, as well as royalties on any future net sales of SB206, a product candidate being developed to treat molluscum contagiosum, and any other Novan products used for the treatment of molluscum (“Novan Molluscum Products”). We paid Novan an upfront payment of $12.0 million, which Novan is required to use to fund the development of SB206. We are not obligated to provide additional funding to Novan for the development or commercialization of SB206. Pursuanthave judgmentally applied credit loss risk factors to the ~~agreement, we will receive up to $20.0 million of milestone~~future expected payments ~~upon the achievement by Novan of certain regulatory milestones for SB206 or any other Novan Molluscum Product and commercial milestones. In addition~~with consideration given to the ~~milestone payments, Novan will pay us tiered royalties from 7.0%~~timing of the payment. Given the higher inherent credit risk associated with longer term receivables, we applied a lower risk factor to ~~10.0% based on aggregate annual~~the earlier years and progressively higher risk factors to the later years. During the nine months ended September 30, 2020, we further considered the current and expected future economic and market conditions surrounding novel coronavirus (COVID-19) pandemic and recorded an additional $0.5 million reserve for credit losses in other expense, net, ~~sales~~in our condensed consolidated statement of SB206 or any other Novan Molluscum Product in North America. We determined the economic rights related to Novan should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20 and will reduce our asset as the funds are expended by Novan. We will evaluate the remaining asset basis for impairment on an ongoing basis.operations.

See further detail described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our ~~2018~~2019 Annual Report.

~~Viking~~

~~Our equity ownership interest in Viking decreased in~~Other Assets

Other assets consist of the first quarter of 2018 to approximately 12.4% due to Viking's financing events in February 2018. As a result, in February 2018, we concluded that we did not exert significant influence over Viking and discontinued accounting for our investment in Viking under the equity method. As of September 30, 2019 and December 31, 2018, we recorded our common stock of Viking at fair value of $41.5 million and $46.2 million, respectively, in "investment in Viking" in our consolidated balance sheets. We also have outstanding warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in “investment in Viking” in our condensed consolidated balance sheet at fair value of $8.3 million at September 30, 2019. Our investment in Viking warrants in the amount of $9.3 million was reclassified from “other current assets” to “investment in Viking” in the audited consolidated balance sheet as of December 31, 2018 to conform to the current period presentation.following (in thousands):


	September 30,		December 31,
	2020		2019
Captisol manufacturing ramp up fee	$	9,215	$	0
Long-term investment receivable	2,000		0
Equity investment	813		750
Deposits	138		219
Other	1,538		1,388
Total other assets	$	13,704	$	2,357

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


		September 30,		December 31,			September 30,		December 31,
		2019		2018			2020		2019
Compensation	Compensation	$	3,605	$	4,045	Compensation	$	4,840	$	1,986
Professional fees	Professional fees	771		942		Professional fees	1,226		1,135
Amounts owed to former licensees	Amounts owed to former licensees	367		428		Amounts owed to former licensees	407		381
Royalties owed to third parties	Royalties owed to third parties	1,049		1,025		Royalties owed to third parties	805		0
Payments due to broker for share repurchases		—		4,613
Return reserve	Return reserve	3,157		3,590		Return reserve	2,835		3,027
Restructuring		7		1,093
Current operating lease liabilities	Current operating lease liabilities	926		—		Current operating lease liabilities	1,029		1,242
Accrued interest						Accrued interest	1,437		690
Other	Other	3,178		3,464		Other	1,919		1,375
Total accrued liabilities	Total accrued liabilities	$	13,060	$	19,200	Total accrued liabilities	$	14,498	$	9,836

Share-Based Compensation

Share-based compensation expense for awards to employees and non-employee directors is a non-cash expense and is recognized on a straight-line basis over the vesting period until the last tranche vests. The following table summarizes share-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands):

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Share-based compensation expense as a component of:
Research and development expenses $ 2,481 $ 2,257 $ 7,136 $ 6,120
General and administrative expenses 3,816 3,213 11,079 8,717
$ 6,297 $ 5,470 $ 18,215 $ 14,837


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
SBC - Research and development expenses	$	3,094	$	2,481	$	8,510	$	7,136
SBC - General and administrative expenses	4,646		3,816		12,242		11,079
	$	7,740	$	6,297	$	20,752	$	18,215

The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Risk-free interest rate 1.6% N/A 2.4% 2.8%
Dividend yield — N/A — —
Expected volatility 41% N/A 43% 34%
Expected term 5.3 N/A 5.2 5.7

~~Derivatives~~

On May 22, 2018, we amended our 2019 Notes making an irrevocable election to settle the entire note in cash. As a result, we reclassified from equity to derivative liability the fair value of the conversion premium as of May 22, 2018. Amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the corresponding convertible bond hedge. As a result, we reclassified from equity to derivative asset the fair value of the bond hedge as of May 22, 2018. Changes in the fair value of these derivatives are reflected in other expense, net, in our condensed consolidated statements of operations.

~~In connection with the payoff of the 2019 Notes on August 15, 2019, the bond hedge was settled and accordingly, the derivative asset and derivative liability were settled to 0. See~~ ~~Note 5, Convertible Senior Notes, for further information.~~


	Three months ended		Nine months ended
	September 30,		September 30,
	2020	2019	2020	2019
Risk-free interest rate	0.3%	1.6%	1.0%	2.4%
Dividend yield	0	0	0	0
Expected volatility	59%	41%	55%	43%
Expected term	4.9	5.3	4.8	5.2

Net Income (loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

~~All~~For the three and nine months ended September 30, 2020, all of the ~~0.7~~0.70 million and 0.65 million, respectively, weighted average shares of outstanding equity awards as of September 30, 2020 were anti-dilutive due to the net loss for the period.

For the three months ended September 30, 2019, all of the 0.70 million weighted average shares of outstanding equity awards as of September 30, 2019 were anti-dilutive due to the net loss for the ~~three months ended September 30, 2019.~~period

Potentially dilutive common shares consist of shares issuable under ~~2019 Notes and~~the 2023 Notes, stock options and restricted stock. ~~2019 Notes and~~The 2023 Notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. ~~In addition, after May 22, 2018, the 2019 Notes can only be settled in cash and therefore there has been no further impact on income per share of these notes since then.~~ Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for the awards. See Note 4 - Convertible Senior Notes and Note 6 - Stockholders’ Equity.

The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):


		Three months ended			Nine months ended				Three months ended			Nine months ended
		September 30,			September 30,				September 30,			September 30,
		2019	2018	2019	2018		2020	2019		2020	2019
Weighted average shares outstanding:	Weighted average shares outstanding:	18,770	21,148	19,586	21,189	Weighted average shares outstanding:	16,082	18,770		16,222	19,586
Dilutive potential common shares:	Dilutive potential common shares:					Dilutive potential common shares:
Restricted stock	Restricted stock	—	83	35	69	Restricted stock	0	0		0	35
Stock options	Stock options	—	1,248	728	1,167	Stock options	0	0		0	728
2019 Convertible Senior Notes		—	—	—	924
Warrants		—	1,573	—	1,081
Shares used to compute diluted income per share	Shares used to compute diluted income per share	18,770	24,052	20,349	24,430	Shares used to compute diluted income per share	16,082	18,770		16,222	20,349
Potentially dilutive shares excluded from calculation due to anti-dilutive effect	Potentially dilutive shares excluded from calculation due to anti-dilutive effect	11,549	3,126	8,694	1,789	Potentially dilutive shares excluded from calculation due to anti-dilutive effect	7,028	11,549		8,330	8,694

~~2. Sale of Promacta License~~

On March 5, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RPI Finance Trust (“RPI”), doing business as “Royalty Pharma”, who is not an affiliate. Under the Asset Purchase Agreement, we sold, transferred, assigned and conveyed to RPI, and RPI purchased, acquired and accepted from us, all of our rights, title and interest in and to the Purchased Assets, which include among other things the intellectual property and related know-how generated by us in connection with the license agreement (collectively, the “Purchased Assets”), dated December 29, 1994, by and between Novartis (as successor in interest to SmithKline Beecham Corporation) and Ligand, which allowed us to receive a royalty on net sales of Promacta. We concluded the sale does not qualify as a sale of a business, but as a sale of a non-financial asset. At the closing on March 6, 2019, RPI paid us $827.0 million in cash and we do not have any remaining performance obligations related to Novartis or RPI for Promacta. The carrying value of our Promacta asset as of March 6, 2019 was 0. Of the total cash proceeds from the sale, $14.2 million was recorded to revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019, and the remaining $812.8 million was recorded to income from operations in accordance with ASC 610-20, ~~Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets~~.

3.2. 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, 2019														December 31, 2018															September 30, 2020				December 31, 2019
		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:	Assets:																	Assets:

Short-term investments⁽¹⁾		2,171		872,147		65		874,383		1,326		599,891		—		601,217
Short-term investments, excluding Viking(1)																		Short-term investments, excluding Viking(1)	$	2,274	$	295,275	$	155	$	297,704	$	3,073	$	936,791	$	125	$	939,989
Investment in Viking common stock	Investment in Viking common stock	41,542		—		—		41,542		46,191		—		—		46,191		Investment in Viking common stock	33,869		0		0		33,869		48,425		0		0		48,425
Investment in Viking warrants⁽²⁾	Investment in Viking warrants⁽²⁾	8,314		—		—		8,314		9,257		—		—		9,257		Investment in Viking warrants(2)	6,581		0		0		6,581		9,910		0		0		9,910
Total assets	Total assets	$	52,027	$	872,147	$	65	$	924,239	$	56,774	$	599,891	$	—	$	656,665	Total assets	$	42,724	$	295,275	$	155	$	338,154	$	61,408	$	936,791	$	125	$	998,324
Liabilities:	Liabilities:																	Liabilities:
Crystal contingent liabilities⁽³⁾	Crystal contingent liabilities⁽³⁾	$	—	$	—	$	1,826	$	1,826	$	—	$	—	$	6,477	$	6,477	Crystal contingent liabilities(3)	$	0	$	0	$	800	$	800	$	0	$	0	$	2,659	$	2,659
CyDex contingent liabilities	CyDex contingent liabilities	—		—		465		465		—		—		514		514		CyDex contingent liabilities	0		0		509		509		0		0		348		348
Metabasis contingent liabilities⁽⁴⁾	Metabasis contingent liabilities⁽⁴⁾	—		7,498		—		7,498		—		5,551		—		5,551		Metabasis contingent liabilities(4)	0		4,985		0		4,985		0		5,935		0		5,935
Icagen contingent liabilities(5)																		Icagen contingent liabilities(5)	0		0		4,504		4,504		0		0		0		0
Amounts owed to former licensor	Amounts owed to former licensor	61		—		—		61		199		—		—		199		Amounts owed to former licensor	71		0		0		71		75		0		0		75
Total liabilities	Total liabilities	$	61	$	7,498	$	2,291	$	9,850	$	199	$	5,551	$	6,991	$	12,741	Total liabilities	$	71	$	4,985	$	5,813	$	10,869	$	75	$	5,935	$	3,007	$	9,017

1.~~Short-term~~Excluding our investment in Viking, our short-term investments in marketable debt and equity securities ~~with original maturities greater than 90 days~~ are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon 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. Short-term investments in mutual funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on ~~intrinsic~~Black Scholes value estimated by management ason the last day of ~~September 30, 2019.~~the period.

2.Investment in warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in "Gain (loss) from ~~Viking"~~short-term investments" in our condensed consolidated statement of operations.

3.The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. Changes in these estimates may materially affect the fair value. During the ~~three months ended September 30, 2019,~~first quarter of 2020, we paid a ~~$3.0~~$1.8 million contingent liability on development milestones to former Crystal shareholders. At September 30, 2019, most of the development and regulatory milestones were estimated to be highly probable of being achieved by 2019. Changes in these estimates may materially affect the fair value.

4.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders ~~four~~4 tradable CVRs, ~~one~~1 CVR from each of ~~four~~4 respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10 million payment upon initiation of a Phase 3 clinical trial. ~~Another Metabasis drug development program, RVT-1502, has been outlicensed to Metavant. RVT-1502 is a novel, orally-bioavailable, small molecule, glucagon receptor antagonist or “GRA.”~~

~~For the first quarter~~The fair value of ~~2019, we reduced~~Icagen contingent liabilities was determined using a probability weighted income approach. Most of the contingent ~~liabilities associated with Crystal by $1.5 million~~payments are based on ~~management's~~certain revenue milestones as defined in the asset purchase agreement with Icagen. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates ofregarding the timing and probability of achievement of certain ~~milestones~~developmental and revenue thresholds. We made $1.0 million and $3.0 million payments to the former shareholders of Crystal during the first quarter of 2018 and third quarter of 2019, respectively. Other than the payments mentioned, there was no significant change toregulatory milestones. Changes in these estimates may materially affect the fair ~~value of Crystal and CyDex during~~value. During the third quarter of ~~2019 or 2018.~~2020, we paid a $0.5 million contingent liability based on revenue milestones to Icagen.

Assets Measured on a Non-Recurring Basis

We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets and long-lived assets.

We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.

There were no triggering events identified and no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the three and nine months ended September 30, 2019. Other than a certain indefinite-lived intangible asset, there were no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the nine months ended September 30, 2018.2020.

4. 3. Acquisitions

Taurus Acquisition

On September 9, 2020, we acquired Taurus, which discovers and develops novel antibodies from immunized cows and cow-derived libraries. The purchase price of $5.1 million included $4.6 million in cash, and a $0.5 million holdback to satisfy indemnification obligations which will be settled by September 2021. We also issued nontransferable CVRs for up to $4.5 million tied to partnered and internal research and development and for up to $25.0 million as a 25% share of post-clinical Taurus product revenues (including milestone payments) received by us. We evaluated this acquisition in accordance with ASC 805, Business ~~Combination~~Combinations, to discern whether the assets and operations of Taurus met the definition of a business. We concluded that substantially all of the fair value of the gross assets acquired is concentrated in the acquired core technology. Accordingly, we accounted for this transaction as an asset acquisition. Of the $5.1 million consideration transferred, we recognized (1) $0.05 million of tangible assets acquired, and (2) $5.0 million of core completed technology intangibles acquired. The core technology is being amortized on a straight-line basis over the estimated useful life of 10 years. We account for the CVRs in accordance with ASC 450, Contingencies, when the contingency is resolved and the liability becomes payable. NaN of the CVRs are recognized as of the acquisition date.

xCella Acquisition

On September 8, 2020, we acquired xCella, an antibody discovery company. We paid $7.1 million in cash (including a $0.5 million holdback to satisfy indemnification obligations which will be settled by September 2021), and issued earnout rights for up to $5.0 million tied to our use of the xCella technology for partnered research and development and for up to $25.75 million as a 25% share of any future milestone payments we received under a certain existing xCella partner arrangement. We evaluated this acquisition in accordance with ASC 805, Business Combinations, to discern whether the assets and operations of xCella met the definition of a business. We concluded that substantially all of the fair value of the gross assets acquired is concentrated in the acquired core technology. Accordingly, we accounted for this transaction as an asset acquisition. Of the $7.1 million consideration transferred, we recognized (1) $0.2 million of tangible assets acquired, (2) $(0.1) million of liabilities assumed, (3) $7.8 million of core completed technology acquired, and (4) $(0.8) million of deferred tax liability. The core technology is being amortized on a straight-line basis over the estimated useful life of 15 years. We account for the earnout rights in accordance with ASC 450, Contingencies, when the contingency is resolved and the liability becomes payable. NaN of the earnout rights are recognized as of the acquisition date.

Icagen Acquisition

On ~~July 23, 2019,~~April 1, 2020, we acquired ~~privately-held Ab Initio Biotherapeutics, Inc., an antigen-discovery company located in South San Francisco, California.~~the core assets, including its partnered programs and ion channel technology from Icagen and certain of its affiliates. The ~~transaction~~acquisition was accounted for as a business ~~combination. We~~combination and we applied the acquisition method of accounting. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the ~~acquisition date.~~applicable date of acquisition. We did ~~not~~0t incur any material acquisition related costs.

The ~~initial~~purchase price of $19.9 million included $15.1 million cash consideration paid upon acquisition, and a contingent earn-out payment of up to $25.0 million of cash payments based on certain revenue milestones with an estimated fair value of $4.8 million. The fair value of the earn-out liability was determined using a probability weighted income approach incorporating the estimated future cash flows from expected future milestones. These cash flows were then discounted to present value using a discount rate based on the market participants' cost of debt reflective of Icagen. Refer to Note 2, Fair Value Measurement, for

further discussion. The liability will be periodically assessed based on events and circumstances related to the underlying milestones, and any change in fair value will be recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amount paid may be materially different than the carrying amount of the liability. There was no change in the fair value of the continent liabilities during the second quarter of 2020. As the acquisition is not considered significant, pro forma information has not been provided. The results of Icagen have been included in our results of operations since the date of acquisition.

The preliminary allocation of the purchase price consisted of (1) $1.8 million of fair value of tangible assets acquired, (2) $(0.8) million of liabilities assumed, (3) $12.8 million of acquired intangibles, (4) $(3.7) million of deferred revenue in connection with assumed performance obligations under a collaboration agreement, (5) $0.8 million of deferred tax asset associated with the deferred revenue, and (6) $9.0 million of goodwill, the majority of which is deductible for tax purposes.

Acquired intangibles include $11.1 million of customer relationships and $1.7 million of core technology. The fair values of the customer relationships were based on a discounted cash flow analysis incorporating the estimated future cash flows from these relationships during the contractual term. These cash flows were then discounted to present value using a discount rate of 17%. The fair value of the customer relationships is being amortized on a straight-line basis over the weighted average estimated useful life of 9.6 years The fair value of the core technology was based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 17%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 10 years. The total acquired intangibles are being amortized on a straight-line basis over the estimated useful life of 9.7 years.

The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, and purchased intangibles are provisional. The accounting for these amounts falls within the measurement period and therefore we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

Ab Initio Acquisition

On July 23, 2019, we acquired privately-held Ab Initio Biotherapeutics, Inc., an antigen-discovery company located in South San Francisco, California. The acquisition was accounted for as a business combination and we applied the acquisition method of accounting. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition. We did 0t incur any material acquisition related costs.

The purchase price of $12.0 million included $11.86 million cash consideration paid upon acquisition, net of cash acquired, and $0.15 million cash holdback for potential indemnification ~~claims.~~claims, which was paid during the third quarter of 2020. As the acquisition is not considered significant, pro forma information has not been provided. The results of Ab Initio have been included in our results of operations since the date of acquisition.

The ~~preliminary~~ allocation of the purchase price consisted of (1) $0.03 million of fair value of tangible assets acquired, (2) ~~$(0.06)~~$(0.08) million of liabilities assumed, (3) ~~$7.4~~$7.40 million of acquired technologies, (4) ~~$(1.0)~~$(0.15) million of deferred tax liability in connection with the acquired intangibles, and (5) ~~$5.7~~$4.81 million of goodwill, none of which is deductible for tax purposes. The fair value of the core technology was based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 12%. The fair value of the core technology is being amortized on a straight-line basis over the weighted average estimated useful life of the approximately 20 years.

The preliminary purchase price allocation falls within the measurement period and therefore we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that exists as of the acquisition date.

5.4. Convertible Senior Notes

~~0.75% Convertible Senior Notes due 2019~~

In August 2014, we issued $245.0 million aggregate principal amount of 2019 Notes. The implied estimated effective rate of the liability component of the 2019 Notes was 5.83% and were convertible into common stock at an initial conversion rate of 13.3251 shares per $1,000 principal amount of 2019 Notes, subject to adjustment upon certain events, which was equivalent to an initial conversion price of approximately $75.05 per share of common stock. The notes accrued cash interest at a rate of 0.75% per year, payable semi-annually.

~~Holders of the 2019 Notes could have converted the notes at any time prior to the close of business on the business day immediately preceding May 15, 2019, under any of the following circumstances:~~

(1) during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;

(2) during the 5 business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or

~~(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.~~

On May 22, 2018, we entered into a supplemental indenture whereby we made an irrevocable election to settle the entire 2019 Notes in cash. As such, we would have been required to deliver cash to settle the principal and any premium due upon conversion. As a result of the requirement to deliver cash to settle any premium due upon conversion, on May 22, 2018, we reclassified from equity to liability the conversion option fair value of $341.6 million. In accordance with ASC 815, ~~Derivatives and Hedging~~, the derivative was adjusted to its fair value as of September 30, 2018 of $563.2 million with the resulting $161.9 million and $221.6 million increase reflected in other expense, net, in our condensed consolidated statement of operations for the three and nine months ended September 30, 2018.

In March and April 2018, we received notices for conversion of $21.8 million of principal amount of the 2019 Notes which were settled in May and June 2018. We paid noteholders the conversion value of the notes in cash, up to the principal amount of the 2019 Notes. The excess of the conversion value over the principal amount, totaling $31.6 million, was paid in shares of common stock. This equity dilution upon conversion of the 2019 Notes was offset by the reacquisition of the shares under the convertible bond hedge transactions entered into in connection with the offering of the 2019 Notes as further discussed below. As a result of the conversions, we recorded a $0.6 million loss on extinguishment of debt calculated as the difference between the estimated fair value of the debt and the carrying value of the 2019 Notes as of the settlement dates.

In July and August 2018, we received notices for conversion of $195.9 million of principal amount of the 2019 Notes which were settled in October and November 2018. We paid the noteholders (1) the $195.9 million principal amount, and (2) the excess of conversion value over the principal portion in an amount of $439.6 million in cash.

In June 2019, we received notices for conversion of $1.0 million of principal amount of the 2019 Notes, which were settled in cash upon the 2019 Notes' maturity date in August 2019. As a result, we paid the noteholders (1) the $1.0 million principal amount, and (2) the excess of conversion value over the principal portion in an amount of $0.5 million in cash.

On August 15, 2019, the 2019 Notes maturity date, we paid the noteholders the remaining $26.3 million principal amount and $11.9 million bond premium, which was classified as a derivative liability, in cash. We recorded the decrease in fair value of the derivative liability of $1.9 million and $11.0 million in other expense, net, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.

~~Convertible Bond Hedge and Warrant Transactions~~

In August 2014, we entered into convertible bond hedges and sold warrants covering 3,264,643 shares of our common stock to minimize the impact of potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes.

The convertible bond hedges have an exercise price of $75.05 per share and were exercisable when and if the 2019 Notes were converted. If upon conversion of the 2019 Notes, the price of our common stock was above the exercise price of the convertible bond hedges, the counterparties would have delivered shares of common stock and/or cash with an aggregate value equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2019 Notes. Holders of the 2019 Notes and warrants do not have any rights with respect to the convertible bond hedges. We paid $48.1 million for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.

As a result of the irrevocable cash election, conversion notices received relating to the 2019 Notes after May 22, 2018 must be fully settled in cash and amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the convertible bond hedge. We have accounted for the bond hedge as a derivative asset and marked it to market at the end of each reporting period. Upon the 2019 Notes payoff on August 15, 2019, the bond hedge was settled, with the resulting $1.9 million and $10.2 million fair value decrease reflected in other expense, net, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.

Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants to acquire approximately 3,264,643 shares of common stock with an exercise price of approximately $125.08 per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. We received $11.6 million for these warrants and recorded this amount to additional paid-in capital. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants. We continue to have the ability to avoid settling the warrants associated with the 2019 Notes in cash after May 22, 2018. Accordingly, the warrants continue to be classified in additional paid in capital. In November 2018, we repurchased a total of 525,000 warrants. As a result, 2,739,643 warrants remained outstanding as of both September 30, 2019 and December 31, 2018.

0.75% Convertible Senior Notes due 2023

In May 2018, we issued $750.0 million aggregate principal amount of 0.75% convertible senior notes. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 4.0244 shares per $1,000 principal amount of the 2023 Notes which represents an initial conversion price of approximately $248.48 per share.

Holders of the 2023 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:

(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;

(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.

The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $248.48. As of September 30, ~~2019,~~2020, the “if-converted value” did not exceed the principal amount of the 2023 Notes. In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portion of these costs allocated to the

liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.

In March 2020, we repurchased $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million. We accounted for the repurchase as a debt extinguishment, which resulted (1) a gain of $0.7 million reflected in other income (expense), net, in our condensed consolidated statement of operations for the nine months ended September 30, 2020; (2) a $32.7 million reduction in debt discount, and (3) a $2.7 million reduction to additional paid in capital, net of tax, related to the reacquisition of the equity component in our condensed consolidated balance sheet as of September 30, 2020. After the repurchases, approximately $515.6 million in principal amount of the 2023 Notes remain outstanding.

Convertible Bond Hedge and Warrant Transactions

In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of ~~its~~our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.

Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering approximately 3,018,327 shares of common stock with an exercise price of approximately $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.

In April 2020, in connection with the repurchases of $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million, during the quarter ended March 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.

The following table summarizes information about the ~~2019 Notes and~~ 2023 Notes (in thousands):

September 30, 2019 December 31, 2018
Principal amount of 2019 Notes outstanding $ — $ 27,326
Unamortized discount (including unamortized debt issuance cost) — (893)
Total current portion of notes payable $ — $ 26,433
Principal amount of 2023 Notes outstanding $ 750,000 $ 750,000
Unamortized discount (including unamortized debt issuance cost) (118,467) (140,136)
Total long-term portion of notes payable $ 631,533 $ 609,864
Carrying value of equity component of 2023 Notes $ 108,205 $ 127,997
Fair value of both 2019 Notes and 2023 Notes outstanding (Level 2) $ 625,088 $ 713,533


	September 30, 2020		December 31, 2019
Principal amount of the 2023 Notes outstanding	$	515,560	$	750,000
Unamortized discount (including unamortized debt issuance cost)	(60,587)		(111,041)
Total long-term portion of notes payable	$	454,973	$	638,959

Carrying value of equity component of the 2023 Notes	$	55,339	$	101,422
Fair value of the 2023 Notes outstanding (Level 2)	$	464,958	$	647,280

6.5. Income Tax

Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three and nine months ended September 30, ~~2019~~2020 was ~~23.2%~~42.3% and ~~20.9%~~37.1%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2019 was primarily attributable to state taxes and a lower R&D tax credit. The variance from the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2019 was primarily attributable to tax deductions related to stock award activities and the release of a valuation allowance relating to our R&D tax credits which were recorded as discrete items. The effective tax rate for the three and nine months ended September 30, 2018 was 15.0% and 19.3%, respectively. The variancevariances from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, ~~2018 was~~2020 were primarily attributable to the mix of earnings in the jurisdictions with lower statutory rates than the U.S. and tax deductions related to stock award activities ~~which~~offset by tax deductions related to foreign derived intangible income tax credits. The effective tax rate for the three and nine months ended September 30, 2019 was 23.2% and 20.9%, respectively. The variances from the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2019 were ~~recorded as discrete items during~~primarily attributable to the ~~periods as well as~~mix of earnings in the ~~release of a valuation allowance relating to our investment in Viking during~~jurisdictions with lower statutory tax rates than the ~~first quarter of 2018.~~U.S..

7.6. Stockholders’ Equity

We grant options and awards to employees and non-employee directors pursuant to a stockholder approved stock incentive plan, which is described in further detail in Note ~~8, Stockholders'~~9, Stockholders’ Equity, of Notes to Consolidated Financial Statements in our ~~2018~~2019 Annual Report.

The following is a summary of our stock option and restricted stock activity and related information:


		Stock Options				Restricted Stock Awards						Stock Options			Restricted Stock Awards
		Shares	Weighted-Average Exercise Price		Shares	Weighted-Average Grant Date Fair Value			Shares	Weighted-Average Exercise Price		Shares	Weighted-Average Grant Date Fair Value
Balance as of December 31, 2018		1,736,304	$	66.71	132,273	$	130.63
Balance as of December 31, 2019								Balance as of December 31, 2019	1,956,379	$	77.54	147,259	$	125.11
Granted	Granted	319,334	$	117.07	101,404	$	113.48	Granted	480,250	$	90.08	104,306	$	89.58
Options exercised/RSUs vested	Options exercised/RSUs vested	(111,010)	$	23.67	(70,166)	$	110.99	Options exercised/RSUs vested	(113,107)	$	23.91	(50,053)	$	122.16
Forfeited	Forfeited	(5,000)	$	136.72	(666)	$	134.36	Forfeited	(10,200)	$	72.01	0	$	0
Balance as of September 30, 2019		1,939,628	$	77.24	162,845	$	128.40
Balance as of September 30, 2020								Balance as of September 30, 2020	2,313,322	$	82.79	201,512	$	107.45

As of September 30, ~~2019,~~2020, outstanding options to purchase ~~1.4~~1.6 million shares were exercisable with a weighted average exercise price per share of ~~$59.49.~~$72.60.

Employee Stock Purchase Plan

The price at which common stock is purchased under the Amended Employee Stock Purchase Plan, or ESPP, is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. As of September 30, ~~2019, 60,642~~2020, 56,079 shares were available for future purchases under the ESPP.

Share Repurchases

During the ~~three and nine months ended September 30, 2019,~~first quarter of 2020, we repurchased ~~$181.2~~$73.3 million ~~and $366.5 million, respectively,~~ of our common stock under our stock repurchase programs as discussed below.

In September 2018, our Board of Directors authorized us to repurchase up to $200.0 million of our common stock from time to time over a period of up to three years. On January 23, 2019, our Board of Directors increased We did 0t have any share repurchases during the ~~share repurchase authorization by $150.0 million. The available amount under the $350.0 million repurchase program was fully utilized during the~~second and third quarter of ~~2019.~~2020.

On September 11, 2019, our Board of Directors approved a stock repurchase program authorizing, but not obligating, the repurchase of up to $500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and ~~have entered into a Rule 10b5-1 trading plan, and~~ may enter into ~~additional~~ Rule 10b5-1 trading plans, ~~in the future,~~ to facilitate open-market

repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. ~~Our prior $350.0 million stock repurchase program mentioned above was terminated in connection with the approval of the new stock repurchase program.~~ Authorization to repurchase ~~$408.7~~$253.5 million of our common stock remained available as of September 30, ~~2019.~~

2020.

8.7. Commitment and ~~Contingencies~~Contingencies: Legal Proceedings

We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in our estimates of potential liability could materially impact our results of operations.

On July 27, 2018, AG Oncon, LLC, AG Ofcon, Ltd., Calamos Market Neutral Income Fund, Capital Ventures International, Citadel Equity Fund Ltd., Opti Opportunity Master Fund, Polygon Convertible Opportunity Master Fund, Wolverine Flagship Fund Trading Limited, as plaintiffs, filed a complaint in the Court of Chancery of the State of Delaware (AG Oncon, LLC v. Ligand Pharmaceuticals Inc.) alleging claims for violation of the Trust Indenture Act, breach of contract, damages and a declaratory judgment that the Supplemental Indenture, dated as of February 20, 2018, entered into by us and Wilmington Trust, National Association, as trustee, is invalid. On October 1, 2018, we filed a motion to dismiss the plaintiffs’ complaint. On May 24, 2019, the Court granted the motion and subsequently entered an order dismissing the action with prejudice. On July 12, 2019, plaintiffs filed a notice of appeal in the Delaware Supreme Court. Plaintiffs filed their opening brief on August 29, 2019. We filed our opposition brief on September 30, 2019. Plaintiffs filed their reply brief on October 15, 2019. The court has not yet set a date for oral argument.

In November 2017, CyDex, our wholly-owned subsidiary, received a Paragraph IV certification Notice Letter from Teva stating that Teva had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of U.S. Patent Nos. 8,410,077 (“the ’077 patent”); 9,200,088 (“the ’088 patent”), or 9,493,582 (“the ’582 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or will not be infringed by Teva’s ANDA product. On December 20, 2017, CyDex filed a complaint against Teva in the U.S. District Court for the District of Delaware, asserting that the filing of Teva’s ANDA constitutes infringement of each of the ’077 patent, the ’088 patent, and the ’582 patent. On March 22, 2018, Teva filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and, on April 12, 2018, CyDex filed an answer to Teva’s counterclaims. On October 31, 2019, CyDex, Teva, and Acrotech Biopharma L.L.C. (the holder of the NDA for EVOMELA®) entered into a Confidential Settlement Agreement, settling this patent litigation. As a result of the settlement, Teva will be permitted to market a generic version of EVOMELA® in the United States on June 1, 2026 or earlier under certain circumstances. The terms of the settlement agreement are otherwise confidential.

On April 9, 2019, CyDex received a Paragraph IV certification Notice Letter from Alembic Global Holdings SA (“Alembic”) stating that Alembic had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or U.S. Patent No. 10,040,872 (“the ’872 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Alembic’s ANDA product. On May 23, 2019, CyDex filed a complaint against Alembic, Alembic Pharmaceuticals, Ltd., and Alembic Pharmaceuticals, Inc. in the U.S. District Court for the District of Delaware, asserting that the filing of Alembic’s ANDA constitutes infringement of each of the ’088 patent and the ’582 patent. On July 29, 2019, Alembic filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and, on August 19, 2019, CyDex filed an answer to Alembic’s counterclaims. On April 7, 2020, the Court ordered that the Scheduling Order be amended such that, inter alia, the fact discovery cut off was set for November 2, 2020, the close of expect discovery was set for March 22, 2021, and that May 17, 2021 would remain the first day of a five-to-six-day bench trial.

On September 16, 2019, CyDex received a Paragraph IV certification Notice Letter from Lupin Ltd. (“Lupin”) stating that Lupin had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or the ’872 patent, and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Lupin’s ANDA product. CyDex filed a complaint on October 29, 2019, alleging patent infringement against Lupin. Lupin filed an answer on December 11, 2019 and counterclaimed for declaratory judgments of invalidity and non-infringement as to all 4 patents and CyDex filed its answer to Lupin’s counterclaims on January 2, 2020. Fact discovery is ongoing. The Court’s scheduling order sets close of discovery on May 7, 2021 and a five day bench trial starting on December 13, 2021.

On October 31, 2019, we received ~~three~~3 civil complaints filed in the US District Court for the Northern District of Ohio on behalf of several Indian tribes. The Northern District of Ohio is the Court that the Judicial Panel on Multi-District Litigation (“JPML”) has assigned ~~several hundred~~more than one thousand civil cases which have been designated as a Multi-District Litigation (“MDL”) and captioned In Re: National Prescription Opiate Litigation. The allegations in these complaints focus on the activities of defendants other than the company and no individualized factual allegations have been advanced against us in any of the ~~three~~3 complaints. The complaints assert that the defendants deceptively marketed and sold various opioid products. The complaints seek compensatory and exemplary damages against all named defendants. However, no specific damages have been asserted at this time with respect to us. We have been engaged to respond to the complaints by requesting dismissals by the court. Since the MDL was designated and the cases were transferred to the Northern District of Ohio, the multiple litigants have been engaged in largely procedural matters. We reject all claims raised in the complaints and intend to vigorously defend these matters.

9.8. Leases

We lease certain office facilities and equipment primarily under various operating leases. Our leases have remaining contractual terms up to seven years, some of which include options to extend the leases for up to seven years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating lease costs are primarily related to facility leases for administration offices and research and development facilities, and our finance leases are immaterial.

Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. For leases with a term of 12 months or less, we elected to not recognize lease assets and lease liabilities and expense the leases over a straight-line basis for the term of those leases.

In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.

The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

~~Operating Lease~~

9. Assets Held for Sale

As discussed in Note 10 - Subsequent Events, we entered into an agreement to divest Vernalis (R&D) Limited in October 2020. As a result of meeting the criteria to classify the disposal group as held for sale under generally accepted accounting principles, Vernalis (R&D) Limited was classified as held for sale as of September 30, 2020. Assets classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell and ~~Liabilities (in thousands):~~are not depreciated or amortized. Classification of our disposal group held for sale occurs when sufficient authority to sell the disposal group has been obtained, the disposal group is available for immediate sale and its sale is probable within one year. If at any time these criteria are no longer met, the disposal group would be reclassified as held and used. We evaluate the held for sale classification during each reporting period. The disposal group did not meet the requirements for presentation as discontinued operations and are included in income from continuing operations for the three and nine months ended September 30, 2020.

We did 0t have any assets held for sale as of December 31, 2019. The following table presents the carrying amounts of major classes of assets and liabilities related to assets held for sale with respect to the Vernalis (R&D) Limited divestiture as of September 30, 2020.


				September 30, 2020
Assets:
	~~September 30, 2019~~Accounts receivable, net						~~Balance Sheet Classification~~
~~Lease assets~~	$	~~10,280~~2,581
Other current assets				2,871
Property and equipment, net				2,445
Operating lease right-of-use assets				5,246
Total assets held for sale				$	13,143

~~Current lease liabilities~~Liabilities:
Accounts payable				$	~~(926)~~	463
Accrued liabilities				1,697
~~Non-current lease liabilities~~	~~(9,932)~~		Deferred revenue				2,464
Long-term operating lease liability				5,084
Other long-term liabilities				653
Total ~~lease~~ liabilities related to assets held for sale				$	~~(10,858)~~10,361

During the nine months ended September 30, 2019, we entered into several new lease agreements including our San Diego headquarter expansion and a new UK office lease, which resulted an increase in lease assets and liabilities of $6.1 million and $6.0 million, respectively.

10. Subsequent Events

~~Maturity of Operating Lease Liabilities (in thousands):~~Pfenex Acquisition

Maturity Dates September 30, 2019
Remaining three months ending December 31, 2019 $ 251
2020 1,857
2021 2,142
2022 2,180
2023 1,905
Thereafter 5,257
Total lease payments 13,592
Less imputed interest (2,734)
Present value of lease liabilities $ 10,858
On October 1, 2020, we completed the acquisition of Pfenex for $437.5 million in cash, plus one non-transferable CVR per share representing the right to receive an aggregate contingent payment of $78 million in cash if a certain specified milestone is achieved. The acquisition was funded using cash on hand. We are currently evaluating the accounting impact of this transaction and anticipate using ASC 805, Business Combinations, but the initial purchase price allocation is not yet complete.

AsDivestiture of September 30, 2019, our operating leases have a weighted-average remaining lease term of 7 years and a weighted-average discount rate of 6%. Cash paid for amounts included in the measurement of operating lease liabilities was $0.5 million and $1.6 million, for the three and nine months ended September 30, 2019, respectively. Operating lease expense was $0.5 million (net of sublease income of $0.02 million) and $1.6 million (net of sublease income of $0.7 million) , for the three and nine months ended September 30, 2019, respectively.Vernalis Research Operations

On October 11, 2020, we and our wholly-owned subsidary Vernalis Limited, a company incorporated in England (“Seller”), entered into an Agreement for the Sale and Purchase of the Entire Issued Share Capital of Vernalis (R&D) Limited (the “Purchase and Sale Agreement”) with HitGen UK Ltd, a company incorporated in England (“Buyer”), and HitGen Inc., a company incorporated in China (“HitGen”), pursuant to which Ligand and Seller agreed to sell the entire issued share capital of Vernalis (R&D) Limited, a company incorporated in England and a wholly-owned subsidiary of Seller (“Vernalis”), which constitutes the sale of the Vernalis business operations including the Vernalis Design Platform. Under the terms of the Purchase and Sale Agreement, at the closing of the transaction, Buyer will pay $25.0 million in cash, subject to a working capital adjustment. In addition, Buyer will pay to Ligand any net receipts pursuant to completed collaboration licenses and a share of any net receipts pursuant to ongoing research collaboration agreements. The closing is expected to occur in the fourth quarter of 2020.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Caution: This discussion and analysis may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Part II, Item 1A:~~"Risk~~ "Risk Factors." This outlook represents our current judgment on the future direction of our business. These statements include those related to our Captisol-related revenues and manufacturing capacity, our Kyprolis, and other product royalty revenues, the impact of COVID-19, product returns, and product development. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected Kyprolis, Captisol and other product revenues to support our ongoing business or that our internal or partnered pipeline products will progress in their development, gain marketing approval or achieve success in the ~~market.~~market, or that the closing conditions of the transaction to divest the Vernalis business will be satisfied. Ligand may not achieve the growth prospects and synergies expected from its acquisitions of Pfenex, xCella and Taurus, and may experience delays, challenges and expenses associated with integrating the related businesses. In addition, ongoing or future arbitration, or litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to make any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Our trademarks, trade names and service marks referenced herein include Ligand. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.

References to ~~"Ligand~~“Ligand Pharmaceuticals Incorporated,~~" "Ligand,"~~” “Ligand,” the ~~"Company," "we"~~“Company,” “we” or ~~"our"~~“our” include Ligand Pharmaceuticals Incorporated and our wholly owned subsidiaries.

Overview

We are a revenue generating biopharmaceutical company focused on developing and acquiring technologies that help pharmaceutical companies discover and develop medicines. We employ research technologies such as antibody discovery technologies, structure-based drug design, formulation science and liver targeted pro-drug technologies to assist companies in their work toward securing prescription drug and biologic approvals. We currently have partnerships and license agreements with over ~~110~~120 pharmaceutical and biotechnology companies. Over 200 different programs ~~under license with us~~ are ~~currently~~ in various stages of commercialization and ~~development.~~development and fully funded by our collaboration partners and licensees. We have contributed novel research and technologies for approved medicines that treat cancer, osteoporosis, fungal infections and ~~low blood platelets,~~postpartum depression, among others. Our collaboration partners and licensees have programs currently in clinical development targeting cancer, seizure, diabetes, cardiovascular disease, muscle wasting, liver disease, and kidney disease, among others. We have over ~~1,200~~1,400 issued patents worldwide.

We have assembled our large portfolio of fully-funded programs either by licensing our own proprietary drug development programs, licensing our platform technologies such as Captisol or OmniAb to partners for use with their proprietary programs, or acquiring existing partnered programs from other companies. Fully-funded programs, which we refer to as ~~"shots~~“shots on goal,"” are those for which our partners pay all of the development and commercialization costs. For our internal programs, we generally plan to advance drug candidates through early-stage drug development or clinical proof-of-concept and then seek partners to continue development and potential commercialization.

Our business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Our goal is to offer investors an opportunity to participate in the promise of the biotech industry in a profitable, diversified and lower-risk business than a typical biotech company. Our business model is based on doing what we do best: drug discovery, early-stage drug development, product reformulation and partnering. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) to ultimately generate our revenue. We believe that focusing on discovery and early-stage drug development while benefiting from our partners’ development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of drug candidates progress to later stages of drug development.

Our revenue ~~consists~~is generated primarily from: royalties on sales of ~~three primary elements: royalties from~~products commercialized ~~products,~~by our partners, sale of Captisol material, and contract revenue ~~from~~which consists of service revenue for contracted R&D services performed for our customers over

time, license fees, contingent milestone payments and other ~~service~~ payments. In addition to discovering and developing our own proprietary drugs, we selectively pursue acquisitions to bring in new assets, pipelines, and technologies to aid in generating additional potential new revenue streams.

Impact of COVID-19 Pandemic

Please see impact of COVID-19 pandemic described in Item 1. Condensed Consolidated Financial Statements - Note 1, “Basis of Presentation and Summary of Significant Accounting Policies”. For additional information on the various risks posed by COVID-19 pandemic, please read Item 1A.Risk Factors included in this report.

Portfolio Program Updates

~~OmniAb~~OmniAb® Platform Updates

~~Acquisition and New Licenses~~

•~~We acquired Ab Initio for $12 million. Ab Initio has a patented antigen technology that~~OmniAb is ~~synergistic with the OmniAb® therapeutic~~our multi-species antibody ~~discovery~~ platform ~~providing our current and potential new partners enhanced capabilities~~ for the discovery of mono- and bi-specific therapeutic human antibodies. As of the third quarter of 2020, more than 8,500 clinical subjects have been or are planned to be treated by partners in clinical trials with OmniAb-derived antibodies. New clinical programs are pending at Johnson & Johnson and Merck, among others. Ligand expects the first regulatory submission for OmniAb-derived antibodies ~~against difficult-to-access cellular targets. Ab Initio has a collaboration agreement~~in 2021, with ~~Pfizer to discover novel therapeutic antibodies against an undisclosed target in the GPCR superfamily.~~

•~~We entered into new OmniAb license agreements with Takeda, GigaGen, Talem Therapeutics, Kira Pharma and Abvivo.~~potential for as many as 10 approvals expected by 2025.

~~Select~~As part of the OmniAb ~~Partner Updates~~platform, we recently announced OmniTaur™, featuring Ultralong CDR-H3 humanized binding domains recently acquired from Taurus Biosciences. The OmniAb platform also includes the ultra-high resolution, high-speed automated antibody selection technology acquired from xCella Biosciences.

•
~~CStone Pharmaceuticals released pooled safety data from~~

Multiple OmniAb partners reported clinical or regulatory progression with OmniAb-derived antibodies during the ~~Phase 1b (GEMSTONE-101) study~~third quarter of ~~their anti-PD-L1 antibody CS1001 in a poster presentation at~~2020. Additionally, three of our partners (Takeda, Immunoprecise and Genovac) are pursuing development of therapeutic antibodies for the ~~European Society~~treatment of ~~Medical Oncology 2019 Congress, demonstrating the promising safety and tolerability profile of CS1001.~~COVID-19 that were discovered with OmniAb.

•CStone Pharmaceuticals announced the formation of a $480 million strategic collaboration that encompasses a $200 million equity investment by Pfizer Hong Kong in CStone, collaboration between CStone and Pfizer Investment for the development and commercialization of CStone’s PD-L1 antibody sugemalimab (CS1001) in mainland China and a framework between CStone and Pfizer Investment to bring additional oncology assets to the Greater China market. CStone announced updated results from ~~the esophageal squamous cell carcinoma cohort~~two clinical studies of ~~a Phase 1b clinical trial of CS1001 in an oral presentation~~sugemalimab at the 22^nd ~~Annual Meeting of the~~2020 Chinese Society of Clinical ~~Oncology.~~

~~Recent OmniAb Publications~~

•~~A paper by our scientists entitled “Discovery of high affinity, pan-allelic, and pan-mammalian reactive antibodies against the myeloid checkpoint receptor SIRPα” was published in the journal~~ ~~mAbs~~.

~~Other Licensing and Acquisition Events~~

•~~We entered a license and supply agreement with SQ Innovation AG for use of our Captisol~~^® technology in the formulation of high-concentration furosemide for the treatment of edema in patients with heart failure. We are eligible to receive potential milestone payments and royalties, as well as revenue from Captisol materials sales.

•~~We entered into new Captisol clinical use or license and supply agreements with Millennium/Takeda, BendaRx, Hikma, the University of Edinburgh and Quadriga Bio.~~

~~Additional Pipeline and Partner Developments~~

•~~Kyprolis~~^® third quarter sales totaled $280 million, consisting of Amgen-reported October 29, 2019 Q3 sales of Kyprolis of $266 million and Ono Pharmaceutical Co.-reported October 30, 2019 Q3 sales of Kyprolis in Japan of $14 million.

•~~On September 13, 2019 Amgen announced the Phase 3 CANDOR study evaluating Kyprolis~~^® ~~in combination with dexamethasone and Darzalex~~^® (KdD) compared to Kyprolis and dexamethasone (Kd) alone met its primary endpoint of progression-free survival. The regimen resulted in a 37% reduction in the risk of progression or death in patients with relapsed or refractory multiple myeloma treated with KdD and the median PFS for patients treated with Kd alone was 15.8 months.

•Amgen announced on October 31, 2019 that it has entered into a strategic collaboration with BeiGene to expand its oncology presence in China. BeiGene is an oncology-focused biotechnology company with an established commercial and clinical development organization in China. Under the agreement, BeiGene will commercialize Kyprolis in China over the next 5 to 7 years along with two other oncology products, Xgeva^® ~~and Blincyto~~^®~~. Amgen and BeiGene will share the profits and losses equally. Kyprolis is currently in a Phase 3 trial in China.~~

•~~CASI Pharmaceuticals launched Evomela~~^® ~~in China; Evomela uses our Captisol technology in its formulation.~~

•~~Retrophin~~Oncology Annual Meeting. CStone announced that it will present new data from the Phase 2 DUET Study examining the impact of sparsentan on quality of life in focal segmental glomerulosclerosis at the American Society of Nephrology (ASN) Kidney Week 2019.

•Novan completed patient recruitment in the B-SIMPLE (Berdazimer Sodium In Molluscum Patients with Lesions) Phase 3 pivotal trials with SB206 for the treatment of molluscum contagiosum. Novan affirmed that topline data from these trials are expected in the first quarter of 2020.

•~~Sage Therapeutics launched Zulresso~~^® ~~(brexanolone) injection. With this launch, Zulresso is the 11~~^th ~~FDA-approved drug to use our Captisol technology.~~

•Sermonix Pharmaceuticals announced enrollment and dosing of the first patient into a Phase 2 clinical trial of its lead investigational drug, lasofoxifene, and announced completion of a $26 million financing to fund the trial through to completion.

•Verona Pharma presented data from a Phase 2b trial with nebulized ensifentrine in COPD at the CHEST Annual Meeting and presented data from a Phase 2 trial with its dry powder inhaler formulation of ensifentrine in COPD at the European Respiratory Society International Congress.

•Marinus Pharmaceuticals announced that results from its Phase 2 trial of ganaxolone in Refractory Status Epilepticus (RSE) were presented at the Neurocritical Care Society 17th Annual Meeting in Vancouver, BC. Ganaxolonesugemalimab met the primary endpoint as first-line treatment in ~~the study with none of the 17 patients progressing to~~stage IV ~~anesthetics within 24 hours of treatment initiation.~~

•In September, results of a randomized Phase 2 study of M6620, an ATR kinase inhibitor in development by Merck KGaA formulated using Captisol, were presented at ESMO 2019 demonstrating that the addition of M6620 to gemcitabine extended PFS without additional toxicity in patients with platinum-resistant, high-grade serous ovariansquamous and non-squamous non-small cell lung cancer.

•~~Takeda Pharmaceutical announced results of a Phase 1 clinical proof-of-concept study of CE TAK-925, a selective orexin type-2 receptor (OX2R) agonist, in individuals with narcolepsy type 1.~~

•~~Opthea announced positive Phase 2b results demonstrating that OPT-302 combination therapy met the primary endpoint of superiority in mean visual acuity gain at 24 weeks compared to Lucentis~~^® ~~monotherapy in treatment-naïve patients with wet age-related macular degeneration; these data were presented at the European Society of Retina Specialists 2019 Congress.~~

•Nucorion Pharmaceuticals closed a $5 million Series B financing to support the Phase 1 clinical development in the U.S. for its lead program, NCO-1010, for the treatment of hepatitis B; NCO-1010 utilizes our LTP Platform™ technology.

~~Internal R&D~~

•WeImmunovant announced positive topline results from a multicenter, placebo-controlled Phase ~~1 clinical~~2a trial (ASCEND MG) of ~~its internal CE Iohexol program. Clinical data have been presented at ASN Kidney Week 2019~~IMVT-1401, a novel investigational anti-FcRn antibody delivered by subcutaneous injection, in ~~Washington, DC on November 8~~^th~~, 2019 and will be presented at~~patients with myasthenia gravis (MG). A registration-enabling Phase 3 MG trial is expected to initiate in the ~~2019 Contrast Media Research Symposium in Erice, Italy on November 11~~^th~~, 2019. Highlights~~first half of ~~the data presented on November 8th, 2019 include:~~2021.

▪In two treatment periods, subjects received each treatment as a single IV dose of 80 milliliters (mL) infused over approximately 20 seconds by a power injector: CE-Iohexol, 755 mg/mL iohexol (350 mg I/mL)/50 mg CAPTISOL^®~~/mL; OMNIPAQUE, 755 mg/mL iohexol (350 mg I/mL).~~

▪~~Bioequivalence between CE-Iohexol and OMNIPAQUE was demonstrated for the key pharmacokinetic (PK) parameters of area under the concentration-time curve (AUC) and maximum concentration (C~~_max).

▪~~Geometric mean ratio of AUCs for CE-Iohexol and OMNIPAQUE was 1.0 with 94% confidence interval of 0.98-1.02. Geometric mean ratio of C~~_max ~~for CE-Iohexol and OMNIPAQUE was 1.0 with 94% confidence interval of 0.95-1.06.~~

▪~~The means of AUC, C~~_max~~, as well as half-life and elimination constant, were similar between treatments; the mean elimination constant was 0.3/hour for both treatments.~~

▪~~Based on these results, it can be concluded that CE-Iohexol is bioequivalent to the reference OMNIPAQUE following IV injection in healthy adults.~~

▪No subject had a serious adverse event or discontinued from the study due to an adverse event. All adverse events were mild to moderate in severity and the incidence of subjects with adverse events was similar in both treatment groups.

▪~~The most common adverse event was a sensation of warmth, which is an adverse event known to occur during IV administration of iodinated contrast agents such as OMNIPAQUE.~~

▪There were no clinically significant abnormal physical examination findings, and there were no clinically meaningful changes in vital signs, laboratory parameters., hematology, urinalysis or ECG results.

▪~~Overall, administration of the Captisol-containing CE-Iohexol following IV injection was safe and well tolerated in normal healthy subjects.~~Captisol® Business Updates

~~Corporate Events~~To date in 2020, we have entered into more than 120 Captisol research use agreements and eight clinical and/or commercial license agreements. This is the highest number of use agreements to be signed in a single year since the invention of Captisol.

•Captisol is utilized in the formulation of Gilead Sciences’ Veklury® (remdesivir), which on October 22, 2020 received U.S. FDA approval for the treatment of patients with COVID-19 requiring hospitalization. The product has regulatory approvals for the treatment of moderate or severe COVID-19 in over 50 countries and is included in more than 30 ongoing clinical trials. We ~~announced the appointment of Sarah Boyce~~are supplying Captisol to ~~our Board of Directors, increasing the total number of our directors~~Gilead under a recently signed 10-year supply agreement. We are also supplying Captisol to ~~nine. Ms. Boyce brings a breadth of commercial~~Gilead’s voluntary licensing generic partners who are manufacturing remdesivir for 127 low- and ~~business development experience that will be valuable as we build our portfolio of tools and drug discovery technologies to help serve the pharmaceutical industry.~~middle-income countries.

Partner Marinus was recently awarded a BARDA contract by the U.S. government to develop Captisol-enabled IV ganaxolone for the treatment of refractory status epilepticus (RSE) caused by nerve agent exposure. Marinus also announced it had satisfied the FDA protocol-specific questions for the registrational Phase 3 trial (the RAISE trial) in RSE, allowing the company to begin patient enrollment in October. Topline data are anticipated in the first half of 2022.

We plan to initiate a potentially pivotal trial for CE-Iohexol in December 2020. CE-Iohexol is an iodine-based contrast agent for hospital-based imaging procedures.

Protein Expression Technology Platform Updates

On October 1, 2020, we closed the previously announced acquisition of Pfenex, Inc. Pfenex brings to us a proprietary protein expression technology, as well as major collaborations with Jazz Pharmaceuticals, Merck, Serum Institute of India and Alvogen, each of which has potential to contribute meaningfully to our royalty revenue. Our partner Merck announced positive data from two Phase 3 studies with V114, which uses the protein expression technology, evaluating the safety, tolerability and immunogenicity of the investigational 15-valent pneumococcal conjugate vaccine with plans for global regulatory licensure applications in the fourth quarter 2020. Also using the platform, Jazz Pharmaceutical’s Erwinaze supply challenges due to issues with their manufacturer were solved, resulting in a robust process showing manufacturing consistency and efficiency. The program was completed from commencement to projected first BLA filing in approximately four years.

We entered into a new 10-year CRM197 supply agreement with a global multi-national pharmaceutical partner focused on vaccine development.

Other Business Updates

We announced the sale of our Vernalis research operations and internal programs to HitGen Inc. for $25 million in cash. Under the terms of the agreement, we will retain economic rights on completed collaboration licenses as well as a share of the economic rights on current research collaboration contracts. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions.

Several partners also had significant regulatory, financing and business updates during the third quarter of 2020: Verona Pharma announced initiation of its ENHANCE Phase 3 trials, Retrophin announced enrollment of the first 280 patients in the pivotal Phase 3 PROTECT study of sparsentan in IgA nephropathy, and Sermonix Pharmaceuticals announced a collaboration with Eli Lilly to study lasofoxifene in combination with Lilly’s CDK 4 and 6 inhibitor abemaciclib in metastatic breast cancer.

Results of Operations

Revenue


(Dollars in thousands)	(Dollars in thousands)	Q3 2019		Q3 2018		Change		% Change		YTD 2019		YTD 2018		Change		% Change		(Dollars in thousands)	Q3 2020		Q3 2019		Change		% Change		YTD 2020		YTD 2019		Change		% Change
Royalties	Royalties	$	9,767	$	36,127	$	(26,360)	(73)	%	$	35,931	$	88,343	$	(52,412)	(59)	%	Royalties	$	9,005	$	9,767	$	(762)	(8)	%	$	22,751	$	35,931	$	(13,180)	(37)	%
Material sales		6,849		7,027		(178)		(3)	%	24,357		19,030		5,327		28	%
License fees, milestones and other revenue		8,192		2,509		5,683		227	%	32,991		84,490		(51,499)		(61)	%
Captisol																		Captisol	23,389		6,849		16,540		241	%	68,966		24,357		44,609		183	%
Contract revenue																		Contract revenue	9,454		8,192		1,262		15	%	24,712		32,991		(8,279)		(25)	%
Total revenue	Total revenue	$	24,808	$	45,663	$	(20,855)	(46)	%	$	93,279	$	191,863	$	(98,584)	(51)	%	Total revenue	$	41,848	$	24,808	$	17,040	69	%	$	116,429	$	93,279	$	23,150	25	%

Royalty revenue is a function of our ~~partners'~~partners’ product sales and the applicable royalty rate. ~~Promacta and~~ Kyprolis royalty rates are under a tiered royalty rate structure with the highest tier being ~~9.4% and~~ 3.0%~~, respectively.~~. Evomela has a fixed royalty rate of 20%. On March 6, 2019, we sold all of our rights, title and interest in and to the Promacta license to ~~RPI;~~Royalty Pharma; therefore, the royalty revenue for Promacta only reflected the revenue prior to the sale. Subsequent to March 6, 2019, we no longer recognize revenue related to Promacta. ~~See~~ ~~Note 2 - Sale of Promacta License~~.Contract revenue includes service revenue, license fees and development, regulatory and sales based milestone payments.

The following tables represent royalty revenue by program:


(in millions)	(in millions)	Q3 2019 Estimated Partner Product Sales		Effective Royalty Rate		Q3 2019 Royalty Revenue		Q3 2018 Partner Product Sales		Effective Royalty Rate		Q3 2018 Royalty Revenue		(in millions)	Q3 2020 Estimated Partner Product Sales		Effective Royalty Rate		Q3 2020 Royalty Revenue		Q3 2019 Partner Product Sales		Effective Royalty Rate		Q3 2019 Royalty Revenue
Promacta		N/A		N/A		N/A		$	295.0	9.4	%	$	27.8
Kyprolis	Kyprolis	$	279.0	2.7	%	$	7.6	243.0		2.6	%	6.3		Kyprolis	$	277.2	2.5	%	$	6.9	$	279.0	2.7	%	$	7.6
Evomela	Evomela	7.5		20.0	%	1.5		6.8		20.0	%	1.3		Evomela	9.0		20.0	%	1.8		7.5		20.0	%	1.5
Other	Other	50.7		1.2	%	0.6		45.7		1.5	%	0.7		Other	45.6		0.6	%	0.3		50.7		1.3	%	0.7
Total	Total	$	337.2			$	9.7	$	590.5			$	36.1	Total	$	331.8			$	9.0	$	337.2			$	9.8

(in millions) YTD 2019 Estimated Partner Product Sales Effective Royalty Rate YTD 2019 Royalty Revenue YTD 2018 Partner Product Sales Effective Royalty Rate YTD 2018 Royalty Revenue
Promacta ⁽¹⁾
$ 225.1 6.3 % $ 14.2 $ 844.0 8.1 % $ 68.2
Kyprolis 778.0 2.1 % 16.3 752.0 1.9 % 14.4
Evomela 17.7 20.0 % 3.5 20.6 20.0 % 4.1
Other 142.8 1.3 % 1.9 131.1 1.2 % 1.6
Total $ 1,163.6 $ 35.9 $ 1,747.7 $ 88.3

~~(1) Promacta YTD 2019 estimated partner product sales represent the pro-rated estimated sales prior to the Promacta sale on March 6, 2019.~~


(in millions)	YTD 2020 Estimated Partner Product Sales		Effective Royalty Rate		YTD 2020 Royalty Revenue		YTD 2019 Partner Product Sales		Effective Royalty Rate		YTD 2019 Royalty Revenue
Kyprolis	$	832.3	2.0	%	$	16.8	$	778.0	2.1	%	$	16.3
Evomela	22.9		20.0	%	4.6		17.7		20.0	%	3.5
Other	132.2		1.0	%	1.4		142.8		1.3	%	1.9
Promacta	N/A		N/A		N/A		225.1		6.3	%	14.2
Total	$	987.4			$	22.8	$	1,163.6			$	35.9

Q3 ~~2019~~2020 vs. Q3 ~~2018~~2019

Total revenue ~~decreased~~increased by ~~$20.8~~$17.0 million, or ~~46%~~69%, to $41.8 million in Q3 2020 compared to $24.8 million in Q3 2019 mainly driven by an increase in Captisol material sales during Q3 2020 attributable to an increased demand from Gilead for remdesivir. See additional remdesivir updates in the Portfolio Program Updates section above.

YTD 2020 vs. YTD 2019

Total revenue increased by $23.2 million, or 25%, to $116.4 million in the YTD 2020 compared to ~~$45.7~~$93.3 million in ~~Q3 2018 due~~the same period last year mainly driven by an increase in Captisol material sales during the YTD 2020 attributable to an increased demand from Gilead for remdesivir as mentioned above. The increases were partially offset by our no longer recognizing royalties related to Promacta since the sale of Promacta in March 2019 and the ~~first quarter of 2019, partially offset by an increase~~decreased contract revenue due to the disruption from COVID-19 as some partners delay starting clinical trials or paused patient enrollment in ~~milestone revenue and service revenue from the Vernalis acquisition.~~ongoing trials.

~~YTD 2019 vs. YTD 2018~~

Total revenue decreased by $98.6 million, or 51%, to $93.3 million in YTD 2019 compared to $191.9 million in the same period in 2018 due to $20.0 million received from Roivant upon entering into the GRA license agreement and a $47.0 million OmniAb platform license fee received from WuXi during 2018 as well as the sale of Promacta in the first quarter of 2019, partially offset by increased material sales during the nine months ended September 30, 2019 primarily related to timing of customer purchases of Captisol for use in clinical trials and in commercialized products.

Operating Costs and Expenses


(Dollars in thousands)	(Dollars in thousands)	Q3 2019		% of Revenue	Q3 2018		% of Revenue	YTD 2019		% of Revenue	YTD 2018		% of Revenue	(Dollars in thousands)	Q3 2020		% of Revenue	Q3 2019		% of Revenue	YTD 2020		% of Revenue	YTD 2019		% of Revenue
Costs of material sales		$	3,147		$	1,460		9,410			3,382
Costs of Captisol														Costs of Captisol	$	6,353		$	3,147		18,680			9,410
Amortization of intangibles	Amortization of intangibles	3,552			5,725			10,560			12,309			Amortization of intangibles	3,875			3,552			11,285			10,560
Research and development	Research and development	13,742			5,483			37,244			19,023			Research and development	12,853			13,742			37,476			37,244
General and administrative	General and administrative	9,525			9,633			31,607			26,571			General and administrative	15,020			9,525			34,353			31,607
Total operating costs and expenses	Total operating costs and expenses	$	29,966	121%	$	22,301	49%	$	88,821	95%	$	61,285	32%	Total operating costs and expenses	$	38,101	91%	$	29,966	121%	$	101,794	87%	$	88,821	95%

Q3 ~~2019~~2020 vs. Q3 ~~2018~~2019

Total operating costs and expenses ~~as a percentage of total revenue increased in Q3 2019 compared to Q3 2018. Total operating costs and expenses~~ increased by ~~$7.7~~$8.1 million or ~~34%~~27%. Cost of ~~material sales~~Captisol increased primarily due to a higher ~~purchase price of the~~ Captisol ~~used for the sales as a result of timing of customer purchases and lower gross margin material~~ sales during Q3 ~~2019~~2020 as ~~compared to Q3 2018. Research~~mentioned above. General and ~~development~~administrative expenses increased primarily due to acquisition integration related costs as well as additional expenses from the ~~Vernalis~~Icagen acquisition ~~and amortization of other economic rights during the three months ended September 30, 2019.~~in April 2020.

YTD ~~2019~~2020 vs. YTD ~~2018~~2019

Total operating costs and expenses ~~as a percentage of total revenue increased in YTD 2019 compared to the same period in 2018. Total operating costs and expenses~~ increased by ~~$27.5~~$13.0 million or ~~45%~~15%. Cost of ~~material sales~~Captisol increased primarily due to higher ~~costs of the~~ Captisol ~~used for the sales as a result of timing of customer purchases and lower gross margin material~~ sales during the YTD ~~2019~~2020 as compared to YTD 2018. Research and development expenses increased due to timing of internal development costs, the Vernalis acquisition, and amortization of other economic rights during the nine months ended September 30, 2019.mentioned above. General and administrative expenses increased primarily due to acquisition integration related costs as well as additional expenses from the ~~Vernalis acquisition.~~Icagen acquisition in April 2020.

Other Income (Expense)


(Dollars in thousands)	(Dollars in thousands)	Q3 2019		Q3 2018		Change		YTD 2019		YTD 2018		Change		(Dollars in thousands)	Q3 2020		Q3 2019		Change		YTD 2020		YTD 2019		Change
Gain (loss) from Viking		$	(10,520)	$	62,398	$	(72,918)	$	(5,592)	$	124,206	$	(129,798)
Loss from short-term investments														Loss from short-term investments	$	(9,862)	$	(13,297)	$	3,435	$	(17,143)	$	(8,524)	$	(8,619)
Interest income	Interest income	7,396		5,474		1,922		22,590		9,111		13,479		Interest income	991		7,396		(6,405)		7,690		22,590		(14,900)
Interest expense	Interest expense	(8,993)		(11,200)		2,207		(26,911)		(28,133)		1,222		Interest expense	(6,269)		(8,993)		2,724		(21,030)		(26,911)		5,881
Other expense, net		(2,596)		(808)		(1,788)		(2,528)		(5,643)		3,115
Other income (expense), net														Other income (expense), net	(219)		181		(400)		1,940		404		1,536
Total other income (expense), net	Total other income (expense), net	$	(14,713)	$	55,864	$	(70,577)	$	(12,441)	$	99,541	$	(111,982)	Total other income (expense), net	$	(15,359)	$	(14,713)	$	(646)	$	(28,543)	$	(12,441)	$	(16,102)

The fluctuation in the gain (loss) from ~~Viking common stock and warrants are~~short-term investments is primarily driven by the changes in the fair value of ~~the~~our ownership in Viking common stock and warrants.

Interest income consists primarily of interest earned on our short-term ~~investment transactions and the change in the fair market value of our~~ investments. The ~~increase in Q3 2019 as compared to Q3 2018 was~~decreases over the prior periods were due to the ~~increase~~decrease in our short-term investment balance ~~as a result of~~resulting from the proceeds ~~from the sale of the Promacta license~~used in ~~March 2019. The increase in YTD 2019 as compared to YTD 2018 was due to the increase in our short-term investment balance as a result of the proceeds from~~share repurchases, the 2023 Notes ~~financing on May 22, 2018~~repurchase during the second quarter of 2020 and the ~~proceeds from~~acquisition of Icagen, xCella and Taurus during the ~~sale of the Promacta license in March 2019.~~nine months ended September 30, 2020.

Interest expense includes the 0.75% coupon cash interest expense in addition to the non-cash accretion of discount (including the amortization of debt issuance cost) on our ~~2019 Notes and~~ 2023 Notes for the three and nine months ended September 30, ~~2019.~~2020. The ~~quarter~~decreases over ~~quarter and year over year decreases~~the prior periods were primarily due to lower average debt outstanding balance ~~for~~during the ~~three and nine months ended September 30, 2019~~current periods as compared to the prior periods. The 2019 Notes were paid off upon the maturity date in August 2019. In March 2020, we repurchased $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million. See Note 54 - Convertible Senior Notes.

Other expense, net, for the three months ended September 30, 2019 increased as compared to the prior period. The increase was primarily due to a $2.8 million unrealized loss in equity investments during the three months ended September 30, 2019. Other expense,income, net, for the nine months ended September 30, ~~2019 decreased~~2020 increased as compared to the ~~prior period.~~same period last year. The ~~decrease was~~ increases were primarily due to ~~(1)~~ a ~~$1.5~~$1.9 million ~~decrease in fair value of contingent liabilities associated with our Crystal acquisition based~~gain on ~~management's estimates of timing and probability of achievement of certain milestones and revenue thresholds during the first quarter of 2019, (2)~~ an ~~increase in the fair value adjustment of contingent liabilities associated with our Metabasis acquisition~~asset sale during the nine months ended September 30, 2018, and (3) a net decrease in our derivative instrument expense associated with our convertible notes and hedge transactions during the nine months ended September 30, 2019 as compared to prior period. See ~~Note 5 - Convertible Senior Notes.~~2020.

Income Tax Benefit (Expense)


(Dollars in thousands)	(Dollars in thousands)	Q3 2019			Q3 2018			Change		YTD 2019			YTD 2018			Change		(Dollars in thousands)	Q3 2020			Q3 2019			Change		YTD 2020			YTD 2019			Change
Income (loss) before income taxes	Income (loss) before income taxes	$	(19,871)		$	79,226		$	(99,097)	$	804,814		$	230,119		$	574,695	Income (loss) before income taxes	$	(11,612)		$	(19,871)		$	8,259	$	(13,908)		$	804,814		$	(818,722)
Income tax benefit (expense)	Income tax benefit (expense)	4,620			(11,864)			16,484		(168,147)			(44,316)			(123,831)		Income tax benefit (expense)	4,911			4,620			291		5,162			(168,147)			173,309
Income (loss) from operations	Income (loss) from operations	$	(15,251)		$	67,362		$	(82,613)	$	636,667		$	185,803		$	450,864	Income (loss) from operations	$	(6,701)		$	(15,251)		$	8,550	$	(8,746)		$	636,667		$	(645,413)
Effective tax rate	Effective tax rate	23.2		%	15.0		%			20.9		%	19.3		%			Effective tax rate	42.3		%	23.2		%			37.1		%	20.9		%

We compute our income tax provision by applying the estimated annual effective tax rate to income from operations and adding the effects of any discrete income tax items specific to the period. ~~Our~~The effective tax rate for the three and nine months ended September 30, ~~2019~~2020 was ~~approximately 23.2%~~42.3% and ~~20.9%~~37.1%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2019 was primarily attributable to state taxes and a lower R&D tax credit. The variance from the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2019 was primarily attributable to tax deductions related to stock award activities and the release of a valuation allowance relating to our R&D tax credits which were recorded as discrete items. Our effective tax rate for the three and nine months ended September 30, 2018 was approximately 15.0% and 19.3%, respectively. The variancevariances from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, ~~2018 was~~2020 were primarily attributable to the mix of earnings in the jurisdictions with higher statutory rates than the U.S. and tax deductions related to stock award activities, ~~which~~offset by tax deductions related to foreign derived intangible income tax credits. The effective tax rate for the three and nine months ended September 30, 2019 was 23.2% and 20.9%, respectively. The variances from the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2019 were ~~recorded as discrete items as well as~~primarily attributable to the ~~release~~mix of ~~a valuation allowance relating to our investment~~earnings in ~~Viking during~~ the ~~first quarter of 2018.~~jurisdictions with lower statutory tax rates than the U.S.

Liquidity and Capital Resources

As of September 30, ~~2019,~~2020, our cash, cash equivalents, and marketable securities totaled ~~$1.1 billion,~~$795.1 million, which were ~~increased~~decreased by ~~$375.7~~$274.8 million from the end of last year, due to factors described in the ~~"Cash~~“Cash Flow ~~Summary"~~Summary” below. This amount excludes our cash payment of $437.5 million million at the closing of our acquisition of Pfenex on October 1, 2020. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, ~~which increased during 2019 primarily from the sale of Promacta,~~ has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs.

Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. ~~As of September 30, 2019, we had $0.9 billion in short-term investments.~~ Our short-term investments include U.S. government debt securities, investment-grade corporate debt securities, mutual funds and certificates of deposit. We have established guidelines relative to diversification and maturities of our investments in order to provide both safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Additionally, we own certain securities which are classified as short-term investments that we received as a result of a milestone and an upfront license payment as well as ~~6.0~~5.8 million shares of common stock in Viking.

In August 2014, we issued an aggregate principal amount of $245.0 million of the 2019 Notes. During 2018, $217.7 million in principal of the 2019 Notes were converted into cash. In June 2019, we received notices for conversion of $1.0 million of principal amount of the 2019 Notes, which were settled in cash upon the 2019 Notes' maturity date in August 2019. On August 15, 2019, the 2019 Notes maturity date, we paid the noteholders the remaining $26.3 million principal amount.

In May 2018, we issued an aggregate principal amount of $750.0 million of the 2023 Notes. In conjunction of the 2023 Notes offering, we used a portion of the proceeds from such issuance totaling $49.7 million to repurchase 260,000 shares of our common stock. In March 2020, we repurchased $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million. After the repurchases, $515.6 million in principal amount of the 2023 Notes remain outstanding. We may continue to use cash on hand to repurchase additional 2023 Notes through open-market transactions, including through Rule 10b5-1 trading plan to facilitate open-market repurchases, or otherwise, from time to time. The timing and amount of repurchase transactions will be determined by management based on the evaluation of market conditions, trading

price of the 2023 Notes, legal requirements and other factors. The 2023 Notes were not convertible as of September 30, ~~2019.~~2020. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. See Note 4 - Convertible Senior Notes.

In September 2018, our Board of Directors authorized us to repurchase up to $200.0 million of our common stock from time to time over a period of up to three years. On January 23, 2019, our Board of Directors increased the share repurchase authorization by $150.0 million. This $350.0 million repurchase plan was fully utilized during the third quarter of 2019.

~~On September 11,~~ 2019, our Board of Directors approved a stock repurchase program authorizing, but not obligating, the repurchase of up to $500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and ~~have entered~~may enter into a Rule 10b5-1 trading ~~plan, and may enter into additional Rule 10b5-1 trading~~ plans ~~in the future,~~ to facilitate open-market repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. ~~Our prior $350.0~~During the first quarter of 2020, we repurchased $73.3 million of our common stock under our stock repurchase ~~program mentioned above was terminated in connection with~~programs as discussed below. We did not have any share repurchases during the ~~approval~~second and third quarter of ~~the new stock repurchase program.~~2020. Authorization to repurchase ~~$408.7~~$253.5 million of our common stock remained available as of September 30, ~~2019.~~2020.

We ~~anticipate~~believe that our ~~current~~existing funds, cash ~~cash equivalents,~~generated from operations and ~~short-term investments, together with cash provided by operating activities,~~existing sources of and access to financing are ~~sufficient~~adequate to fund our ~~near term capital and operating needs~~need for ~~at least the next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund~~ working capital, ~~and~~ capital ~~expenditures. Our primary short-term needs for capital, which are subject to change, include:~~

~~• potential early repayment of~~expenditures, debt ~~obligations as a result of conversions;~~

~~• repurchases of our outstanding common stock;~~

~~• the~~service requirements, continued advancement of research and development ~~efforts;~~

•efforts, potential ~~strategic~~stock repurchases and other business initiatives we plan to strategically pursue, including acquisitions and ~~investments; and~~

~~• the expansion needs of our facilities, including costs of leasing additional facilities.~~strategic investments.

As of September 30, ~~2019,~~2020, we had ~~$9.8~~$10.8 million in fair value of contingent consideration liabilities associated with prior acquisitions to be settled in future periods.

Leases and Off-Balance Sheet Arrangements

We lease our office facilities under operating lease arrangements with varying terms through September 2026. The agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases of 3.0%. See further information in Note 9,8, Leases. We had no off-balance sheet arrangements at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

Cash Flow Summary


(Dollars in thousands)	(Dollars in thousands)	YTD 2019		YTD 2018		(Dollars in thousands)	YTD 2020		YTD 2019
Net cash provided by (used in):	Net cash provided by (used in):					Net cash provided by (used in):
Operating activities	Operating activities	$	(21,997)	$	161,487	Operating activities	$	54,049	$	(21,997)
Investing activities	Investing activities	$	530,097	$	(698,571)	Investing activities	$	613,850	$	530,097
Financing activities	Financing activities	$	(401,479)	$	675,670	Financing activities	$	(283,016)	$	(401,479)

During the nine months ended September 30, 2020, we repurchased $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million; paid $15.1 million in cash for the Icagen acquisition, $11.6 million in cash for xCella and Taurus acquisitions, and used $73.3 million to repurchase our common stock. During the nine months ended September 30, 2019, we generated $827 million from the sale of ~~the~~ Promacta license (including $14.2 million recorded to revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019), used cash for net purchases of short-term investments, used $371.1 million to repurchase our common stock, used $93.8 million to pay federal and state estimated income taxes, paid off the remaining balance of the 2019 Notes in the amount of $27.3 million, paid $12.0 million for the purchase of Novan economic rights and paid $11.8 million for the Ab Initio acquisition (net of cash acquired). ~~During~~

Contractual Obligations

There have been no material changes outside the ~~nine months ended September 30, 2018, we generated cash from operations, from issuance~~ordinary course of ~~common stock~~business to the “Contractual Obligations” table set forth in our 2019 Annual Report, other than our purchase obligations under ~~employee stock plans,~~our agreements with Hovione for Captisol purchases and ~~from issuance of 2023 Notes, partially offset~~equipment investment increased by ~~cash used for net purchases of short-term investments and $52.7 million used to repurchase our common stock.~~approximately $69 million.

Critical Accounting Policies

Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ materially from the estimates made. There have been no material changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2019 Annual Report, other than the adoption of the Accounting Standards Updates described in Item 1. Condensed Consolidated Financial Statements - Note 1, "Basis of Presentation and Summary of Significant Accounting Policies," ~~as compared~~related to ~~the critical accounting policies and estimates described in our 2018 Annual Report.~~allowance for credit losses.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no substantial changes to our market risks in the three and nine months ended September 30, ~~2019,~~2020, when compared to the disclosures in Item 7A of our ~~2018~~2019 Annual Report.

Item 4. Controls and Procedures

~~Under~~We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of ~~the design and operation of~~ our disclosure controls and procedures, as ~~such term is~~ defined in Rules ~~13a15(e)~~13a-15(e) and 15d-15(e) ~~under the Exchange Act. Based upon and as~~ of the ~~date~~Securities Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of September 30, 2020 were effective to ~~provide reasonable assurance~~ensure that information required to be disclosed by us in reports that we file or submit ~~pursuant to~~under the Securities Exchange Act of 1934 is ~~(1)~~ recorded, processed, summarized and reported within the time periods specified in ~~SEC~~the SEC’s rules and forms, and ~~(2)~~that such information is accumulated and communicated to ~~our~~ management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

~~Our disclosure controls~~There were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.

~~There have not been any~~ changes in our internal control over financial reporting ~~(as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act)~~that occurred during the quarter ~~of the fiscal year to which this report relates~~ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information that updates the disclosures set forth under Part I, Item 3, “Legal Proceedings” in our ~~2018~~2019 Annual Report, refer to Note 8,7, Commitment and Contingencies: Legal Proceedings, to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this report.

Item 1A. Risk Factors

There have been no material changes to the risk factors included in “Item 1A. Risk Factors” in our ~~2018~~2019 Annual Report, other than as set forth below:

Our business is subject to risks arising from epidemic diseases, such as the recent COVID-19 pandemic, which has impacted and could continue to impact our business.

~~Our investments~~Several of our partners have reported that their operations have been impacted including delays in research and development programs and deprioritizing clinical trials in favor of treating patients who have contracted the virus or to prevent the spread of the virus. This may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are ~~subject~~currently enrolled in the clinical trials being conducted by us or our partners. In addition, certain of our partners have reported negative impacts on product sales which will impact our royalty revenues. As the COVID-19 pandemic continues to ~~market and credit risks~~spread around the globe, we may experience disruptions that could ~~diminish their value and these risks could be greater during periods of extreme volatility or disruption in the financial and credit markets, which could adversely~~severely impact our business, ~~financial condition, results of operations, liquidity~~drug manufacturing and ~~cash flows.~~supply chain, nonclinical activities and clinical trials and our partners’ business may be impacted in similar ways, including due to:

~~Our investments are~~•delays or difficulties in enrolling patients in clinical trials;

•delays or difficulties in clinical site initiation, including difficulties in recruiting or supporting clinical site investigators and clinical site staff;

•diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as clinical trial sites and hospital staff supporting the conduct of clinical trials;

•interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;

•interruption or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines;

•interruption of, or delays in receiving, supplies of Captisol or other product or product candidates from contract manufacturing organizations due to ~~risks~~staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, which may result in cancellations of ~~credit defaults~~Captisol orders or refunds if we fail to deliver Captisol timely;

•delays in clinical sites receiving the supplies and materials needed to conduct clinical trials and interruption in global shipping that may affect the transport of clinical trial materials;

•interruptions in nonclinical studies due to restricted or limited operations at laboratory facility or those of outsourced service providers;

•limitations on employee resources that would otherwise be focused on the conduct of nonclinical studies or clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

•delays in receiving approval from local regulatory authorities to initiate planned clinical trials;

•changes in ~~market values. Periods~~local regulations as part of ~~macroeconomic weakness~~a response to COVID-19 which may require us to change the ways in which clinical trials are conducted, which may result in unexpected costs, or ~~recession, heightened volatility~~to discontinue the clinical trials altogether;

•delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or ~~disruption~~forced furlough of government employees;

•refusal of the FDA to accept data from clinical trials in affected geographies outside the ~~financial~~United States;

•interruption or delays to discovery and ~~credit markets could increase these risks, potentially resulting in other than temporary impairment~~development pipelines; and

•difficulties launching or commercializing products, including due to reduced access to doctors as a result of assets in our investment portfolio. Any event reducing the estimated fair value of these securities, other than on a temporary basis, could have a material and adverse effect on our business, results of operations, financial condition, liquidity and cash flows. If our investment manager, fails to react appropriately to difficult market, economic and geopolitical conditions, our investment portfolio could incur material losses.social distancing protocols.

~~We have~~In addition, if COVID-19 infects our genetically modified animals which form the basis of our OmniAb platform, or if there is an outbreak among our employees who maintain and care for these animals, we and our partners may be unable to produce antibodies for development. Further, the spread of COVID-19 has had and may continue to severely impact the trading price of shares of our common stock and could further severely impact our ability to raise additional capital on a risk management framework in place to identify, assess and prioritize risks, including the market and credit risks to which our investments are subject. As part of that framework, we test our investment portfolio based on various market scenarios. Under certain stressed market scenarios, unrealized losses on our investment portfolio could lead to material reductions in its carrying value.timely basis or at all.

~~A decline in fair value below~~The COVID-19 pandemic continues to evolve. The extent to which the ~~amortized cost of a security requires management~~COVID-19 may impact our business, including our drug manufacturing and supply chain, nonclinical activities, clinical trials and financial condition, including due to ~~assess whether an other-than-temporary impairment (OTTI) has occurred. The decision~~impacts on ~~whether to record an OTTI is determined in part by~~ our ~~assessment~~partners’ businesses, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

To the extent the COVID-19 pandemic adversely affects our business and financial ~~condition and prospects~~results, it may also have the effect of ~~a particular issuer, projections of future cash flows and recoverability~~heightening many of the ~~particular security as well as management’s assertion~~other risks described in this section and in the “Risk Factors” section of ~~whether it is more likely than not that we will sell the particular security before recovery.~~our 2019 Annual Report.

Future revenue ~~based on Kyprolis and Evomela, as well as~~from sales of Captisol material to our ~~other products,~~license partners may be lower than expected.

~~We receive revenue~~Revenues from ~~Amgen based on both~~ sales ~~of Kyprolis and purchases~~ of Captisol material ~~for clinical~~to our collaborative partners, including Amgen and ~~commercial uses. These payments are expected to be~~Gilead, represent a ~~substantial~~significant portion of our ~~ongoing revenues for some time. In addition, we receive revenues based on sales of Evomela and other products.~~current revenues. Any setback that may occur with respect to ~~any of our partners' products, and in particular Kyprolis,~~Captisol could significantly impair our

operating results and/or reduce ~~our revenue and~~ the market price of our stock. Setbacks for ~~the products~~Captisol could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the products ~~as well as higher than expected total rebates, returns, discounts,~~using Captisol. In addition, revenue from Captisol sales related to remdesivir may not continue or ~~unfavorable exchange rates. These~~materially increase due to a number of factors, including: if remdesivir is later shown to not be effective or safe for the treatment of COVID-19; the FDA revises or revokes its approval of remdesivir; if alternative therapies or vaccines are approved; or the risk of COVID-19 infection significantly diminishes, in which case the commercial opportunity could be materially and adversely affected.

If products ~~also~~or product candidates incorporating Captisol material were to cause any unexpected adverse events, the perception of Captisol safety could be seriously harmed. If this were to occur, we may not be able to sell Captisol unless and until we are able to demonstrate that the adverse event was unrelated to Captisol, which we may not be able to do. Further, the FDA could require us to submit additional information for regulatory review or approval, including data from extensive safety testing or clinical testing of products using Captisol. This would be expensive and it may ~~become subject~~delay the marketing of Captisol-enabled products and receipt of revenue related to ~~generic competition.~~those products, which could significantly impair our operating results and/or reduce the market price of our stock.

We ~~rely heavily on collaboration relationships,~~obtain Captisol from Hovione, our third party manufacturer, primarily at Hovione’s facilities in Portugal and Ireland. If Hovione were to cease to be able, for any ~~disputes or litigation with our collaboration partners or termination or breach of any of the related agreements could reduce the financial resources available~~reason, to supply Captisol to us ~~including milestone payments~~in the amounts we require, or decline to supply Captisol to us, we would be required to seek an alternative source, which could potentially take a considerable length of time and ~~future royalty revenues.~~impact our revenue and customer relationships. In the event of a Captisol supply interruption, we are permitted to designate and, with Hovione’s assistance, qualify one or more alternate suppliers, although there is no assurance that we could do so timely or at an acceptable costs, if at all. In addition to manufacturing at Hovione’s facilities in Ireland and Portugal, we have now added final step processing capacity for Captisol in both the United States and England.

~~Our strategy~~We maintain inventory of Captisol, which has a five year shelf life, at three geographically dispersed storage locations in the United States and Europe. If we were to encounter problems maintaining our inventory, such as natural disasters, at one or more of these locations, it could lead to supply interruptions. In addition, we will rely on Hovione to expand manufacturing capacity of Captisol and any failure by Hovione to timely implement such increased capacity could adversely affect our ability to supply Captisol to our partners. While we believe we maintain adequate inventory of Captisol to meet our current partner needs, and our planned expansion of Captisol capacity will be sufficient to meet future partner needs, our estimates and projections for developing and commercializing many of our potential products, including products aimed at larger markets, includes entering into collaboration agreements with corporate partners and others. These agreements give our collaboration partners significant discretion when deciding whether or not to pursue any development program. Our existing collaborationsCaptisol demand may not ~~continue or~~ be ~~successful,~~correct and weany supply interruptions could materially adversely impact our operating results. In addition, our plan to invest additional capital for the expansion of Captisol manufacturing capacity may ~~be unable to enter into~~not yield a return on investment if future ~~collaboration arrangements to develop and commercialize~~Captisol sales fall below our ~~unpartnered assets.~~expectations.

~~In addition, our collaborators may develop drugs, either alone or with others that compete with the types of drugs they are developing with us (or that we are developing~~We currently depend on our ~~own). This would result in increased competition~~arrangements with our partners and licensees to sell products using our Captisol technology. These agreements generally provide that our partners may terminate the agreements at will. If our partners discontinue sales of products using Captisol, fail to obtain regulatory approval for ~~our or our partners' programs. If~~ products ~~are approved for marketing~~using Captisol, fail to satisfy their obligations under our collaboration programs, revenues we receive will depend on the manufacturing, marketing and sales efforts of our collaboration partners, who generally retain commercialization rights under the collaboration agreements. Generally, our current collaboration partners also have the right to terminate their collaborations at will or under specified circumstances. If any of our collaboration partners breach (for example, by not making required payments when due, or at all) or terminate their agreements with us, or ~~otherwise fail~~choose to ~~conduct their collaboration activities successfully,~~utilize a competing product, or if we are unable to establish new licensing and marketing relationships, our ~~product development under~~financial results and growth prospects would be materially affected. Furthermore, we maintain significant accounts receivable balances with certain customers purchasing Captisol materials, which may result in the concentration of credit risk. We generally do not require any collateral from our customers to secure payment of these agreements will be delayed or terminated. Disputes or litigation may also arise with our collaborators (with us and/or with one or more third parties), including those over ownership rights to intellectual property, know-how or technologies developed with our collaborators. Such disputes or litigation could adversely affect our rights to one or moreaccounts receivable. If any of our ~~product candidates. Any such dispute or litigation could delay, interrupt or terminate~~major customers were to default in the collaboration research, development and commercialization of certain potential products, create uncertainty as to ownership rights of intellectual property, or could result in litigation or arbitration. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.

~~Our collaboration partners may change their strategy or the focus~~payment of their ~~development~~obligations to us, our business, operating results and ~~commercialization efforts with respect to our partnered programs, and the success of our partnered programs~~cash flows could be adversely affected.

Further, under most of our Captisol outlicenses, the amount of royalties we receive will be reduced or will cease when the relevant patent expires. Our low-chloride patents and foreign equivalents are not expected to expire until 2033, our high purity patents and foreign equivalents, are not expected to expire until 2029 and our morphology patents and foreign equivalents, are not expected to expire until 2025, but the initially filed patents relating to Captisol expired starting in 2010 in the United States and in 2016 in most countries outside the United States. If our ~~collaboration~~other intellectual property rights are not sufficient to prevent a generic form of Captisol from coming to market and if in such case our partners choose to terminate their ~~collaborations~~agreements with us, ~~or do not commit sufficient resources to the development, manufacture, marketing or distribution of~~ our partnered programs, we could be required to devote additional resources to our partnered programs, seek new collaboration partners or abandon such partnered programs, all of which could have an adverse effect on our business. For example, several of our collaboration partners using our OmniAb antibody platform have terminated their contracts or substantially reduced their investment in the antibodies discovered based on the platform. Although we expect growth in the net number of partners with one more active programs based on antibodies discovered using our OmniAb platform, there can be no assurance that our partners will continue their programs or that we will be able to find new collaboration partners interested in discovering antibodies based on our OmniAb platform.Captisol revenue may decrease significantly.

Our OmniAb antibody platform faces specific risks, including the fact that no ~~drug~~product using antibodies from the platform has been approved by the FDA or similar regulatory ~~agency~~.agency.

None of our collaboration partners using our OmniAb antibody platform have received approval from the FDA or similar regulatory agency to market a product discovered based on our platform. In addition, only a few of our collaboration partners’ product candidates based on the platform have been tested in late stage clinical trials. If one of our OmniAb collaboration

partners’ ~~drug~~product candidates fails during preclinical studies or clinical trials, our other OmniAb collaboration partners may decide to abandon ~~drugs~~product candidates using antibodies generated from the OmniAb platform, whether or not such failure is attributable to the platform. All of our OmniAb collaboration partners may terminate their programs at any time without penalty. In addition, our OmniRat and OmniFlic platforms, which we consider the most promising, are covered by ~~five~~six patents within the U.S. and three patents in the European Union and are subject to the same risks as our patent portfolio discussed elsewhere in this report and our 2019 Annual Report, including the risk that our patents may infringe on third party patent rights or that our patents may be invalidated. As of a result of these factors, the future revenue generated from this platform may be materially lower than what we currently anticipate. Further, we face significant competition from other companies selling human antibody-generating rodents, especially mice which compete with our OmniMouse platform, including the VelocImmune mouse, the AlivaMab mouse, the Trianni mouse and the Kymouse. Many of our competitors have greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market competing antibody platforms. Our competitors may render our OmniAb antibody platform obsolete, or limit the commercial value of any product candidates developed using our platform, by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages that we believe our platform offers.

Our recent strategic acquisitions and announced dispositions may adversely affect our stock price, operating results and results of operations.

We recently acquired Pfenex, as well as Taurus and xCella. We may not be able to integrate these acquired business successfully, achieve the expected growth prospects and synergies, expected royalties and other economics or operate such businesses profitably. In addition, such acquisitions may disrupt our current plans and operations, we may not be able to retain key personnel or preserve existing business relationships following such acquisitions, and may incur unexpected costs, charges or expenses resulting from completion of the acquisitions. Further, many of the risks we disclose for our programs and our existing partners’ programs in “Item 1A. Risk Factors” in our 2019 Annual Report would also apply these acquired companies and businesses. For example, the platform we acquired from Pfenex faces many of the same risks that face our OmniAb platform, including that we are entirely dependent on our partners' efforts to develop and commercial products based on the platform.

We also recently announced the disposition of Vernalis (R&D) Limited. We cannot assure you that the closing of this transaction will occur on our expected timeframe or at all, whether as a result of the failure to meet closing conditions or otherwise, including the requirement that required governmental approvals may not obtained or may be delayed. Furthermore, we may not realize expected future benefits from the Vernalis transaction, including from retained licenses and collaboration economics and as a result of indemnification claims under the Vernalis Purchase Agreement and our retention of certain liabilities associated with the Vernalis business.

If we fail to realize the expected benefits from these acquisitions and our proposed Vernalis disposition, our business, results of operations and financial condition could be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the nine months ended September 30, 2019, we have repurchased 3,361,205 shares, in amount of $366.5 million , of our common stock under our stock repurchase programs approved by our board of directors. See detail in ~~Note 7, Stockholders' Equity, to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this report.~~

~~The following tables present information regarding repurchases by us of common stock during the three months ended September 30, 2019 under the stock repurchase programs.~~

~~ISSUER PURCHASES OF EQUITY SECURITIES~~

~~Prior Stock Repurchase Program~~

Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
(in thousands)⁽¹⁾
July 1 - July 31, 2019 115,296 $ 113.42 115,296 $ 76,870
August 1 - August 31, 2019 822,271 $ 93.45 822,271 $ 29
September 1 - September 30, 2019 — N/A — —
Total 937,567 $ 95.91 937,567
(1) Our prior $350.0 million stock repurchase program was fully utilized and terminated in connection with the approval of the new stock repurchase program on September 11, 2019.

~~Current Stock Repurchase Program~~

Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
(in thousands)
July 1 - July 31, 2019 — N/A — N/A
August 1 - August 31, 2019 — N/A — N/A
September 1 - September 30, 2019 896,329 $ 101.83 896,329 $ 408,730
Total 896,329 $ 101.83 896,329

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

None

Item 6. Exhibits


Exhibit Number			Description
2.1			Agreement and Plan of Merger, dated as of August 10, 2020, by and among Pfenex, Inc., Ligand Pharmaceuticals Incorporated and Pelican Acquisition Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2020).
2.2			Agreement and Plan of Merger, dated September 8, 2020, among Ligand Pharmaceuticals Incorporated, xCella Biosciences, Inc. and other persons (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2020).
2.3			Agreement and Plan of Merger, dated September 9, 2020, among Ligand Pharmaceuticals Incorporated, Taurus Biosciences, LLC and other persons (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2020).
2.4			Contingent Value Rights Agreement, dated September 9, 2020, between Ligand Pharmaceuticals Incorporated and Vaughn Smider, as Members' Representative (regarding Taurus Biosciences, LLC acquisition) (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2020).
2.5			Contingent Value Rights Agreement, dated as of September 30, 2020, by and between Ligand Pharmaceuticals Incorporated and American Stock Transfer & Trust Company, LLC.*
2.6			Agreement for the Sale and Purchase of the Entire Issued Share Capital of Vernalis (R&D) Limited, dated as of October 11, 2020, by and among Ligand Pharmaceuticals Incorporated, Vernalis Limited, HitGen UK Ltd and HitGen Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 13, 2020).
10.1			Commercial License Agreement, dated September 9, 2020, between Taurus Biosciences, LLC and Minotaur Therapeutics, Inc. (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2020).
10.2			Amendment to Supply Agreement, dated September 21, 2020, by and between Cydex Pharmaceuticals, Inc. and Gilead Sciences, Inc., which amends that certain Supply Agreement, dated December 2, 2015, by and between Cydex Pharmaceuticals, Inc. and Gilead Sciences, Inc.*
31.1			Certification by Principal Executive Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2			Certification by Principal Financial Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1			Certifications by Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101			The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2019,~~2020, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Operations, (iii) Consolidated Condensed Statement of Comprehensive Income, (iv) Consolidated Condensed Statements of Stockholders' Equity, (v) Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.*
104			The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2019,~~2020, formatted in Inline XBRL and contained in Exhibit 101.

*Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:

November ~~8, 2019~~6, 2020

By:

/s/ Matthew Korenberg

Matthew Korenberg

Executive Vice President, Finance and Chief Financial Officer

Duly Authorized Officer and Principal Financial Officer

3839


	September 30, 2019		December 31, 2018
Principal amount of 2019 Notes outstanding	$	—	$	27,326
Unamortized discount (including unamortized debt issuance cost)	—		(893)
Total current portion of notes payable	$	—	$	26,433

Principal amount of 2023 Notes outstanding	$	750,000	$	750,000
Unamortized discount (including unamortized debt issuance cost)	(118,467)		(140,136)
Total long-term portion of notes payable	$	631,533	$	609,864

Carrying value of equity component of 2023 Notes	$	108,205	$	127,997
Fair value of both 2019 Notes and 2023 Notes outstanding (Level 2)	$	625,088	$	713,533


Maturity Dates	September 30, 2019
Remaining three months ending December 31, 2019	$	251
2020	1,857
2021	2,142
2022	2,180
2023	1,905
Thereafter	5,257
Total lease payments	13,592
Less imputed interest	(2,734)
Present value of lease liabilities	$	10,858


(in millions)	YTD 2019 Estimated Partner Product Sales		Effective Royalty Rate		YTD 2019 Royalty Revenue		YTD 2018 Partner Product Sales		Effective Royalty Rate		YTD 2018 Royalty Revenue
Promacta ⁽¹⁾	$	225.1	6.3	%	$	14.2	$	844.0	8.1	%	$	68.2
Kyprolis	778.0		2.1	%	16.3		752.0		1.9	%	14.4
Evomela	17.7		20.0	%	3.5		20.6		20.0	%	4.1
Other	142.8		1.3	%	1.9		131.1		1.2	%	1.6
Total	$	1,163.6			$	35.9	$	1,747.7			$	88.3


	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in thousands)⁽¹⁾
July 1 - July 31, 2019	115,296	$	113.42	115,296	$	76,870
August 1 - August 31, 2019	822,271	$	93.45	822,271	$	29
September 1 - September 30, 2019	—	N/A		—	—
Total	937,567	$	95.91	937,567
(1) Our prior $350.0 million stock repurchase program was fully utilized and terminated in connection with the approval of the new stock repurchase program on September 11, 2019.