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 SeptemberJune 30, 20202021
or
☐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
lgnd-20200930_g1.jpg
lgnd-20210630_g1.jpg

LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware77-0160744
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3911 Sorrento Valley Boulevard,5980 Horton Street, Suite 110405
San DiegoEmeryville
CA9212194608
(Address of principal executive offices)(Zip Code)
(858) 550-7500
(Registrant's Telephone Number, Including Area Code)

3911 Sorrento Valley Boulevard, Suite 110
San Diego, CA 92121
(Former Name or Former Address, if Changed Since Last Report)

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 shareLGNDThe 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 3, 2020,July 30, 2021, the registrant had 16,091,31916,676,532 shares of common stock outstanding.




LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION


2



GLOSSARY OF TERMS AND ABBREVIATIONS
AbbreviationDefinition
20192020 Annual ReportAnnual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on February 27, 2020
2019 Notes$245.0 million aggregate principal amount of convertible senior unsecured notes due 201924, 2021
2023 Notes$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
Ab InitioAb Initio Biotherapeutics, Inc.
AmgenAmgen, Inc.
ANDAAbbreviated New Drug Application
ASCAccounting Standards Codification
ASUAccounting Standards Update
AziyoAziyo Med, LLC
CECaptisol-enabled
CompanyLigand Pharmaceuticals Incorporated, including subsidiaries
CorMatrixCorMatrix Cardiovascular, Inc.
CVRContingent value right
CrystalCrystal Bioscience, Inc.
CStone PharmaceuticalsCStone Pharmaceuticals (Suzhou) Co., Ltd.
CyDexCyDex Pharmaceuticals, Inc.
Dianomi TherapeuticsDianomi Therapeutics, Inc.
ESPPEmployee Stock Purchase Plan, as amended and restated
FASBFinancial Accounting Standards Board
FDAFood and Drug Administration
GAAPGenerally accepted accounting principles in the United States
GileadGilead Sciences, Inc.
GRAGlucagon receptor antagonist
IcagenIcagen, Inc.
INDInvestigational New Drug
LigandLigand Pharmaceuticals Incorporated, including subsidiaries
MetabasisMetabasis Therapeutics, Inc.
NDANew Drug Application
PfenexPfenex Inc.
Pfenex CVRContingent value rights agreement, dated September 30, 2020, by and between Ligand and Pfenex
PfizerPfizer Inc.
Q3 2019The Company's fiscal quarter ended September 30, 2019
Q3Q2 2020The Company's fiscal quarter ended SeptemberJune 30, 2020
RoivantQ2 2021Roivant Sciences GmbH
Roivant License AgreementLicense Agreement, dated March 5, 2018, between Ligand and Roivant
RetrophinRetrophin, Inc.The Company's fiscal quarter ended June 30, 2021
SBCShare-based compensation expense
SECSecurities and Exchange Commission
SelexisSelexis, SA
sNDASupplemental New Drug Application
TaurusTaurus Biosciences, LLC
TevaTeva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
VernalisTravereVernalis plcTravere Therapeutics, Inc.
VikingViking Therapeutics, Inc.
xCellaxCella Biosciences, Inc.
YTDYear-to-date

3


PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Unaudited, in thousands, except par value)
September 30, 2020December 31, 2019
ASSETS
Current assets:
   Cash and cash equivalents$456,916 $71,543 
   Short-term investments338,154 998,324 
   Accounts receivable, net32,907 30,387 
   Inventory13,430 7,296 
   Income taxes receivable0 11,361 
   Other current assets3,191 4,734 
   Assets held for sale13,143 0 
      Total current assets857,741 1,123,645 
Deferred income taxes, net27,026 25,608 
Intangible assets, net224,582 210,448 
Goodwill102,136 95,229 
Commercial license and other economic rights, net10,834 20,090 
Property and equipment, net7,157 7,185 
Operating lease right-of-use assets4,269 10,353 
Other assets13,704 2,357 
      Total assets$1,247,449 $1,494,915 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable$10,169 $2,420 
   Accrued liabilities14,498 9,836 
   Income taxes payable674 0 
   Current contingent liabilities1,194 2,607 
   Deferred revenue5,404 2,139 
   Liabilities related to assets held for sale10,361 0 
      Total current liabilities42,300 17,002 
2023 convertible senior notes, net454,973 638,959 
Long-term contingent liabilities9,604 6,335 
Deferred income taxes, net13,508 32,937 
Long-term operating lease liabilities3,920 9,970 
Other long-term liabilities25,320 22,480 
      Total liabilities549,625 727,683 
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized; 0 issued and outstanding at September 30, 2020 and December 31, 20190 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, respectively16 17 
   Additional paid-in capital313,057 367,326 
   Accumulated other comprehensive loss(1,441)(216)
   Retained earnings386,192 400,105 
      Total stockholders' equity697,824 767,232 
      Total liabilities and stockholders' equity$1,247,449 $1,494,915 
June 30, 2021December 31, 2020
ASSETS
Current assets:
   Cash and cash equivalents$21,863 $47,619 
   Short-term investments279,972 363,567 
   Accounts receivable, net58,156 56,847 
   Inventory39,946 26,487 
   Income taxes receivable4,694 2,217 
   Other current assets6,270 3,822 
      Total current assets410,901 500,559 
Deferred income taxes, net27,882 24,320 
Intangible assets, net572,006 595,330 
Goodwill190,517 189,662 
Commercial license and other economic rights, net10,638 10,979 
Property and equipment, net17,628 14,434 
Operating lease right-of-use assets6,500 6,892 
Financing lease right-of-use assets17,383 15,842 
Other assets2,828 4,267 
      Total assets$1,256,283 $1,362,285 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable$17,273 $3,784 
   Accrued liabilities10,107 18,530 
   Current contingent liabilities5,650 39,884 
   Deferred revenue17,147 29,435 
   Current operating lease liabilities2,275 1,885 
   Current financing lease liabilities45 6,593 
      Total current liabilities52,497 100,111 
2023 convertible senior notes, net315,318 442,293 
Long-term contingent liabilities9,121 9,249 
Deferred income taxes, net60,053 64,598 
Long-term operating lease liabilities4,771 5,643 
Other long-term liabilities28,006 30,866 
      Total liabilities469,766 652,760 
Commitments and contingencies00
Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized; 0 issued and outstanding at June 30, 2021 and December 31, 20200 0 
   Common stock, $0.001 par value; 60,000 shares authorized; 16,676 and 16,080 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively17 16 
   Additional paid-in capital346,578 318,358 
   Accumulated other comprehensive loss(861)(801)
   Retained earnings440,783 391,952 
      Total stockholders' equity786,517 709,525 
      Total liabilities and stockholders' equity$1,256,283 $1,362,285 

See accompanying notes to unaudited condensed consolidated financial statements.



4







LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three months endedNine months ended
September 30,September 30,
2020201920202019
Revenues:
   Royalties$9,005 $9,767 $22,751 $35,931 
   Captisol23,389 6,849 68,966 24,357 
   Contract revenue9,454 8,192 24,712 32,991 
Total revenues41,848 24,808 116,429 93,279 
Operating costs and expenses:
   Cost of Captisol6,353 3,147 18,680 9,410 
   Amortization of intangibles3,875 3,552 11,285 10,560 
   Research and development12,853 13,742 37,476 37,244 
   General and administrative15,020 9,525 34,353 31,607 
Total operating costs and expenses38,101 29,966 101,794 88,821 
Gain from sale of Promacta license0 0 0 812,797 
Income (loss) from operations3,747 (5,158)14,635 817,255 
Other income (expense):
   Loss from short-term investments(9,862)(13,297)(17,143)(8,524)
   Interest income991 7,396 7,690 22,590 
   Interest expense(6,269)(8,993)(21,030)(26,911)
   Other income (expense), net(219)181 1,940 404 
Total other income (loss), net(15,359)(14,713)(28,543)(12,441)
Income (loss) before income taxes(11,612)(19,871)(13,908)804,814 
Income tax benefit (expense)4,911 4,620 5,162 (168,147)
Net income (loss)$(6,701)$(15,251)$(8,746)$636,667 
     Basic net income (loss) per share$(0.42)$(0.81)$(0.54)$32.51 
     Shares used in basic per share calculations16,082 18,770 16,222 19,586 
     Diluted net income (loss) per share$(0.42)$(0.81)$(0.54)$31.29 
     Shares used in diluted per share calculations16,082 18,770 16,222 20,349 
Three months endedSix months ended
June 30,June 30,
2021202020212020
Revenues:
   Royalties$8,616 $7,181 $15,728 $13,746 
   Captisol62,509 24,468 93,781 45,577 
   Contract revenue13,550 9,771 30,316 15,258 
Total revenues84,675 41,420 139,825 74,581 
Operating costs and expenses:
   Cost of Captisol30,593 7,644 38,746 12,327 
   Amortization of intangibles11,779 3,875 23,565 7,410 
   Research and development15,953 12,732 33,832 24,623 
   General and administrative14,711 10,069 27,028 19,333 
   Other operating income(34,100)0 (33,800)0 
Total operating costs and expenses38,936 34,320 89,371 63,693 
Income from operations45,739 7,100 50,454 10,888 
Other income (expense):
   Gain (loss) from short-term investments(6,864)23,460 6,197 (7,281)
   Interest income233 1,969 529 6,699 
   Interest expense(4,883)(6,213)(10,714)(14,761)
   Other income (expense), net(924)1,803 (7,401)2,159 
Total other income (loss), net(12,438)21,019 (11,389)(13,184)
Income (loss) before income taxes33,301 28,119 39,065 (2,296)
Income tax benefit (expense)(2,576)(6,033)9,766 251 
Net income (loss)$30,725 $22,086 $48,831 $(2,045)
     Basic net income (loss) per share$1.84 $1.38 $2.95 $(0.13)
     Shares used in basic per share calculations16,659 16,055 16,548 16,292 
     Diluted net income (loss) per share$1.79 $1.32 $2.84 $(0.13)
     Shares used in diluted per share calculations17,172 16,694 17,210 16,292 


See accompanying notes to unaudited condensed consolidated financial statements.
5





LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)

Three months endedNine months endedThree months endedSix months ended
September 30,September 30,June 30,June 30,
20202019202020192021202020212020
Net income (loss):Net income (loss):$(6,701)$(15,251)$(8,746)$636,667 Net income (loss):$30,725 $22,086 $48,831 $(2,045)
Unrealized net gain (loss) on available-for-sale securities, net of taxUnrealized net gain (loss) on available-for-sale securities, net of tax(54)(187)(84)546 Unrealized net gain (loss) on available-for-sale securities, net of tax(5)2,742 (60)(30)
Foreign currency translationForeign currency translation923 (764)(1,141)(1,015)Foreign currency translation0 (185)0 (2,064)
Comprehensive income (loss)Comprehensive income (loss)$(5,832)$(16,202)$(9,971)$636,198 Comprehensive income (loss)$30,720 $24,643 $48,771 $(4,139)

See accompanying notes to unaudited condensed consolidated financial statements.

6


LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)

Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retained earningsTotal stockholders' equity
SharesAmount
Balance at January 1, 202016,823 $17 $367,326 $(216)$400,105 $767,232 
Issuance of common stock under employee stock compensation plans, net105 — (1,008)— — (1,008)
Share-based compensation— — 5,653 — — 5,653 
Repurchase of common stock(878)(1)(73,286)— — (73,287)
Unrealized net loss on available-for-sale securities, net of deferred tax— — — (2,772)— (2,772)
Foreign currency translation adjustment— — — (1,879)— (1,879)
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
— — — — (5,167)(5,167)
Net loss— — — — (24,131)(24,131)
Balance at March 31, 202016,050 $16 $295,940 $(4,867)$370,807 $661,896 
Issuance of common stock under employee stock compensation plans, net21 — 1,128 — — 1,128 
Share-based compensation— — 7,359 — — 7,359 
Unrealized net gain on available-for-sale securities, net of deferred tax— — — 2,742 — 2,742 
Foreign currency translation adjustment— — — (185)— (185)
Adjustment on reacquisition of equity due to 2023 debt extinguishment, net of tax— — (23)— — (23)
Net income— — — — 22,086 22,086 
Balance at June 30, 202016,071 $16 $304,404 $(2,310)$392,893 $695,003 
Issuance of common stock under employee stock compensation plans, net20 — 910 — — 910 
Share-based compensation— — 7,740 — — 7,740 
Unrealized net loss on available-for-sale securities, net of deferred tax— — — (54)— (54)
Foreign currency translation adjustment— — — 923 — 923 
Other— — 3 — — 3 
Net loss— — — — (6,701)$(6,701)
Balance at September 30, 202016,091 $16 $313,057 $(1,441)$386,192 $697,824 
Common StockAdditional paid in capitalAccumulated other comprehensive lossRetained earningsTotal stockholders' equity
SharesAmount
Balance at January 1, 202116,080 $16 $318,358 $(801)$391,952 $709,525 
Issuance of common stock under employee stock compensation plans, net572 1 20,580 — — 20,581 
Share-based compensation— — 8,405 — — 8,405 
Unrealized net loss on available-for-sale securities, net of deferred tax— — — (55)— (55)
Reacquisition of equity due to 2023 debt extinguishment, net of tax— — (9,086)— — (9,086)
Warrant and bond hedge unwind transactions— — 396 — — 396 
Tax effect for 2023 Notes transactions(2,032)(2,032)
Net income— — — — 18,106 18,106 
Balance at March 31, 202116,652 $17 $336,621 $(856)$410,058 $745,840 
Issuance of common stock under employee stock compensation plans, net24 — 1,103 — — 1,103 
Share-based compensation— — 10,216 — — 10,216 
Unrealized net loss on available-for-sale securities, net of deferred tax— — — (5)— (5)
Reacquisition of equity due to 2023 debt extinguishment, net of tax(1,073)(1,073)
Tax effect for 2023 Notes transactions(289)(289)
Net income— — — — 30,725 30,725 
Balance at June 30, 202116,676 $17 $346,578 $(861)$440,783 $786,517 




7


Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retained earnings (Accumulated deficit)Total stockholders' equityCommon StockAdditional paid in capitalAccumulated other comprehensive lossRetained earnings (Accumulated deficit)Total stockholders' equity
SharesAmountSharesAmount
Balance at January 1, 201920,765 $21 $791,114 $(1,024)$(229,197)$560,914 
Issuance of common stock under employee stock compensation plans, net135 — (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, 201919,664 $20 $643,317 $(503)$437,140 $1,079,974 
Issuance of common stock under employee stock compensation plans, net17 — 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, 201919,390 $19 $619,255 $(542)$422,721 $1,041,453 
Balance at January 1, 2020Balance at January 1, 202016,823 $17 $367,326 $(216)$400,105 $767,232 
Issuance of common stock under employee stock compensation plans, netIssuance of common stock under employee stock compensation plans, net7 — 199 — — 199 Issuance of common stock under employee stock compensation plans, net105 — (1,008)— — (1,008)
Share-based compensationShare-based compensation— — 6,297 — — 6,297 Share-based compensation— — 5,653 — — 5,653 
Repurchase of common stockRepurchase 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 taxUnrealized 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 adjustmentForeign 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 taxReacquisition 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 taxCumulative-effect adjustment from adoption of ASU 2016-13, net of tax(5,167)(5,167)
Net lossNet loss— — — — (15,251)(15,251)Net loss— — — — (24,131)(24,131)
Balance at September 30, 201917,563 $17 $444,587 $(1,493)$407,470 $850,581 
Balance at March 31, 2020Balance at March 31, 202016,050 $16 $295,940 $(4,867)$370,807 $661,896 
Issuance of common stock under employee stock compensation plans, netIssuance of common stock under employee stock compensation plans, net21 — 1,128 — — 1,128 
Share-based compensationShare-based compensation— — 7,359 — — 7,359 
Unrealized net gain on available-for-sale securities, net of deferred taxUnrealized net gain on available-for-sale securities, net of deferred tax— — — 2,742 — 2,742 
Foreign currency translation adjustmentForeign currency translation adjustment— — — (185)— (185)
Adjustment on reacquisition of equity due to 2023 debt extinguishment, net of taxAdjustment on reacquisition of equity due to 2023 debt extinguishment, net of tax— — (23)— — (23)
Net incomeNet income— — — — 22,086 22,086 
Balance at June 30, 2020Balance at June 30, 202016,071 $16 $304,404 $(2,310)$392,893 $695,003 

See accompanying notes to unaudited condensed consolidated financial statements.
87


LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited, in thousands)
Nine months ended
September 30,
20202019
Cash flows from operating activities:
Net income (loss)$(8,746)$636,667 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain from sale of Promacta license0 (812,797)
Change in estimated fair value of contingent liabilities(397)762 
Depreciation and amortization of intangible assets12,645 11,648 
Amortization of premium (discount) on investments, net1,507 (7,477)
Amortization of debt discount and issuance fees17,743 22,562 
Amortization of commercial license and other economic rights2,505 10,047 
Gain on debt extinguishment(659)0 
Share-based compensation20,752 18,215 
Deferred income taxes(19,311)57,766 
Loss from short-term investments17,143 8,524 
Other(1,525)(4,253)
Changes in operating assets and liabilities, net of acquisition:
     Accounts receivable, net(5,080)33,892 
     Inventory(4,914)(1,500)
     Accounts payable and accrued liabilities9,894 (3,302)
     Income tax receivable and payable12,026 16,571 
     Other economic rights0 (12,000)
     Other466 2,678 
                Net cash provided by (used in ) operating activities54,049 (21,997)
Cash flows from investing activities:
Proceeds from sale of Promacta license0 812,797 
Purchase of short-term investments(337,016)(1,682,586)
Proceeds from sale of short-term investments389,296 144,182 
Proceeds from maturity of short-term investments589,155 1,274,851 
Cash paid for acquisition, net of cash acquired(26,857)(11,840)
Cash paid for equity method investment(500)(1,000)
Other(228)(6,307)
               Net cash provided by investing activities613,850 530,097 
Cash flows from financing activities:
Repurchase of 2023 Notes(203,210)0 
Repayment of 2019 Notes0 (27,323)
Proceeds from convertible bond hedge settlement0 12,401 
Payments to convertible bond holders for bond conversion0 (12,401)
Net proceeds from stock option exercises and ESPP2,459 2,856 
Taxes paid related to net share settlement of equity awards(1,429)(2,906)
Share repurchase(73,287)(371,106)
Payments to CVR Holders(2,325)(3,000)
Other(5,224)0 
               Net cash used in financing activities(283,016)(401,479)
Effect of exchange rate changes on cash(50)(88)
Net increase in cash, cash equivalents and restricted cash384,833 106,533 
Cash, cash equivalents and restricted cash at beginning of period72,273 119,780 
Cash, cash equivalents and restricted cash at end of period$457,106 $226,313 

Six months ended
June 30,
20212020
Cash flows from operating activities:
Net income (loss)$48,831 $(2,045)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in estimated fair value of contingent liabilities(33,502)(371)
Depreciation and amortization of intangible assets25,179 7,869 
Amortization of premium (discount) on investments, net109 1,198 
Amortization of debt discount and issuance fees9,073 12,442 
Amortization of commercial license and other economic rights206 2,733 
Loss (gain) on debt extinguishment7,175 (659)
Share-based compensation18,621 13,012 
Deferred income taxes(9,766)(8,890)
Loss (gain) from short-term investments(6,197)7,281 
Other595 (1,499)
Changes in operating assets and liabilities:
     Accounts receivable, net(2,659)(11,466)
     Inventory(2,326)6,977 
     Accounts payable and accrued liabilities(4,340)2,909 
     Income tax receivable and payable(2,477)8,673 
     Deferred revenue(14,605)7,268 
     Other assets and liabilities(2,786)(4,128)
                Net cash provided by operating activities31,131 41,304 
Cash flows from investing activities:
Purchase of short-term investments(96,136)(336,726)
Proceeds from sale of short-term investments150,648 179,431 
Proceeds from maturity of short-term investments34,600 452,405 
Cash paid for acquisition, net of cash acquired0 (15,140)
Purchase of property and equipment(4,794)(791)
Other135 2,600 
               Net cash provided by investing activities84,453 281,779 
Cash flows from financing activities:
Repurchase of 2023 Notes(153,381)(203,210)
Payments under financing lease obligations(9,188)(1,134)
Proceeds from convertible bond hedge settlement16,855 0 
Payments to convertible bond holders for warrant purchases(16,459)0 
Net proceeds from stock option exercises and ESPP27,584 1,550 
Taxes paid related to net share settlement of equity awards(5,901)(1,429)
Share repurchase0 (73,287)
Payments to CVR Holders(1,050)(1,800)
               Net cash used in financing activities(141,540)(279,310)
Effect of exchange rate changes on cash0 (160)
Net increase (decrease) in cash, cash equivalents and restricted cash(25,956)43,613 
Cash, cash equivalents and restricted cash at beginning of period47,963 72,273 
Cash, cash equivalents and restricted cash at end of period$22,007 $115,886 
Supplemental disclosure of cash flow information:
Interest paid$1,737 $2,531 
Taxes paid$3,552 $0 
Restricted cash in other current assets$144 $730 
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases$359 $292 
Accrued inventory purchases$12,695 $3,553 
Unrealized loss on AFS investments$(60)$(38)
98


Supplemental disclosure of cash flow information:
Interest paid$2,531 $3,015 
Taxes paid$2,130 $93,817 
Restricted cash in other current assets$190 $1,011 
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases$381 $0 
Accrued inventory purchases$1,390 $0 
Accrued financing lease payment$2,500 $0 
Unrealized gain (loss) on AFS investments$(109)$699 
See accompanying notes to unaudited condensed consolidated financial statements.
109


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 20192020 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 in “short-term investments”“contract revenue” and “service revenue” presented 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 previously included in “other income, net”. As a result, the audited consolidated balance sheet as of December 31, 2019 and the condensed consolidated statementsstatement of operations for the three and ninesix months ended SeptemberJune 30, 20192021 have been reclassifiedcombined into “contract revenue” in the condensed consolidated statement of operations to conform towith 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 the Notes to Consolidated Financial Statements in our 20192020 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.

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Some of our partners are working to develop drugs to treat COVID-19. For example, we are supplying Captisol to partners, including Gilead and the Gilead consortium (a consortium of manufacturing partners that Gilead is working with to bring efforts together to help maximize global supply) for Veklury® (remdesivir),remdesivir, the first FDA-approved treatment for COVID-19 for the
10


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.hospitalization. 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, the emergence and spread of COVID-19 variants, and the economic impact on local, regional, national and international markets.

Accounting Standards Recently Adopted

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. 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. We adopted this standard on January 1, 2020, and the adoption did 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. We adopted this standard on January 1, 2020, and the adoption did not have a material impact 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
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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, 2023,2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures. We intend to adopt this standard on January 1, 2022.

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.

Royalties

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 when the underlying 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 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.

Captisol Sales

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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
13


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.

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 ninesix months ended SeptemberJune 30, 2021, the amount recognized as revenue that was previously deferred was $10.3 million, and $16.1 million, respectively. During the three and six months ended June 30, 2020, the amount recognized as revenue that was previously deferred was $5.8$2.0 million and $8.3$2.4 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. We expect to satisfy the performance obligations related to long-term deferred revenue within the next 3 years.

Disaggregation of Revenue

The following table represents disaggregation of royalties, Captisol and contract revenue (in thousands):

Three months endedNine months endedThree months endedSix months ended
September 30,September 30,June 30,June 30,
20202019202020192021202020212020
RoyaltiesRoyaltiesRoyalties
Kyprolis$6,923 $7,602 $16,809 $16,317 Kyprolis$5,440 $5,481 $9,727 $9,886 
Evomela1,802 1,515 4,577 3,570 Evomela2,193 1,199 4,526 2,775 
Other280 650 1,365 1,851 Other983 501 1,475 1,085 
Promacta0 0 0 14,193 $8,616 $7,181 $15,728 $13,746 
$9,005 $9,767 $22,751 $35,931 
CaptisolCaptisol$23,389 $6,849 $68,966 $24,357 Captisol$62,509 $24,468 $93,781 $45,577 
Contract
Contract revenueContract revenue
Service Revenue$7,341 $4,548 $15,280 $12,990 Service Revenue$7,360 $4,582 $12,822 $7,939 
License Fees158 243 1,793 3,083 License Fees1,050 660 2,093 1,635 
Milestone960 2,674 4,766 15,425 Milestone3,600 3,472 12,017 3,806 
Other995 727 2,873 1,493 Other1,540 1,057 3,384 1,878 
$9,454 $8,192 $24,712 $32,991 $13,550 $9,771 $30,316 $15,258 
TotalTotal$41,848 $24,808 $116,429 $93,279 Total$84,675 $41,420 $139,825 $74,581 

1412


Short-term Investments
Our short-term investments excluding investment in Viking, consist of the following at SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands):
September 30, 2020December 31, 2019
Amortized costGross unrealized gainsGross unrealized lossesEstimated fair valueAmortized costGross unrealized gainsGross unrealized lossesEstimated fair value
Short-term investments
     Bank deposits$68,226 $101 $0 $68,327 $411,690 $188 $(3)$411,875 
     Corporate bonds27,125 102 0 27,227 63,818 161 0 63,979 
     Commercial paper47,943 60 0 48,003 210,525 43 (16)210,552 
     Corporate equity securities4,484 415 (2,624)2,275 4,506 416 (1,850)3,072 
     Mutual fund151,513 204 0 151,717 250,635 0 (249)250,386 
     Warrants0 155 0 155 0 125 0 125 
$299,291 $1,037 $(2,624)$297,704 $941,174 $933 $(2,118)$939,989 
June 30, 2021December 31, 2020
Amortized costGross unrealized gainsGross unrealized lossesEstimated fair valueAmortized costGross unrealized gainsGross unrealized lossesEstimated fair value
     Bank deposits$33,560 $13 $(2)$33,571 $84,120 $35 $(1)$84,154 
     Corporate bonds25,965 62 (2)26,025 30,512 99 (1)30,610 
     Agency bonds2,500 0 (1)2,499 4,499 2 0 4,501 
     Commercial paper19,258 12 0 19,270 45,459 27 (1)45,485 
     Corporate equity securities5,807 172 (310)5,669 4,466 360 (1,388)3,438 
     Mutual fund151,949 53 0 152,002 151,512 386 0 151,898 
     Treasury bill0 0 0 0 3,999 0 0 3,999 
     Warrants0 713 0 713 0 393 0 393 
$239,039 $1,025 $(315)$239,749 $324,567 $1,302 $(1,391)$324,478 
     Viking common stock40,223 32,763 
     Viking warrants0 6,326 
Total short-term investments$279,972 $363,567 

In addition, as of September
During the six months ended June 30, 2020 and December 31, 2019,2021, we recorded shares ofexercised all outstanding 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 theAs of June 30, 2021, we have 0 Viking 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.outstanding.

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

ForAllowances are recorded 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 of the investment.losses. This standard limits the amount of credit losses tothat can 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 ninesix months ended SeptemberJune 30, 2020.2021.

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

September 30, 2020
Amortized CostFair Value
Within one year$121,452 $121,610 
After one year through five years21,842 21,947 
After five years0 0 
Total$143,294 $143,557 

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

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Less than 12 months12 months or greaterTotal
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 
June 30, 2021
Amortized CostFair Value
Within one year$57,997 $58,050 
After one year through five years23,286 23,316 
Total$81,283 $81,366 

Our investment policy is capital preservation and we only invested in U.S.-dollar denominated investments. We held a total of 27 positions which were in an unrealized loss position as of SeptemberJune 30, 2020.2021. 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 believeand it is not more-likely-than-not 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 ninesix months ended SeptemberJune 30, 2020.2021.
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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 ninesix months ended SeptemberJune 30, 2020,2021, 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)COVID-19 pandemic on our business and recorded an adjustment of $(0.1)$0.04 million and $0.2$0.1 million of allowance for credit losses, respectively, as of SeptemberJune 30, 2020.2021.

Inventory

Inventory, which consists of prepaid inventory and 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.

As of June 30, 2021, we have made advanced payments for inventory from our supplier of Captisol totaling $50.2 million. We have applied credits for such inventory purchases of $15.8 million and will utilize the remaining advanced payments to offset a portion of the purchase price for future Captisol purchases.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other identifiable intangible assets consist of the following (in thousands):
September 30,December 31,
20202019
     Goodwill$102,136 $95,229 
Definite lived intangible assets
     Complete technology257,317 242,813 
          Less: accumulated amortization(1)
(59,869)(50,203)
     Trade name2,642 2,642 
          Less: accumulated amortization(1,279)(1,180)
     Customer relationships40,700 29,600 
          Less: accumulated amortization(14,929)(13,224)
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.
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June 30,December 31,
20212020
Indefinite-lived intangible assets
     Goodwill$190,517 $189,662 
Definite lived intangible assets
     Complete technology277,980 277,740 
          Less: accumulated amortization(71,276)(63,600)
     Trade name2,642 2,642 
          Less: accumulated amortization(1,378)(1,312)
     Customer relationships40,700 40,700 
          Less: accumulated amortization(16,932)(15,597)
     Contractual relationships362,000 362,000 
          Less: accumulated amortization(21,730)(7,243)
Total goodwill and other identifiable intangible assets, net$762,523 $784,992 

Commercial License and Other Economic Rights

Commercial license and other economic rights consist of the following (in thousands):
September 30, 2020December 31, 2019
Gross
Adjustments(1)
NetGross
Adjustments(2)
Net
Aziyo and CorMatrix$17,696 $(9,644)$8,052 $17,696 $(5,500)$12,196 
Palvella10,000 (10,000)0 10,000 (7,492)2,508 
Selexis and Dianomi10,602 (7,820)2,782 10,602 (5,216)5,386 
     Total$38,298 $(27,464)$10,834 $38,298 $(18,208)$20,090 

June 30, 2021December 31, 2020
Gross
Adjustments(1)
NetGross
Adjustments(2)
Net
Aziyo and CorMatrix$17,696 $(9,470)$8,226 $17,696 $(9,588)$8,108 
Selexis and Dianomi10,602 (8,190)2,412 10,602 (7,731)2,871 
     Total$28,298 $(17,660)$10,638 $28,298 $(17,319)$10,979 
(1) Amounts represent accumulated amortization to principal or research and development expenses of $21.5$11.7 million and credit loss adjustments of $6.0 million as of SeptemberJune 30, 2020.2021.
(2) Amounts represent accumulated amortization to principal or researchof $11.3 million and development expensescredit loss adjustments of $6.0 million as of December 31, 2019.2020.

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. Commercial license rights acquired are accounted for as financial assets and other economic rights are accounted for as funded research and developmentsdevelopment as further discussed below.below and in Note 1,Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2020 Annual Report.

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,
14


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 SeptemberJune 30, 20202021 is 23%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received during the six months ended June 30, 2021 were accordingly allocated between revenue and the amortization of the commercial license rights.

In December 2018,Prior to 2020, 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 milestonesaccounted 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 economiccommercial license rights related to Palvella should be characterizeddevelopmental pipeline products such as Selexis and Dianomi on a non-accrual basis. We continue to account for commercial license rights related to Dianomi on a non-accrual basis as of June 30, 2021, but starting in 2020, given the expected cash flow from the Selexis program, we started to account for the Selexis commercial license right as a funded research and development arrangement, thus we account for itfinancial asset in accordance with ASC 730-20, Research310, and Development Arrangements, and reduce our assetamortize 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 Selexis as of June 30, 2021 is 21%. Revenue is calculated by multiplying the funds are expendedcarrying value of the commercial license right by Palvella. As of September 30, 2020, the fund has been fully expended by Palvella and our cost basis foreffective interest. The payments received during the 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 ninesix months ended SeptemberJune 30, 2020.2021 were accordingly allocated between revenue and the amortization of the commercial license rights.

We recorded a $5.5 million pre-tax reserve for credit losses upon adoption of the new credit losses standard (ASU 2016-13) 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 addition, we have judgmentally applied credit loss risk factors to the future expected payments with consideration given to the timing of the payment. Given the higher inherent credit risk associated with longer term receivables, we applied a lower risk factor to the earlier years and progressively higher risk factors to the later years. During the ninesix months ended SeptemberJune 30, 2020,2021, 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 reserveconcluded no further adjustment was needed on the allowance for credit losses in other expense, net, in our condensed consolidated statementas of 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 2019 Annual Report.
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Other Assets

Other assets consist of the following (in thousands):
September 30,December 31,
20202019
Captisol manufacturing ramp up fee$9,215 $0 
Long-term investment receivable2,000 0 
Equity investment813 750 
Deposits138 219 
Other1,538 1,388 
     Total other assets
$13,704 $2,357 
June 30, 2021.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):
September 30,December 31,
20202019
Compensation$4,840 $1,986 
Professional fees1,226 1,135 
Amounts owed to former licensees407 381 
Royalties owed to third parties805 0 
Return reserve2,835 3,027 
Current operating lease liabilities1,029 1,242 
Accrued interest1,437 690 
Other1,919 1,375 
     Total accrued liabilities
$14,498 $9,836 
June 30,December 31,
20212020
Compensation$3,684 $8,810 
Professional fees977 977 
Amounts owed to former licensees446 421 
Royalties owed to third parties52 693 
Return reserve105 687 
Acquisition related liabilities1,500 1,500 
Subcontractor0 733 
Supplier681 604 
Accrued interest295 464 
Other2,367 3,641 
     Total accrued liabilities$10,107 $18,530 

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 endedNine months ended
September 30,September 30,
2020201920202019
SBC - Research and development expenses$3,094 $2,481 $8,510 $7,136 
SBC - General and administrative expenses4,646 3,816 12,242 11,079 
$7,740 $6,297 $20,752 $18,215 
Three months endedSix months ended
June 30,June 30,
2021202020212020
SBC - Research and development expenses$4,556 $3,019 $8,495 $5,416 
SBC - General and administrative expenses5,660 4,340 10,126 7,596 
$10,216 $7,359 $18,621 $13,012 

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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 endedSix months ended
June 30,June 30,
2021202020212020
Risk-free interest rate0.9%0.4%0.5%1.1%
Dividend yield0000
Expected volatility54%69%62%55%
Expected term5.55.15.04.8

Three months endedNine months ended
September 30,September 30,
2020201920202019
Risk-free interest rate0.3%1.6%1.0%2.4%
Dividend yield0000
Expected volatility59%41%55%43%
Expected term4.95.34.85.2
A limited amount of performance-based restricted stock units (PSUs) contain a market condition based on our relative total shareholder return ranked on a percentile basis against the NASDAQ Biotechnology Index over a three-year performance period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation cost for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the performance conditions.

Net Income (loss)(Loss) Per Share
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Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-averageweighted 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.

For Diluted net loss per share is computed based on the three and nine months ended September 30, 2020, allsum of the 0.70 million and 0.65 million, respectively, weighted average number of common shares of outstanding equity awards as of September 30, 2020 were anti-dilutive due to the net loss forduring 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 period

Potentially dilutive common shares consist of shares issuable under the 2023 Notes, stock options and restricted stock. 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. 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 endedNine months ended
September 30,September 30,
2020201920202019
Weighted average shares outstanding:16,082 18,770 16,222 19,586 
Dilutive potential common shares:
     Restricted stock0 0 0 35 
     Stock options0 0 0 728 
Shares used to compute diluted income per share16,082 18,770 16,222 20,349 
Potentially dilutive shares excluded from calculation due to anti-dilutive effect7,028 11,549 8,330 8,694 
Three months endedSix months ended
June 30,June 30,
2021202020212020
Weighted average shares outstanding:16,659 16,055 16,548 16,292 
Dilutive potential common shares:
     Restricted stock69 40 90 0 
     Stock options444 599 572 0 
Shares used to compute diluted income per share17,172 16,694 17,210 16,292 
Potentially dilutive shares excluded from calculation due to anti-dilutive effect5,087 7,832 4,684 8,988 

For the six months ended June 30, 2020, all of the 0.6 million weighted average shares of outstanding equity awards as of June 30, 2020 were anti-dilutive due to the net loss for the period.
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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, 2020December 31, 2019
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:
Short-term investments, excluding Viking(1)
$2,274 $295,275 $155 $297,704 $3,073 $936,791 $125 $939,989 
Investment in Viking common stock33,869 0 0 33,869 48,425 0 0 48,425 
Investment in Viking warrants(2)
6,581 0 0 6,581 9,910 0 0 9,910 
     Total assets$42,724 $295,275 $155 $338,154 $61,408 $936,791 $125 $998,324 
Liabilities:
Crystal contingent liabilities(3)
$0 $0 $800 $800 $0 $0 $2,659 $2,659 
CyDex contingent liabilities0 0 509 509 0 0 348 348 
Metabasis contingent liabilities(4)
0 4,985 0 4,985 0 5,935 0 5,935 
Icagen contingent liabilities(5)
0 0 4,504 4,504 0 0 0 0 
Amounts owed to former licensor71 0 0 71 75 0 0 75 
     Total liabilities$71 $4,985 $5,813 $10,869 $75 $5,935 $3,007 $9,017 
June 30, 2021December 31, 2020
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:
Short-term investments, excluding Viking(1)
$5,669 $233,368 $712 $239,749 $3,438 $320,647 $393 $324,478 
Investment in Viking common stock40,223 0 0 40,223 32,763 0 0 32,763 
Investment in Viking warrants(2)
0 0 0 0 6,326 0 0 6,326 
     Total assets$45,892 $233,368 $712 $279,972 $42,527 $320,647 $393 $363,567 
Liabilities:
Crystal contingent liabilities(3)
$0 $0 $800 $800 $0 $0 $800 $800 
CyDex contingent liabilities0 0 376 376 0 0 508 508 
Metabasis contingent liabilities(4)
0 3,930 0 3,930 0 3,821 0 3,821 
Icagen contingent liabilities(5)
0 0 5,625 5,625 0 0 6,404 6,404 
Pfenex contingent liabilities(6)
0 0 3,800 3,800 0 0 37,600 37,600 
xCella contingent liabilities(7)
0 0 240 240 0 0 0 0 
Amounts owed to former licensor31 0 0 31 60 0 0 60 
     Total liabilities$31 $3,930 $10,841 $14,802 $60 $3,821 $45,312 $49,193 

1.Excluding our investment in Viking, our short-term investments in marketable debt and equity securities 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 Black Scholes value estimated by management on the last day of the period.
2.Investment in Viking 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 short-term investments" in our condensed consolidated statement of operations. During the six months ended June 30, 2021, we exercised all of the outstanding Viking warrants.
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 first quarter of 2020, we paid a $1.8 million contingent liability on development milestones to former Crystal shareholders.
4.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders 4 tradable CVRs, 1 CVR from each of 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.
5.The fair value of Icagen contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on 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 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 third quarter of 2020,six months ended June 30, 2021, we paid a $0.5$1.1 million contingent liability based on revenue milestones to Icagen.former Icagen shareholders.
6.The fair value of Pfenex contingent liabilities was determined using a probability-adjusted income approach. These cash flows were then discounted to present value using a discount rate based on the market participants' cost of debt reflective of the Company. During the three and six months ended June 30, 2021, we reduced the contingent liability by $34.1 million and $33.8 million, respectively, primarily due to the lower probability of achieving the specific development and regulatory milestone by December 31, 2021 as defined by the Pfenex CVR. See further detail on Pfenex CVR in Note 3, Acquisitions.
7.The fair value of xCella contingent liabilities is determined when it is probable that the earnout liability will occur and the amount can be reasonably estimated. Management concluded that no earnout liability would be recognized at the acquisition date in September 2020. During the first quarter of 2021, management recorded an earnout liability to be allocated to the cost of the acquired assets due to contingencies being met as part of the acquisition agreement.

2017


A reconciliation of the level 3 financial instruments as of June 30, 2021 is as follows (in thousands):
Fair value of level 3 financial instruments as of December 31, 2020$45,312 
Payments to CVR holders and other contingent payments(1,050)
Fair value adjustments to contingent liabilities(33,661)
Contingent liabilities from xCella asset acquisition240
Fair value of level 3 financial instruments as of June 30, 2021$10,841 

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.

ThereDuring the second quarter of 2021, in connection with the Pfenex CVR fair value evaluation, we also evaluated the related indefinite-lived contractual relationship intangible for recoverability and concluded there was no impairment.

Other than the above mentioned triggering event, there were no other triggering events identified and no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the three and ninesix months ended SeptemberJune 30, 2020.2021.

3. Acquisitions

Pfenex Acquisition

On October 1, 2020, we acquired Pfenex, which develops next-generation and novel protein therapeutics to improve existing therapies and create new therapies for biological targets linked to critical, unmet diseases using a protein expression technology platform.

The preliminary purchase price of $465.1 million included $429.6 million cash consideration paid upon acquisition, and a contingent CVR payment of up to $77.8 million in cash based on a certain specified milestone with an estimated initial fair value of $37.0 million. The CVR will only be paid in full if the milestone is achieved by December 31, 2021. The amount of the CVR included in the purchase price was reduced by $1.5 million that was determined to be post-combination expense. The fair value of the CVR liability was determined using a probability-adjusted income approach. These cash flows were then discounted to present value using a discount rate based on market participants' cost of debt reflective of the Company, which was 7.1%. The liability is periodically assessed based on events and circumstances related to the underlying milestone, and any change in fair value is recorded in our consolidated statements of operations.

In connection with the acquisition, a portion of Pfenex's equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required us to allocate the fair value of the equity attributable to pre-combination service to the purchase price and the remaining amount was considered our post-combination expense. We paid $17.3 million in cash for equity compensation, which is attributable to pre-combination services and is reflected as a component of the total purchase price paid of $429.6 million. In addition, the fair value of equity compensation attributable to the post-combination service period was $8.7 million. These amounts were associated with the accelerated vesting of stock options previously granted to Pfenex employees and were fully paid in cash, which was recognized as general and administrative expenses during the fourth quarter of 2020.

The following table sets forth an allocation of the preliminary purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill (in thousands):

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Cash$51,407 
Restricted cash200 
Accounts and unbilled receivables1,359 
Property and equipment, net7,823 
Right-of-use asset3,070 
Other assets1,338 
Intangibles acquired385,000 
Goodwill(1)
91,837 
Accounts payable(6,814)
Accrued liabilities(8,455)
Deferred revenue(3,908)
Lease liabilities(3,070)
Other liabilities(1,382)
Deferred tax liabilities, net(53,296)
$465,109 
(1) Goodwill represents the excess of the purchase price over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Pfenex and expected synergies. NaN of the goodwill is expected to be deductible for tax purposes.

Acquired intangibles include $362 million of contractual relationships and $23 million of core technology. The fair values of the contractual relationships were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, collaboration and product revenue streams derived from the licensing of the related technologies over the estimated contractual relationship period. The fair value of the contractual relationships is being amortized on a straight-line basis over the weighted average estimated useful life of 12.9 years. The fair values of the acquired technologies were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, collaboration and product revenue streams derived from the licensing of the related technologies over the estimated useful lives. These projected cash flows were discounted to present value using discount rate, which varies from 12% to 15%. The total acquired intangibles are being amortized on a straight-line basis over the weighted average estimated useful life of 13.0 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.

The following summary presents our unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2020 as if the Pfenex acquisition had occurred on January 1, 2020, which gives effect to certain transaction accounting adjustments, including amortization of acquired intangibles and share based compensation expense for retained Pfenex employees. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the date indicated, nor is it necessarily indicative of future operating results (in thousands, except per share amounts):
Three months ended
June 30, 2020		Six months ended
June 30, 2020
Revenue$42,201 $76,044 
Net income (loss)$7,435 $(30,505)
Net income (loss) per common share:
Basic$0.46 $(1.87)
Diluted$0.45 $(1.87)

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 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.
19


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.

June 30, 2021.

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. During the three months ended June 30, 2021, 0 contingencies were resolved during the period. During the six months ended June 30, 2021, we recognized $0.2 million in earnout rights when certain contingencies were resolved during the period.

Icagen Acquisition

On April 1, 2020, we acquired the core assets, including its partnered programs and ion channel technology, from Icagen and certain of its affiliates. 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 relatedacquisition-related costs.

The 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
21


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 yearsyears. 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.
20


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, 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 allocation of the purchase price consisted of (1) $0.03 million of fair value of tangible assets acquired, (2) $(0.08) million of liabilities assumed, (3) $7.40 million of acquired technologies, (4) $(0.15) million of deferred tax liability in connection with the acquired intangibles, and (5) $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.

4. Convertible Senior Notes

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:
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(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;

(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.

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 SeptemberJune 30, 2020,2021, 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,During the six months ended June 30, 2021, we repurchased $234.4$149.6 million in principal of the 2023 Notes for $203.8$153.7 million in cash, including accrued interest of $0.6$0.3 million. We accounted for the repurchase as a debt extinguishment, which resulted in (1) a gainloss of $0.7$7.2 million reflected in other income (expense), net, in our condensed consolidated statement of operations for the ninesix months ended SeptemberJune 30, 2020;2021, (2) a $32.7$13.5 million reduction in debt discount, and (3) a $2.7$10.2 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 SeptemberJune 30, 2020. After the repurchases, approximately $515.6 million in principal amount of the 2023 Notes remain outstanding.2021.

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 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
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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,January 2021, 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.

23In March 2021, in connection with the repurchases of $104.5 million in principal of the 2023 Notes for $109.1 million in cash, including accrued interest of $0.2 million, during the quarter ended March 31, 2021, we entered into Warrant Early Unwind Agreements and Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We paid $16.5 million as part of the Warrant Early Unwind Agreements reducing the number of shares covered by the warrants from 3,018,327 to 2,597,750. We received $16.9 million as part of the Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 645,500. These unwind transactions resulted in a $0.4 million net increase in additional paid-in-capital in our condensed consolidated balance sheet as of March 31, 2021.


The following table summarizes information about the 2023 Notes (in thousands):
September 30, 2020December 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 
June 30, 2021December 31, 2020
Principal amount of the 2023 Notes outstanding$345,729 $495,280 
Unamortized discount (including unamortized debt issuance cost)(30,411)(52,987)
Total long-term portion of notes payable$315,318 $442,293 
Carrying value of equity component of the 2023 Notes$27,776 $48,397 
Fair value of the 2023 Notes outstanding (Level 2)$341,687 $466,053 

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 ninesix months ended SeptemberJune 30, 2021 was 7.7% and (25.0)%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and six months ended June 30, 2021 was significantly impacted by tax benefits related to (1) a $34.1 million Pfenex CVR adjustment recorded during the second quarter of 2021 due to the lower probability of achieving the specific development and regulatory milestone by December 31, 2021 as defined by the Pfenex CVR, and (2) net excess tax windfalls from share-based compensation resulting from increased stock option exercise activity, stock award vesting and appreciation of our stock price during the period. The effective tax rate for the three and six months ended June 30, 2020 was 42.3%21.5% and 37.1%10.9%, respectively. The variances from the U.S. federal statutory tax rate of 21% for the three and ninesix months ended SeptemberJune 30, 2020 were primarily attributable to the mix of earnings in the jurisdictions with lower statutory rates than the U.S. andoffset by tax deductions related to stock award activities offset byand 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 primarily attributable to the mix of earnings in the jurisdictions with lower statutory tax rates than the U.S..

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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 9, Stockholders’ Equity, of the Notes to Consolidated Financial Statements in our 20192020 Annual Report.

The following is a summary of our stock option and restricted stock activity and related information:
Stock OptionsRestricted Stock Awards
SharesWeighted-Average Exercise PriceSharesWeighted-Average Grant Date Fair Value
Balance as of December 31, 20191,956,379 $77.54 147,259 $125.11 
Granted480,250 $90.08 104,306 $89.58 
Options exercised/RSUs vested(113,107)$23.91 (50,053)$122.16 
Forfeited(10,200)$72.01 0 $0 
Balance as of September 30, 20202,313,322 $82.79 201,512 $107.45 
Stock OptionsRestricted Stock Awards
SharesWeighted-Average Exercise PriceSharesWeighted-Average Grant Date Fair Value
Balance as of December 31, 20202,561,822 $85.59 206,202 $106.88 
Granted318,381 $164.30 158,456 $171.44 
Options exercised/RSUs vested(533,451)$52.00 (95,607)$126.49 
Forfeited(83,489)$106.98 (6,790)$126.23 
Balance as of June 30, 20212,263,263 $103.79 262,261 $138.23 

As of SeptemberJune 30, 2020,2021, outstanding options to purchase 1.61.3 million shares were exercisable with a weighted average exercise price per share of $72.60.$91.50.

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 SeptemberJune 30, 2020, 56,0792021, 46,866 shares were available for future purchases under the ESPP.

Share Repurchases

During the first quarter of 2020, we repurchased $73.3 million of our common stock under our stock repurchase programs as discussed below. We did 0t have any share repurchases during the second and third quarter of 2020.six months ended June 30, 2021.

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 may enter into Rule 10b5-1 trading plans, to facilitate open-market
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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. Authorization to repurchase $253.5$248.8 million of our common stock remained available as of SeptemberJune 30, 2020.2021.

7. Commitment and 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.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 April 9, 2019, CyDex, our wholly-owned subsidiary, 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®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®,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,The parties entered into a settlement agreement 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,June 1, 2021 and that May 17, 2021 would remain the first day of a five-to-six-day bench trial.lawsuit has been dismissed.

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®EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or the ’872 patent, and alleging
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that these patents, each of which relates to Captisol®,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 discoveryparties entered into a settlement agreement on May 7,April 26, 2021 and a five day bench trial starting on December 13, 2021.the lawsuit has been dismissed.

On October 31, 2019, we received 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 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 3 complaints. We reject all claims raised in the complaints and intend to vigorously defend these matters.

8. Leases

We lease certain office facilitiesIn May and equipment primarily under various operating leases. Our leases have remaining contractual terms up to seven years, someAugust of 2019, Pfenex Inc., which include options to extend was acquired by us in October 2020, filed 3 petitions (IPR2019- 01027, IPR2019-01028 and IPR2019-01478) for inter partes review of U.S. Patent No. 9,422,345 (“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‘345 patent,” entitled “Expression System”), which is owned by GlaxoSmithKline Biologicals S.A. (“GSK”), with the Patent Trial 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 locationAppeal Board (“PTAB”) of the lease asset, unlessU.S. Patent and Trademark Office. In November 2019 and February 2020, the implicit rateBoard instituted trial on invalidity grounds in IPR2019-01028, but exercised its discretion not to institute trial on IPR2019-01027 or IPR2019-01478. In May 2020, GSK filed 2 petitions (IPR2020-00890 and IPR2020-00962) for inter partes review of U.S. Patent No. 8,530,171 (“the ‘171 patent,” entitled “High Level Expression of Recombinant Toxin Proteins”), which is readily determinable. Lease assets also include any upfront lease payments madeowned by Pfenex, with the PTAB of the U.S. Patent and lease incentives. Lease terms include optionsTrademark Office. On June 29, 2020, GSK filed a motion to extend orwithdraw IPR2020-00890, which was granted on August 28, 2020. In October 2020, Pfenex and GSK executed a confidential settlement agreement agreeing to terminate the lease when it is reasonably certain that those options will be exercised. For leases withproceedings before the PTAB resolving these issues. Pfenex and GSK filed a term ofjoint motion to terminate IPR2019-01028 and IPR2020-00962 on October 30, 2020, and an amended joint motion to terminate on November 4, 2020. A decision granting the parties’ joint motion to terminate in IPR2019-01028 was issued on November 12, months or less, we elected2020. The PTAB subsequently granted the parties’ joint motion to not recognize lease assets and lease liabilities and expense the leases over a straight-line basis for the term of those leases.

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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 recordedterminate in IPR2020-00962 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.

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 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.


On January 12, 2021, Abvivo submitted a JAMS arbitration demand naming the Company as respondent. Abvivo claimed that the Company was in violation of the assignment provision of that certain Commercial Platform License and Services Agreement (“CPLSA”), dated October 9, 2019, by and among OMT and Crystal, on the one hand, and Abvivo, on the other hand because the Company allegedly withheld its consent to a proposed assignment required for Abvivo to negotiate a discovery and development alliance with certain third parties. On January 26, 2021, we submitted a response to the demand, denying all claims and alleging counterclaims against Abvivo and Brian Lundstrom, a Company employee and the sole owner of Abvivo. We alleged that Mr. Lundstrom breached his fiduciary duty of loyalty to the Company and that Abvivo and Mr. Lundstrom fraudulently induced the Company, OMT and Crystal into certain business transactions and contracts. Abvivo and Mr. Lundstrom’s response to these counterclaims was due on February 9, 2021, but they did not submit a response. Under JAMS rules, the counterclaims were deemed denied. On February 22, 2021, Abvivo submitted documents to JAMS which indicated that it sought to dismiss its claim without prejudice. On February 25, 2021, we submitted additional counterclaims against Abvivo and Mr. Lundstrom.
September 30, 2020These counterclaims alleged that Abvivo and Mr. Lundstrom made false promises regarding the CPLSA, Abvivo’s breach of and failure to perform under the CPLSA, and Abvivo’s infringement of certain Ligand trademarks.On March 11, 2021, Abvivo and Mr. Lundstrom submitted an answer to our amended counterclaims denying all of the claims and asserting various affirmative defenses. On June 21, 2021, the parties executed a confidential settlement agreement that settled all claims in this arbitration.On June 29, 2021, the parties jointly submitted to JAMS a dismissal with prejudice of all claims by all parties in the arbitration.
Assets:
Accounts receivable, net$2,581 
Other current assets2,871 
Property and equipment, net2,445 
Operating lease right-of-use assets5,246 
          Total assets held for sale$13,143 
Liabilities:
Accounts payable$463 
Accrued liabilities1,697 
Deferred revenue2,464 
Long-term operating lease liability5,084 
Other long-term liabilities653 
          Total liabilities related to assets held for sale$10,361 

10. Subsequent Events

Pfenex Acquisition

CyDex and Baxter Healthcare Corp. (“Baxter”) are parties to a license agreement relating to Ligand’s Captisoltechnology and, more specifically, relating to Captisol-enabled Nexterone (amiodarone HCl premixed injection). Baxter contends that it has overpaid royalties for several years, and seeks both refunds of those overpayment and a reduced royalty going forward. CyDex contends that Baxter has not paid the royalties due to CyDex under the terms of the license agreement. On October 1, 2020, we completedApril 6, 2021, Baxter initiated an arbitration with the acquisitionAmerican Arbitration Association pursuant to the arbitration provision of Pfenex for $437.5 millionthe license agreement. On April 21, 2021, CyDex filed an Answering Statement and Counterdemand. On May 5, 2021, Baxter filed an Answering Statement in cash, plus one non-transferable CVR per share representingresponse to CyDex’s Counterdemand. On June 30, 2021, the right to receive an aggregate contingent payment of $78 millionparties’ held a Preliminary Hearing before the arbitrator. The arbitration is 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.its early stages.

Divestiture of Vernalis Research Operations

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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.
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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: "Risk1A. 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, 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.market. 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.

OurWe use our trademarks, trade names and services marks in this report as well as trademarks, trade names and service marks referenced herein include Ligand. Eachthat are the property of other trademark,organizations. Solely for convenience, trademarks and trade name or service mark appearingnames referred to in this quarterly report belongsappear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its owner.rights, to these trade marks and trade names.

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


Overview

We are a revenue generating biopharmaceutical company focused on developing andor acquiring technologies that help pharmaceutical companies discover and develop medicines. We employ research technologies such as antibody discovery technologies, structure-based drug design,ion channel discovery technology, Pseudomonas fluorescens protein expression technology, 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 120130 pharmaceutical and biotechnology companies. Over 200 different300 programs are in various stages of commercialization, development or research and development andare 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 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 1,400 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 is generated primarily from:consists of three primary elements: royalties on sales offrom commercialized products, commercialized by our partners, sale of Captisol material, and contract revenue which consists offrom license, milestone and other service revenue for contracted R&D services performed forpayments. In addition to discovering and developing our customers overown
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time, license fees, contingent milestone payments and other 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 impactImpact of COVID-19 pandemicPandemic 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 the COVID-19 pandemic, please read Item 1A."Risk FactorsFactors" included in this report.report and in our 2020 Annual Report.

Portfolio Program Updates

OmniAb®OmniAb® Platform Updates

OmniAb is our industry-leading, AI- and BI- (Biological Intelligence) powered multi-species antibody platform for the discovery of mono-mono and bi-specificbispecific therapeutic human antibodies. As of the third quarter of 2020, more than 8,500 clinical subjectsJune 30, 2021, 19 different OmniAb-derived antibodies have been studied in approximately 77 active or are planned to be treated by partners incompleted clinical trials with OmniAb-derived antibodies. New clinical programs are pending at Johnson & Johnson and Merck, among others. Ligand expectstrials. We expect the first regulatory submissionapprovals for OmniAb-derived antibodies in 2021, with potential for as many as 10 approvals expected by 2025.2021.

As partArcus Biosciences announced initial efficacy and safety from one of the OmniAbcohorts in ARC-6, a randomized Phase 1b/2 platform we recentlystudy evaluating the combination of etrumadenant (dual adenosine A2a/A2b receptor antagonist) plus zimberelimab (an OmniAb-derived, anti-PD1 antibody) and docetaxel in people with taxane-naïve metastatic castration-resistant prostate cancer. Arcus also announced OmniTaur™, featuring Ultralong CDR-H3 humanized binding domains recently acquiredencouraging clinical results from Taurus Biosciences.an interim analysis of the Phase 2 ARC-7 study evaluating the safety and efficacy of anti-TIGIT mAb domvanalimab-based combinations with or without zimberelimab as a first-line treatment of PDL1-high non-small cell lung cancer (NSCLC). The OmniAb platform also includes the ultra-high resolution, high-speed automated antibody selection technology acquired from xCella Biosciences.zimberelimab monotherapy arm showed activity similar to that of marketed anti-PD-1 antibodies studied by other companies in this setting.

Multiple OmniAb partners reported clinical or regulatory progressionJanssen provided an update on their Phase 1 trial results for teclistamab in heavily pretreated patients with OmniAb-derived antibodies during the third quarter of 2020. Additionally, three of our partners (Takeda, Immunoprecisemultiple myeloma suggesting deep and Genovac) are pursuing development of therapeutic antibodiesdurable responses, and also announced FDA Breakthrough Therapy Designation for teclistamab for the treatment of COVID-19 that were discovered with OmniAb.relapsed or refractory multiple myeloma. Teclistamab is an OmniAb-derived bispecific antibody targeting BCMA and CD3.

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-L1OmniAb-derived anti-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 two clinical studies of sugemalimab at the 2020 Chinese Society of Clinical Oncology Annual Meeting. CStone announced that sugemalimab met theits primary endpoint as first-line treatment in stage IV squamousthe first-in-class registrational clinical trial for Stage III NSCLC and non-squamous non-small cell lung cancer.plans to submit a New Drug Application in China for this expanded indication.

ImmunovantAptevo Therapeutics announced positive Phase 1 clinical data for APVO436 from the dose-escalation portion of their Phase 1 trial in adults with relapsed acute myeloid leukemia, and initiation of the expansion phase of the study using the recommended dose identified in Part 1. APVO436 is an OmniAb-derived bispecific antibody targeting CD123 and CD3 for the potential treatment of hematological malignancies.

Harbour BioMed reported positive topline results from a multicenter, placebo-controlledfor the Phase 2a2 proof-of-concept trial (ASCEND MG) of IMVT-1401,batoclimab, a novel investigational anti-FcRn antibody, delivered by subcutaneous injection, in Chinese patients with generalized myasthenia gravis (MG). A registration-enablinggravis. Harbor BioMed plans to initiate a Phase 3 MG trial is expected to initiatestudy in this indication in the firstsecond half of 2021.

Captisol® Business UpdatesDuring the second quarter of 2021,we entered into OmniAb licensing agreements with GenScript Biotech and ImmuNext.

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 are supplying Captisol to Gilead under a recently signed 10-year supply agreement. We are also supplying Captisol to Gilead’s voluntary licensing generic partners who are manufacturing remdesivir for 127 low- and 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.

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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 TechnologyPelican Platform Updates

On October 1, 2020, we closed the previously announced acquisition of Pfenex, Inc. Pfenex brings to us aThe Pelican Expression Technology™ is our proprietary Pseudomonas fluorescens protein expression technology as well asthat has 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 partnerIn addition, large pharma and small biotech partners continue to expand their use of our PeliCRM™ (CRM197), a non-toxic mutant diphtheria toxin vaccine carrier protein produced using Pelican Expression Technology, adding to near-term revenue.

Jazz Pharmaceuticals recently received FDA approval for Rylaze™, formerly JZP458, for the treatment of acute lymphoblastic leukemia (ALL) or lymphoblastic lymphoma (LBL). Rylaze is a recombinant Erwinia asparaginase used as a
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component of a multi-agent chemotherapeutic regimen for the treatment of pediatric and adult patients with ALL or LBL who are hypersensitive to E. coli-derived asparaginase products. In July, Jazz launched Rylaze and announced that the National Comprehensive Cancer Network® (NCCN) added Rylaze to the Clinical Practice Guidelines in Oncology (NCCN Guidelines®) for ALL in pediatric and adult patients.

Merck received FDA approval for VAXNEUVANCE™, formerly V114, for the prevention of pneumococcal disease in adults. VAXNEUVANCE is a 15-valent pneumococcal vaccine utilizing our CRM197 vaccine carrier protein produced using the Pelican Expression Technology platform. Additionally, Merck announced positive dataresults from twoinitial Phase 3 studies with V114, which usespediatric clinical trials for VAXNEUVANCE in pneumococcal disease. CRM197, produced by the protein expression technology, evaluating the safety, tolerability and immunogenicity of thePelican Expression Technology™, is also used by Merck in its 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.candidates, including V116.

Other Business Updates

We announcedBeiGene received approval in China of Kyprolis (carfilzomib) in combination with dexamethasone for adult patients with relapsed or refractory multiple myeloma who have received at least two prior therapies, including a proteasome inhibitor and an immunomodulatory agent. This is the salefirst approval of our VernalisKyprolis in China. BeiGene licensed Kyprolis in 2019 for commercialization and development in China under a strategic collaboration with Amgen.

Roche and Ligand expanded an existing collaboration agreement utilizing the Icagen Ion Channel Technology platform to a third program for the development and commercialization of small molecule ion channel modulators for the treatment of neurological diseases. Roche made an upfront cash payment to us and will also provide research operations and internal programsfunding. In addition, we are eligible to HitGen Inc. for $25receive up to $274 million in cash. Under the terms of the agreement, we will retain economic rights on completed collaboration licensesresearch, development and commercial milestone payments, as well as royalties on net sales should a share ofdrug from 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.be commercialized.

Several partners also had significant regulatory, financing and business updates during the third quarterTravere Therapeutics announced completion 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 studyclinical trial to evaluate the long-term nephroprotective potential of sparsentan in IgA nephropathy,nephropathy. Travere anticipates topline interim efficacy data in the third quarter of 2021. In May 2021, Travere announced that the FDA indicated the available data from the interim assessment in the pivotal, Phase 3 DUPLEX study in focal segmental glomerulosclerosis would not be adequate to support an accelerated approval at this time. The FDA indicated an application for accelerated approval may be possible after additional eGFR data accrue in the first-half of 2022.

Novan announced positive topline results from the pivotal Phase 3 B-SIMPLE5 trial of SB206, a topical antiviral gel, for the treatment of molluscum contagiosum. The clinical trial achieved statistical significance (p<0.0001) for the primary endpoint of complete clearance of all lesions at Week 12, and statistical significance for all secondary endpoints including proportion achieving a lesion count of 0 or 1 at Week 12, proportion achieving ≥90% clearance of lesions at Week 12 and complete clearances of all lesions at Week 8. Novan intends to submit an NDA by the third quarter of 2022.

Sermonix Pharmaceuticals announced a collaboration with Eli Lilly to studycomplete enrollment in its Phase 2 clinical trial studying lasofoxifene in combination with Eli Lilly’s FDA-approved CDK 4 and 6 inhibitor abemaciclib into treat ESR1-mutated metastatic breast cancer.and gynecological cancers. Lasofoxifene is an investigational, nonsteroidal selective estrogen receptor modulator. Sermonix expects initial data from the trial to be available in the first half of 2022.


Results of Operations

Revenue
(Dollars in thousands)Q3 2020Q3 2019Change% ChangeYTD 2020YTD 2019Change% Change
Royalties$9,005 $9,767 $(762)(8)%$22,751 $35,931 $(13,180)(37)%
Captisol23,389 6,849 16,540 241 %68,966 24,357 44,609 183 %
Contract revenue9,454 8,192 1,262 15 %24,712 32,991 (8,279)(25)%
Total revenue$41,848 $24,808 $17,040 69 %$116,429 $93,279 $23,150 25 %
(Dollars in thousands)Q2 2021Q2 2020Change% ChangeYTD 2021YTD 2020Change% Change
Royalties$8,616 $7,181 $1,435 20 %$15,728 $13,746 $1,982 14 %
Captisol62,509 24,468 38,041 155 %93,781 45,577 48,204 106 %
Contract revenue13,550 9,771 3,779 39 %30,316 15,258 15,058 99 %
Total revenue$84,675 $41,420 $43,255 104 %$139,825 $74,581 $65,244 87 %

Royalty revenue is a function of our partners’ product sales and the applicable royalty rate. Kyprolis royalty rates are under a tiered royalty rate structure with the highest tier being 3.0%. 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 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. 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)Q3 2020 Estimated Partner Product SalesEffective Royalty RateQ3 2020 Royalty RevenueQ3 2019 Partner Product SalesEffective Royalty RateQ3 2019 Royalty Revenue
Kyprolis$277.2 2.5 %$6.9 $279.0 2.7 %$7.6 
Evomela9.0 20.0 %1.8 7.5 20.0 %1.5 
Other45.6 0.6 %0.3 50.7 1.3 %0.7 
Total$331.8 $9.0 $337.2 $9.8 



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(in millions)YTD 2020 Estimated Partner Product SalesEffective Royalty RateYTD 2020 Royalty RevenueYTD 2019 Partner Product SalesEffective Royalty RateYTD 2019 Royalty Revenue
Kyprolis$832.3 2.0 %$16.8 $778.0 2.1 %$16.3 
Evomela22.9 20.0 %4.6 17.7 20.0 %3.5 
Other132.2 1.0 %1.4 142.8 1.3 %1.9 
PromactaN/AN/AN/A225.1 6.3 %14.2 
Total$987.4 $22.8 $1,163.6 $35.9 
The following table represents royalty revenue by program:
(in millions)Q2 2021 Estimated Partner Product SalesEffective Royalty RateQ2 2021 Royalty RevenueQ2 2020 Partner Product SalesEffective Royalty RateQ2 2020 Royalty Revenue
Kyprolis$266.5 2.0 %$5.4 $269.1 2.0 %$5.5 
Evomela11.0 20.0 %2.2 6.0 20.0 %1.2 
Other41.3 2.4 %1.0 40.8 1.2 %0.5 
Total$318.8 $8.6 $315.9 $7.2 


Q3 2020 vs. Q3 2019
(in millions)YTD 2021 Estimated Partner Product SalesEffective Royalty RateYTD 2021 Royalty RevenueYTD 2020 Partner Product SalesEffective Royalty RateYTD 2020 Royalty Revenue
Kyprolis$527.1 1.8 %$9.7 $555.1 1.8 %$9.9 
Evomela22.2 20.0 %4.5 13.9 20.0 %2.8 
Other68.4 2.2 %1.5 86.6 1.3 %1.1 
Total$617.7 $15.7 $655.6 $13.7 

Total revenue increased by $17.0 million, or 69%, to $41.8 million in Q3Q2 2021 vs. Q2 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$43.3 million, or 25%104%, to $116.4$84.7 million in Q2 2021 compared to $41.4 million in Q2 2020 primarily reflecting higher sales of Captisol for use in the manufacturing of remdesivir. Contract revenue increased in Q2 2021 compared to Q1 2020, with the increase primarily attributable to (1) the timing of partner milestone events and (2) the additional contract revenue of $5.2 million from our Pelican Expression Technology, acquired in October 2020.

YTD 2021 vs. YTD 2020

Total revenue increased by $65.2 million, or 87%, to $139.8 million in YTD 2021 compared to $93.3$74.6 million in the same period last year mainly driven by anprimarily reflecting higher sales of Captisol for use in the manufacturing of remdesivir. Contract revenue increased in the first half of 2021 compared to the same period last year, with the increase in Captisol material sales during the YTD 2020primarily 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(1) the saletiming of Promacta in March 2019partner milestone events and (2) the decreasedadditional contract revenue due toof $8.0 million and $8.5 million from the disruption from COVID-19 as some partners delay starting clinical trials or paused patient enrollmentacquisitions of Icagen in ongoing trials.April 2020 and Pfenex in October 2020, respectively.

Operating Costs and Expenses
(Dollars in thousands)Q3 2020% of RevenueQ3 2019% of RevenueYTD 2020% of RevenueYTD 2019% of Revenue
Costs of Captisol$6,353 $3,147 18,680 9,410 
Amortization of intangibles3,875 3,552 11,285 10,560 
Research and development12,853 13,742 37,476 37,244 
General and administrative15,020 9,525 34,353 31,607 
Total operating costs and expenses$38,101 91%$29,966 121%$101,794 87%$88,821 95%
(Dollars in thousands)Q2 2021% of RevenueQ2 2020% of RevenueYTD 2021% of RevenueYTD 2020% of Revenue
Cost of Captisol$30,593 $7,644 $38,746 $12,327 
Amortization of intangibles11,779 3,875 23,565 7,410 
Research and development15,953 12,732 33,832 24,623 
General and administrative14,711 10,069 27,028 19,333 
Other operating income(34,100)— (33,800)— 
Total operating costs and expenses$38,936 46%$34,320 83%$89,371 64%$63,693 85%

Q3Q2 2021 vs. Q2 2020 vs. Q3 2019

Total operating costs and expenses during Q2 2021 increased by $8.1$4.6 million, or 27%. 13%, compared to Q2 2020 primarily due to additional operating costs attributable to Pfenex, which we acquired on October 1, 2020, as well as an increase in Captisol sales for the current period. The increase was partially offset by a $34.1 million non-cash valuation adjustment recorded in the second quarter of 2021 to reduce the Pfenex CVR liability. See additional information on the Pfenex CVR liability in Note 2, Fair Value Measurements.

Cost of Captisol increased primarily due to higher Captisol sales during Q3Q2 2021 compared to Q2 2020. Cost of Captisol as a percentage of Captisol revenue was 49% in Q2 2021 compared to 31% in Q2 2020, as mentioned above. with the increase primarily due to the significant sales to the Gilead consortium partners in India who had sales prices lower than other customers during Q2 2021.

Amortization of intangibles increased in Q2 2021 compared to the same period in 2020 primarily due to the amortization of contractual relationships and technologies acquired from Pfenex in October 2020.

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At any one time, we are working on multiple programs. As such, we generally do not track our R&D expenses on a specific program basis. Our R&D expenses increased year over year in Q2 2021 due to the $4.2 million costs associated with our Pfenex acquisition, which primarily consisted of salaries and lab costs.

General and administrative expenses increased in Q2 2021 compared to the same period in 2020 primarily due to acquisition integration related costs as well asthe additional expenses from the IcagenPfenex acquisition as well as increased share-based compensation expense.

Other operating income in AprilQ2 2021 included a $34.1 million non-cash valuation adjustment to reduce the Pfenex CVR liability. The decrease in Pfenex CVR liability is due to an expected lower probability of achieving the required milestone under the Pfenex CVR Agreement, which provides for payment to Pfenex CVR holders upon notice from the FDA that teriparatide injection receives an “A” therapeutic equivalence designation relative to the listed drug, FORTEO, by December 31, 2021. Based on feedback from the FDA, our commercial partner, Alvogen, will perform and submit to the FDA the results from an assessment to address concerns relating to potential innate immunogenicity, reducing the probability of achieving the milestone by December 31, 2021. There were no items recorded in other operating income in Q2 2020.

YTD 20202021 vs. YTD 20192020

Total operating costs and expenses during YTD 2021 increased by $13.0$25.7 million, or 15%40%, compared to YTD 2020 primarily due to additional operating costs attributable to Icagen and Pfenex, as well as higher Captisol sales during YTD 2021. The increases were partially offset a $34.1 million non-cash valuation adjustment to reduce the Pfenex CVR liability. See additional disclosure on the Pfenex CVR liability in Note 2, Fair Value Measurements.

Cost of Captisol increased primarily due to higher Captisol sales during theYTD 2021 compared to YTD 2020. Cost of Captisol as a percentage of Captisol revenue was 41% in YTD 2021 compared to 27% in YTD 2020, as mentioned above. with the increase primarily due to the significant sales to the Gilead consortium partners in India who had sales prices lower than other customers during Q2 2021.

Amortization of intangibles increased in YTD 2021 compared to the same period in 2020 primarily due to the amortization of contractual relationships and technologies acquired from Icagen in April 2020 and Pfenex in October 2020.

At any one time, we are working on multiple programs. As such, we generally do not track our R&D expenses on a specific program basis. Our R&D expenses increased year over year in YTD 2021 due to the $9.2 million costs associated with our Pfenex acquisition, which primarily consisted of salaries and lab costs.

General and administrative expenses increased in YTD 2021 compared to the same period in 2020 primarily due to acquisition integration related costs as well asthe additional expenses from the Pfenex and Icagen acquisitionacquisitions as well as increased share-based compensation expense.

Other operating income in AprilYTD 2021 primarily included a $34.1 million non-cash valuation adjustment to reduce the Pfenex CVR liability during Q2 2021 as mentioned above. There were no items recorded in other operating income in YTD 2020.

Other Income (Expense)
(Dollars in thousands)Q2 2021Q2 2020ChangeYTD 2021YTD 2020Change
Gain (loss) from short-term investments$(6,864)$23,460 $(30,324)$6,197 $(7,281)$13,478 
Interest income233 1,969 (1,736)529 6,699 (6,170)
Interest expense(4,883)(6,213)1,330 (10,714)(14,761)4,047 
Other income (expense), net(924)1,803 (2,727)(7,401)2,159 (9,560)
Total other income (expense), net$(12,438)$21,019 $(33,457)$(11,389)$(13,184)$1,795 
(Dollars in thousands)Q3 2020Q3 2019ChangeYTD 2020YTD 2019Change
Loss from short-term investments$(9,862)$(13,297)$3,435 $(17,143)$(8,524)$(8,619)
Interest income991 7,396 (6,405)7,690 22,590 (14,900)
Interest expense(6,269)(8,993)2,724 (21,030)(26,911)5,881 
Other income (expense), net(219)181 (400)1,940 404 1,536 
Total other income (expense), net$(15,359)$(14,713)$(646)$(28,543)$(12,441)$(16,102)

Q2 2021 vs. Q2 2020

The fluctuation in the gain (loss) from short-term investments is primarily driven by the changes in the fair value of our ownership in Viking common stock and warrants.
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warrants (an unrealized loss of $8.3 million in Q2 2021 as compared to an unrealized gain of $23.5 million in Q2 2020).

Interest income consists primarily of interest earned on our short-term investments. The decreasesdecrease over the prior periods wereperiod was due to the decrease in our short-term investment balance.

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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 2023 Notes for the three months ended June 30, 2021. The decrease was primarily due to lower average debt outstanding balance resulting fromduring Q2 2021 as compared to Q2 2020. In Q2 2021, we repurchased $45.1 million in principal of the proceeds used2023 Notes for $44.6 million in share repurchases,cash, including accrued interest of $0.03 million. See Note 4, Convertible Senior Notes.
Other income (expense), net, in Q2 2021 included a $2.3 million loss on debt extinguishment in connection with the 2023 Notes repurchase during the second quarter of 2020 and the acquisition of Icagen, xCella and Taurus during the ninethree months ended SeptemberJune 30, 2020.2021.

YTD 2021 vs. YTD 2020

The fluctuation in the gain (loss) from short-term investments is primarily driven by the changes in the fair value of our ownership in Viking common stock and warrants (an unrealized gain of $0.9 million in YTD 2021 as compared to an unrealized loss of $6.2 million in YTD 2020).

Interest income consists primarily of interest earned on our short-term investments. The decrease over the prior period was due to the decrease in our short-term investment balance.

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 2023 Notes for the three and ninesix months ended SeptemberJune 30, 2020.2021. The decreases over the prior periods weredecrease was primarily due to lower average debt outstanding balance during the current periodsYTD 2021 as compared to the prior periods. The 2019 Notes were paid off upon the maturity date in August 2019. In March 2020,YTD 2020. During YTD 2021, we repurchased $234.4$149.6 million in principal of the 2023 Notes for $203.8$153.7 million in cash, including accrued interest of $0.6$0.3 million. See Note 4, - Convertible Senior Notes.
Other income (expense), net, forin YTD 2021 included a $7.2 million loss on debt extinguishment in connection with the nine2023 Notes repurchase during the six months ended SeptemberJune 30, 2020 increased as compared to the same period last year. The increases were 2021.
primarily due to a $1.9 million gain on an asset sale during the nine months ended September 30, 2020.

Income Tax Benefit (Expense)
(Dollars in thousands)Q3 2020Q3 2019ChangeYTD 2020YTD 2019Change
Income (loss) before income taxes$(11,612)$(19,871)$8,259 $(13,908)$804,814 $(818,722)
Income tax benefit (expense)4,911 4,620 291 5,162 (168,147)173,309 
Income (loss) from operations$(6,701)$(15,251)$8,550 $(8,746)$636,667 $(645,413)
Effective tax rate42.3 %23.2 %37.1 %20.9 %
(Dollars in thousands)Q2 2021Q2 2020ChangeYTD 2021YTD 2020Change
Income (loss) before income taxes$33,301 $28,119 $5,182 $39,065 $(2,296)$41,361 
Income tax benefit (expense)(2,576)(6,033)3,457 9,766 251 9,515 
Income (loss) from operations$30,725 $22,086 $8,639 $48,831 $(2,045)$50,876 
Effective tax rate7.7 %21.5 %(25.0)%10.9 %

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. The effective tax rate for the three and ninesix months ended SeptemberJune 30, 2021 was 7.7% and (25.0)%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and six months ended June 30, 2021 was significantly impacted by tax benefits related to (1) a $34.1 million Pfenex CVR adjustment recorded during the second quarter of 2021 due to the lower probability of achieving the specific development and regulatory milestone by December 31, 2021 as defined by the Pfenex CVR, and (2) net excess tax windfalls from share-based compensation resulting from increased stock option exercise activity, stock award vesting and appreciation of our stock price during the period. The effective tax rate for the three and six months ended June 30, 2020 was 42.3%21.5% and 37.1%10.9%, respectively. The variances from the U.S. federal statutory tax rate of 21% for the three and ninesix months ended SeptemberJune 30, 2020 were primarily attributable to the mix of earnings in the jurisdictions with higherlower statutory rates than the U.S. andoffset by tax deductions related to stock award activities offset byand 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 primarily attributable to the mix of earnings in the jurisdictions with lower statutory tax rates than the U.S.

Liquidity and Capital Resources

As of SeptemberJune 30, 2020,2021, our cash, cash equivalents, and marketable securitiesshort-term investments totaled $795.1$301.8 million, which were decreased by $274.8$109.4 million from the end of last year due to factors described in the “Cash Flow 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 short-term investments, 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. Our short-term investments include U.S. government
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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 5.86.7 million shares of common stock in Viking.

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,During the six months ended June 30, 2021, we repurchased $234.4$149.6 million in principal of the 2023 Notes for $203.8$153.7 million in cash, including accrued interest of $0.6$0.3 million. After the repurchases, $515.6$345.7 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
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price of the 2023 Notes, legal requirements and other factors. The 2023 Notes were not convertible as of SeptemberJune 30, 2020.2021. 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 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 may enter into Rule 10b5-1 trading plans 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. During the first quarter of 2020, we repurchased $73.3 million of our common stock under our stock repurchase programs as discussed below. We did not have any share repurchases during the second and third quarter of 2020. Authorization to repurchase $253.5 million of our common stock remained available as of September 30, 2020.

We believe that our existing funds, cash generated from operations and existing sources of and access to financing are adequate to fund our need for working capital, capital expenditures, debt service requirements, continued advancement of research and development efforts, potential stock repurchases and other business initiatives we plan to strategically pursue, including acquisitions and strategic investments.

As of SeptemberJune 30, 2020,2021, we had $10.8$14.8 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. In addition, we signed our new Emeryville office lease in June 2021 as discussed below under the "Contractual Obligations" section. The lease agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases ofbetween 3.0% to 4.0%. See further information in Note 8, Leases. We had no off-balance sheet arrangements at SeptemberJune 30, 20202021 and December 31, 2019.2020.

Cash Flow Summary
(Dollars in thousands)YTD 2020YTD 2019
Net cash provided by (used in):
  Operating activities$54,049 $(21,997)
  Investing activities$613,850 $530,097 
  Financing activities$(283,016)$(401,479)
(Dollars in thousands)YTD 2021YTD 2020
Net cash provided by (used in):
  Operating activities$31,131 $41,304 
  Investing activities$84,453 $281,779 
  Financing activities$(141,540)$(279,310)

During the ninesix months ended SeptemberJune 30, 2021, we repurchased $149.6 million in principal of the 2023 Notes for $153.7 million in cash, including accrued interest of $0.3 million. During the six months ended June 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;million, used $73.3 million to repurchase our common stock, and 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 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).acquisition.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the “Contractual Obligations”Contractual Obligations table set forth in our 20192020 Annual Report, other than our purchase obligations under our agreements with Hovione for Captisol purchases and equipment investment increasedoperating lease obligation will increase by approximately $69 million.$22 million (undiscounted cash outflow) in connection with our new Emeryville office lease signed in June 2021 with projected commencement dates of July 2021 for the first phase of occupancy and April 2022 for the second phase over the next 10 year term.

Critical Accounting Policies
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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 20192020 Annual Report, other than the adoption of the Accounting Standards Updates described in Item 1. Condensed Consolidatedconsolidated Financial Statements - Note 1, "BasisBasis of Presentation and Summary of Significant Accounting Policies," related to 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 ninesix months ended SeptemberJune 30, 2020,2021, when compared to the disclosures in Item 7A of our 20192020 Annual Report.

Item 4.    Controls and Procedures

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 our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the 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 SeptemberJune 30, 20202021 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20202021 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,I. Item 3, “Legal Proceedings”3. Legal Proceedings in our 20192020 Annual Report, refer to Note 7, Commitment and Contingencies: Legal Proceedings, to the Condensed Consolidated Financial Statements contained in Part I,I. Item 11. of this report.


Item 1A. Risk Factors

There have been no material changes to the risk factors included in “ItemPart I. Item 1A. Risk Factors”Factors in our 20192020 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.

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 are taking 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.

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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. As the COVID-19 pandemic continues to spread around the globe, we may experience disruptions that could severely impact our business, drug manufacturing and supply chain, nonclinical activities and clinical trials and our partners’ business may be impacted in similar ways, including due to:

•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 staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, which may result in cancellations of 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 local regulations as part of 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 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 forced furlough of government employees;
•refusal of the FDA to accept data from clinical trials in affected geographies outside the United States;
•interruption or delays to discovery and development pipelines; and
•difficulties launching or commercializing products, including due to reduced access to doctors as a result of social distancing protocols.

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 timely basis or at all.

The COVID-19 pandemic continues to evolve. The extent to which the COVID-19 may impact our business, including our drug manufacturing and supply chain, nonclinical activities, clinical trials and financial condition, including due to impacts on our 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 results, it may also have the effect of heightening many of the other risks described in this section and in the “Risk Factors” section of our 2019 Annual Report.

Future revenue from sales of Captisol material to our license partners may be lower than expected.

Revenues from sales of Captisol material to our collaborative partners, including Amgen, Gilead and the Gilead consortium, represent a significant portion of our current revenues. Any setback that may occur with respect to Captisol could significantly impair our
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operating results and/or reduce the market price of our stock. Setbacks for 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 using Captisol. In addition, revenue from Captisol sales related to remdesivir may not continue or materially increase due to a number of factors, including: if Gilead successfully develops or manufactures an alternative formulation of remdesivir that does not incorporate Captisol or uses less Captisol in such formulation; 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. For example, Gilead has announced plans to develop an
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inhaled dosage form of remdesivir that uses less Captisol than the current formulation and expects result from an ongoing proof-of-concept study later this year.

If products 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 delay the marketing of Captisol-enabled products and receipt of revenue related to those products, which could significantly impair our operating results and/or reduce the market price of our stock.

We obtain Captisol from Hovione, our third party manufacturer, primarily at Hovione’stheir facilities in PortugalIreland and Ireland.Portugal. If Hovione were to cease to be able, for any reason, to supply Captisol to us 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 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,cost, 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.

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 Captisol demand may not be correct and any 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 not yield a return on investment if future Captisol sales fall below our expectations.

We currently depend on our 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 products using Captisol, fail to satisfy their obligations under their agreements with us, or choose to utilize a competing product, or if we are unable to establish new licensing and marketing relationships, our 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 accounts receivable. If any of our major customers were to default in the payment of their obligations to us, our business, operating results and 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 2025,2026 in United States, 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 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 agreements with us, our Captisol revenue may decrease significantly.

Our OmniAb antibody platform faces specific risks, including the fact that no product using antibodies from the platform has been approved by the FDA or similar regulatory 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 onfrom our platform. In addition, only a fewsubset of our collaboration partners’ product candidates based on the platform have been tested in late stage clinical trials. If one of our OmniAb collaboration
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partners’ product candidates fails during preclinical studies or clinical trials, our other OmniAb collaboration partners may decide to abandon 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, areOmniAb platform is covered by six167 patents worldwide (including 32 patents within the U.S. and three7 patents in the European Union Union)and are subject to the same risks as our patent portfolio discussed elsewhere in this report and our 20192020 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
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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 TrianniAlloy 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.

Third party intellectual property may prevent us or our partners from developing our potential products; our and our partners’ intellectual property may not prevent competition; and any intellectual property issues may be expensive and time consuming to resolve.

The manufacture, use or sale of our potential products or our licensees' products or potential products may infringe the patent rights of others. If others obtain patents with conflicting claims, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products.

Generally, our success will depend on our ability and the ability of our partners to obtain and maintain patents and other intellectual property rights for our and their potential products. Our recent strategic acquisitionspatent position is uncertain and announced dispositionsinvolves complex legal and technical questions for which legal principles are unresolved. Even if we or our partners do obtain patents, such patents may not adequately protect the technology we own or have licensed.

We permit our partners to list our patents that cover their branded products in the Orange Book. If a third party files an NDA or ANDA for a generic drug product that relies in whole or in part on studies contained in our partner’s NDA for their branded product, the third party will have the option to certify to the FDA that, in the opinion of that third party, the patents listed in the Orange Book for our partner’s branded product are invalid, unenforceable, or will not be infringed by the manufacture, use or sale of the third party’s generic drug product. A third party certification that a new product will not infringe Orange Book-listed patents, or that such patents are invalid, is called a paragraph IV patent certification. If the third party submits a paragraph IV patent certification to the FDA, a notice of the paragraph IV patent certification must be sent to the NDA owner and the owner of the patents that are subject to the paragraph IV patent certification notice once the third-party’s NDA or ANDA is accepted for filing by the FDA. A lawsuit may then be initiated to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of the receipt of notice of a paragraph IV patent certification automatically prevents the FDA from approving the generic NDA or ANDA until the earlier of the expiration of a 30-month period, the expiration of the patents, the entry of a settlement order stating that the patents are invalid or not infringed, a decision in the infringement case that is favorable to the NDA or ANDA applicant, or such shorter or longer period as the court may order. If a patent infringement lawsuit is not initiated within the required 45-day period, the third-party’s NDA or ANDA will not be subject to the 30-month stay.

Several third-parties have challenged, and additional third parties may challenge, the patents covering our partner’s branded products, including Kyprolis and Evomela, which could result in the invalidation or unenforceability of some or all of the relevant patent claims. We may from time to time become party to litigation or other proceedings as a result of Paragraph IV certifications. For example, as a result of the settlement of one such matter, 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. Also, as noted above, Amgen has settled patent litigation related to Kyprolis on confidential terms with several parties, but it has been publicly reported that the U.S. launch date for at least Breckenridge Pharmaceuticals’ applicable generic product will be “on a date that is held as confidential in 2027 or sooner, depending on certain occurrences”.

In addition, we cannot assure you that all of the potentially relevant prior art information that was or is deemed available to a person of skill in the relevant art prior to the priority date of the claimed invention-relating to our and our partners’ patents and patent applications has been found. If such prior art exists, it can invalidate a patent or prevent a patent from issuing from a pending patent application, and we or our partners may be subject to a third party pre-issuance submission of prior art to the United States Patent and Trademark Office. Even if patents do successfully issue and even if such patents cover our or our partner’s products or potential products, third parties may initiate litigation or opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices, or similar proceedings challenging the validity, enforceability or scope of such patents, which may result in the patent claims being narrowed or invalidated, may allow third parties to commercialize our or our partners’ products and compete directly with us and our
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partners, without payment to us or our partners, or limit the duration of the patent protection of our and our partners’ technology and products.

Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorable results that could adversely impact our ability to prevent third parties from competing with our partner’s products. Any adverse outcome of such litigation or other proceedings could result in one or more or our patents being held invalid or unenforceable, which could adversely affect our stock price, operatingability to successfully execute our business strategy and negatively impact our financial condition and results of operations. However, given the unpredictability inherent in litigation, we cannot predict or guarantee the outcome of these matters or any other litigation. Regardless of how these matters are ultimately resolved, these matters may be costly, time-consuming and distracting to our management, which could have a material adverse effect on our business.

In addition, periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and or applications will be due to the U.S. and various foreign patent offices at various points over the lifetime of our and our licensees’ patents and/or applications. We have systems in place to remind us to pay these fees, and we rely on our outside patent annuity service to pay these fees when due. Additionally, the U.S. and various foreign patent offices require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with rules applicable to the particular jurisdiction. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If such an event were to occur, it could have a material adverse effect on our business.

Any conflicts with the patent rights of others could significantly reduce the coverage of our patents or limit our ability to obtain meaningful patent protection. For example, our European patent related to Agglomerated forms of Captisol was limited during an opposition proceeding, and the rejection of our European patent application related to High Purity Captisol was upheld on appeal. In addition, any determination that our patent rights are invalid may result in early termination of our agreements with our license partners and could adversely affect our ability to enter into new license agreements. We also rely on unpatented trade secrets and know-how to protect and maintain our competitive position. We require our employees, consultants, licensees and others to sign confidentiality agreements when they begin their relationship with us. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our competitors may independently discover our trade secrets.

We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others' rights. If this occurs, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor's rights. In addition, if any of our competitors have filed patent applications in the United States which claim technology we also have invented, the United States Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology.

The occurrence of any of the foregoing problems could be time-consuming and expensive and could adversely affect our financial position, liquidity 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 mayThe occurrence of a catastrophic disaster could disrupt our current plansbusiness, damage our facilities beyond insurance limits or increase our costs 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.expenses.

We also recently announcedare vulnerable to damage and business disruptions from natural or man-made disasters, such as earthquakes, tornadoes, severe weather conditions, power loss, fire, floods and similar events, as well as from accidental loss or destruction. If any disaster were to occur, our ability to operate our business could be seriously impaired. We have property, liability, and business interruption insurance which may not be adequate to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the dispositioncost of Vernalis (R&D) Limited. We cannot assure youobtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and prospects. Our ability to obtain Captisol supply from our third-party manufactures could be disrupted if the closingoperations of this transaction will occurthese manufacturers were affected by a natural or man-made disaster or other business interruption. In addition, we rely on our expected timeframe or at all, whetherpartners to generate most of our revenues through royalties, Captisol sales and development activities and any disruptions to their business 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 andsuch disasters could negatively impact our retention of certain liabilities associated with the Vernalis business.revenues.

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

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

NoneNone.
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Item 6. Exhibits

Exhibit NumberDescription
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).
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).
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).
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).
Contingent Value Rights Agreement, dated as of September 30, 2020, by and between Ligand Pharmaceuticals Incorporated and American Stock Transfer & Trust Company, LLC.*
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).
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).
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.*
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.*
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.*
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.*
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The following financial information from our Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2020,2021, 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.*
104The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2020,2021, formatted in Inline XBRL and contained in Exhibit 101.

*Filed herewith.







SIGNATURES


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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 6, 2020August 3, 2021By:/s/ Matthew Korenberg
Matthew Korenberg
Executive Vice President, Finance and Chief Financial Officer
Duly Authorized Officer and Principal Financial Officer

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